Introduction to FHSA
FHSA stands for First Home Savings Account, which is a new account offered to Canadian first-time home buyers. The account is designed to help you save money for a down payment on a home. You may be asking yourself, “How will the account help me save money?” The answer to this question lies in the amount of taxes you can save by utilizing the account. As the old saying goes, there are only two guarantees in life; death and taxes. Given that taxes alone account for a large portion of your income each year, taking advantage of accounts that help you save on taxes is essential. Some other examples of these types of accounts that can help lesson your tax burden, are RRSPs and TFSAs. All three accounts (RRSP, TFSA & FHSA) are registered accounts, which means that they are tightly regulated and come with a long list of conditions that must be met in order to take full advantage of them. To help you understand this new account, I will be going over the essential basics of the FHSA.
Making a Contribution
You can contribute up to $8000 on an annual basis, based on the year you open the FHSA. For accounts opened anytime in 2023, $8000 can be invested, then this amount will reset beginning 2024, allowing individuals to contribute an additional $8000. If you open an account in 2023, but choose not to contribute the maximum amount, then any unused contribution room will be carried-forward into the following year. There is a lifetime maximum of $40,000 that can be contributed to your FHSA, which means that if you were to contribute the yearly maximum every year, it would only take you 5 years to max out your lifetime contribution room.
Contributions made to your FHSA are deductible on your income tax return for the year of the contribution. This function is similar to that of contributing to your RRSP, where your taxable income is reduced by the corresponding contribution amount.
Withdrawing from Your Account
There is no minimum number of days that contributions must stay in your FHSA before you can withdraw the funds. The purpose for your withdrawal is significant for tax consequences because qualifying withdrawals are made tax-free, meaning it will not show up on your taxable income for the year. A qualifying withdrawal must meet a set number of conditions, which qualifies you as a first-time home buyer, and proof of the funds going directly towards a qualifying home. Amounts withdrawn that do not meet these conditions will be included in your taxable income for that year.
Important Considerations
Upon opening an FHSA account, you will have 15 years to purchase a home, in order to qualify for a tax-free withdrawal. Before opening an account, you need to ask yourself if 15 years down the road you see yourself purchasing a home. This question will answer if now is the right time to open an account, or if you should wait. Speaking with a qualified advisor can help answer this question for you, as well as explore options for best utilizing funds inside the account.
Please note that iA Private Wealth is expecting to have this account available for our clients in Q4 of 2023, but we would love to hear any questions you may have on the account and its suitability for you.
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Source: Government of Canada, (May 2023). First Home Savings Account (FHSA). https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account.html
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