The federal government recently released new details about the First Home Savings Account (FHSA). The account is a registered savings plan that was designed to help Canadians save for their first home.
The plan can be a great tool but there are many questions people have about the program and how they will be able to use it. To help you get more comfortable and familiarized with the FHSA, we have answered some of the most common questions people ask.
1. How Much Can You Save in Your FHSA?
Canadians will be able to put up to $40,000 into their FHSA tax-free. However, you will only be able to put a maximum of $8,000 into your account for each year that it is open. If you are not able to put the maximum amount into your account in a given year, the remaining amount will carry forward and can be deposited in a later year.
For example, if you contribute $4,000 in your first year, the remaining $4,000 will carry forward to the second year and be added to the second year's annual amount of $8,000. This means you can contribute up to $12,000 in the second year. If you contribute less than $12,000 in the second year, the difference will then carry forward to the third year and so on.
2. Who is Eligible?
To be eligible to open a FHSA, you must be a Canadian resident over the age of 18 at the time of contribution. You (or your common-law partner/spouse) also can not have owned a primary residence in the past four calendar years.
3. Are There Tax Benefits?
Yes, you will receive a tax deduction on your income tax return for contributions you make into your FHSA. The amount of income tax you save will depend on the province or territory where you live and the amount of contribution you make
4. When Can You Start Contributing to Your FHSA?
FHSAs don’t come into effect until April 1, 2023. That being said, you will be able to contribute the full $8,000 in 2023 so long as you open your account before the end of the year.
5. How is an FHSA Different Than a TFSA?
The FHSA has many of the same benefits as a TFSA, such as the ability to save tax-free and withdraw the money at any time. The main difference is that the FHSA can only be used to purchase your first home, while a TFSA can be used for any purpose.
Additionally, contributions made to a TFSA are not tax deductible while contributions to an FHSA are. That means that any amount that you contribute to your FHSA, will be deducted from your income so long as you do not exceed annual or lifetime limits.
6. How is an FHSA Different Than an RRSP?
The FHSA and RRSPs have some similarities in that they both provide a tax deduction on contributions made. However, the main difference between these two accounts is the restrictions on withdrawals. With an RRSP, any withdrawals you make, including investment income, are taxable. On the other hand, with an FHSA, you are only able to withdraw funds to purchase your first home and the amount withdrawn, including investment income, is not taxable.
7. How is an FHSA Different Than the HBP?
The FHSA and Home Buyer’s Plan (HBP) are similar in that both are registered savings plans that are intended to help you save for your first home. However, the main difference between the two is that funds withdrawn from an FHSA do not need to be paid back. Withdrawals from an HBP through your RRSP need to be paid back within a set period of time or the amount withdrawn will be included in your income.
8. Can You Have More Than One FHSA?
Yes, you can have more than one FHSA, but the total amount contributed to your FHSAs cannot exceed your annual limit of $8,000 or lifetime limit of $40,000.
9. What Happens if I Exceed My Annual or Lifetime Limit?
If you exceed your annual contribution limit, you will be subject to a federal over-contribution penalty of 1% per month (including part-months). The penalty will apply to the highest amount in access that occurred during the month.
10. What Can You Do if You Over-Contribute?
If you have exceeded the limits, you will need to withdraw the excess contribution by the end of the year or you will face a penalty. You can withdraw the contribution without having to pay tax as long as you have not taken a tax deduction on the contribution or it is transferred to an RRSP.
You also have the option of leaving the overcontribution in your account and waiting for the new year when an additional contribution room is added, which will absorb the overcontribution. However, using this method will require you to pay penalties on any months the excess exists before the new year.
11. When Can You Withdraw Funds From Your FHSA?
You can withdraw funds from your FHSA for the purchase of your first home at any time. Funds must also be used to purchase, build or renovate a qualifying home within 15 years of the date of application.
To withdraw your funds, you must be a first time home buyer buying or building a qualifying home in Canada, have a written agreement to buy or build before October 1 of the year following the year you make the withdrawal and intend to move in within a year of buying and building.
Any remaining funds that are left after making the qualifying withdrawal can be transferred by December 31 of the same year to an RRSP or RRIF without penalty. Transfers will not reduce your RRSP contribution room.
12. What Happens if You Don’t Use the Funds in 15 Years?
If the FHSA funds are not used to buy a house after 15 years, the funds you must close the plan. The amount can be transferred into an RRSP or RRIF without penalty or you can withdraw the funds and pay the applicable taxes on the income.
Similarly, if you don’t buy a house by the end of the year you turn 71, even if it hasn’t been 15 years, you will have to close the plan.
If you do not take any actions before the account closes, any amounts in the plan will be included as income. The amount that is deemed income will be the fair market value of your funds immediately before the account closes.
13. What Investments Can You Hold in an FHSA?
You can invest your FHSA funds into a variety of investments, such as stocks, bonds, mutual funds, and GICs. Prohibited investment rules, along with non-qualified investment rules, that apply to other registered plans will apply to your FHSA.
14. Can You Contribute to a Spouse’s FHSA?
You are able to provide funds to your spouse for them to contribute to their own FHSA. When this is done, your spouse deducts the contribution from their income. There is no way for you to contribute to their FHSA so that you receive the deduction.
15. Can You Contribute to a Child’s FHSA?
As is the case with your spouse, you can give your child money to deposit into their FHSA, however, they will receive the deduction for the contribution.
16. What Happens to Your FHSA if You Have a Marital Breakdown?
If you have a breakdown of marriage or common-law partnership, you can transfer an amount from one FHSA to a spouse’s FHSA, RRSP or RRIF. The transfer will not restore your contribution room and will count against the receiving spouse's contribution room.
17. Can You Transfer Funds From an RRSP to a FHSA?
Yes, you can transfer funds from an RRSP to an FHSA and these transfers will be tax free. You are, however, limited to the $8,00 annual and $40,000 lifetime limits.
The amount transferred into the FHSA will count against your contribution room and your RRSP contribution room will not be restored. Transfers to an FHSA are not subject to the 30-day transfer rule.
18. Can You Use Your HBP and FHSA on The Same Home Purchase?
Yes, you can buy or build a home and use both your HBP and FHSA. Originally this was not allowed but rules changed with the November update.
For more information about the FHSA contact us.
Correction: In the original blog post published on March 6, 2023, we mistakenly stated that you can withdraw funds from your FHSA for the purchase of your first home at any time, but that the withdrawal must be at least six months after the date of contribution. In fact, the CRA has not currently stated how long the money has to sit in the account before it can be withdrawn. We updated the post on April 14, 2023, to fix the mistake.
