FHSA: The Best of Two Worlds
The First Home Savings Account (FHSA) was introduced in 2023 to help individuals save for their first home. It combines features from the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP), offering tax advantages designed to assist with saving towards a home purchase.
What are the eligibility requirements to be a “first-time” home buyer?
If you did not, at any time in the current calendar year before the account is opened or at any time in the preceding four calendar years, live in a qualifying home (or what would be a qualifying home if located in Canada) as your principal residence
At least 18 years of age, and not turning 72 or older in the current calendar year
What is the eligibility of a qualifying withdrawal?
1. To make a withdrawal, you must be a resident of Canada from the time of the withdrawal until the purchase of the qualifying home, and you must be a first-time homebuyer at the time of the withdrawal.
However, an exception allows you to make a qualifying withdrawal within 30 days of moving into a qualifying home.
2. Additionally, you must have a written agreement to purchase or build a qualifying home by October 1 of the year following the withdrawal, with the intent to occupy the home as your principal residence within one year of buying or building it.
The qualifying home must be a housing unit located in Canada.
3. Funds leftover in the plan after making a qualifying withdrawal can be transferred to another FHSA or RRSP or a Registered Retirement Income Fund (RRIF) on a tax-free basis before the end of the year following the year that the first qualifying withdrawal is made.
Transfers do not decrease your available RRSP contribution room
Any non-qualifying withdrawals are subject to tax at your marginal tax rate as realized income
Tax-Sheltered
Any income (interest, dividends, capital gains) earned within the account is not taxed, but it remains in the account. When you withdraw funds from the FHSA to purchase your first home, the withdrawal is tax-free, provided it meets the qualifying conditions.
This is an alternative investment vehicle investors may want to consider contributing to before contributing to the TFSA or RRSP, depending on the goal of the investment.
Tax-Sheltered
FHSA allows you to contribute $8,000 annually for five years ($40,000 maximum contribution). Additionally, you can carry one year’s worth of contribution room into next year. For example, if you open an FHSA in 2023 and only contribute $4,000, you can carry forward the remaining $4,000 into the next year and contribute $12,000. You can carry forward up to a maximum of $8,000 of unused FHSA participation room at the end of the year to use in the following year (subject to the lifetime FHSA limit).
What are corporate-class mutual funds?
Corporate-class mutual funds are similar to normal mutual funds, where the underlying assets are stocks, bonds, and other mutual funds held in a corporate structure instead of a trust structure. Corporate class funds typically distribute less taxable income compared to the trust versions. This is especially relevant to investors with high personal tax rates