First Home Savings Account: A Tax-Free Way to Save for Your First Home
Buying a home is a major milestone in many people’s lives. It is a significant investment that requires a considerable amount of money, planning, and commitment. Saving for a down payment can be challenging, especially for first-time homebuyers who are just starting to establish their financial footing. Fortunately, the Canadian government has introduced the First Home Savings Account (FHSA) to help individuals save for their first home.
What is FHSA?
The FHSA is a registered account that allows prospective first-time homebuyers to save up to $40,000 on a tax-free basis. This means that any contributions made to the account are not subject to income tax, and any withdrawals made to purchase a first home are also tax-free. The FHSA also allows an $8,000 annual contribution limit, in addition to a $40,000 lifetime contribution limit.
How to Qualify
To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. In addition, the individual must be a first-time homebuyer, which means that they have not owned a home in which they lived at any time during the part of the calendar year before the account is opened or at any time in the preceding four calendar years.
Contributions made to the FHSA are tax-deductible, and individuals can carry forward unused portions of their annual contribution limit up to a maximum of $8,000. This means that individuals can save for their first home at their own pace, without worrying about exceeding their annual contribution limit.
In order for an FHSA withdrawal to be a qualifying (i.e., non-taxable) withdrawal, certain conditions must be met. First, a taxpayer must be a first-time homebuyer at the time a withdrawal is made. Specifically, the taxpayer could not have owned a home in which they lived at any time during the part of the calendar year before the withdrawal is made or at any time in the preceding four calendar years.
The taxpayer must also have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal and intend to occupy the qualifying home as their principal place of residence within one year after buying or building it. Provided the taxpayer meets the qualifying withdrawal conditions, the entire amount of available FHSA funds may be withdrawn on a tax-free basis in a single withdrawal or a series of withdrawals.
Benefits
One of the great benefits of the FHSA is that individuals can transfer funds from an FHSA to another FHSA, an RRSP or a RRIF on a tax-free basis. Individuals would also be allowed to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits and the qualified investment rules. Although such transfers would be subject to FHSA contribution limits, they would not be deductible and would also not reinstate an individual’s RRSP contribution room.
In conclusion, the FHSA is an excellent savings account for first-time homebuyers who want to save for their first home on a tax-free basis. With an $8,000 annual contribution limit and a $40,000 lifetime contribution limit, individuals can save for their first home at their own pace, without worrying about exceeding their annual contribution limit. The FHSA also allows individuals to transfer funds to other accounts on a tax-free basis, making it a flexible and convenient savings option.
To know more about FHSA, get in touch with our experienced advisors.