Tax Tip Thursday

As of last week, the First Home Savings Account (FHSA) has become available to Canadians. Although I understand the banks are challenged right now in terms of being able to deal with it, you can still start talking to them and start putting some money away, even if it is NOT in the FHSA.

What is an FHSA?

FHSAs are very, very specific tax-free savings accounts that help Canadians save up to $40,000 toward buying a first home (in Canada). You can contribute as much as $8,000 per year, but unused portions of your contribution limit carry forward. For example, if you contribute $5,500 in 2023, the maximum contribution you could make in 2024 would be $10,500 (the $2,500 space leftover from 2023 plus the $8,000 of new contribution room from 2024).

When does the FHSA start?

The first FHSAs can be opened April 1, 2023.

What are the benefits of an FHSA?

It is the best of both worlds!  RRSPs and TFSAs!  Like an RRSP, any contributions you make to your FHSA are tax deductible and like a TFSA, the money in your FHSA (including any gains) are tax free!

Who can open an FHSA?

To open an FHSA, you need to be between the ages of 18 and 71 and a resident of Canada. Since the account is meant to help first-time homebuyers, you also can’t have lived in a home you own in the year you open your FHSA or four years prior to that. Owning a home, for the government’s purposes, means owing less than 90% of the home’s purchase price.

What if I have beneficial ownership?

If you own 25% or more of a home, the law considers you a beneficial owner — and that counts as ownership according to the FHSA. If that’s you and you want to use an FHSA, you’ll need to wait until at least five years after you lived in that house to open one.

Can I use an FHSA to buy an investment property?

No.   you must “intend to occupy the qualifying home as [your] principal place of residence within one year after buying or building it.”   I am sure people will try and take advantage of that wording, but you could find yourself in trouble if you do not follow through.

What assets can go in an FHSA?

An FHSA can hold stocks, mutual funds, bonds, GICs, and other assets, so long as the total contribution remains under the $40,000 lifetime limit.

Are there penalties for over-contributing to your FHSA?

Any contributions over the $8,000 annual limit (except for any unused portions from the previous year) will be hit with a 1% penalty every month until you correct the issue.

How quickly do I have to use the funds in my FHSA?

From the time you open a First Home Savings Account, you have 15 years to spend the money on a down payment toward a home.

What happens if I don’t use the money in my FHSA?

If you don’t use the money in your FHSA within 15 years of opening the account (or by the year you turn 71), you can transfer it, tax-free, to an RRSP or RRIF. You could also withdraw it and pay taxes on the amount you saved.

Busy Tax Season

Interested in using an FHSA? I don’t blame you, and will be happy to help you figure it all out. However, as it’s currently tax season, we are closed to new business until May 8, unless you are a Corporate Client.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.