In Canada, the struggle to find affordable housing is no secret. From renting to buying that first home, securing a stable, long-term residence has become increasingly challenging, especially for younger Canadians. However, there is some hope on the horizon.
In early 2022, the federal government introduced a new tax measure as part of its 2022-23 budget. It was aimed at helping Canadians achieve their dream of homeownership.
While it may not be a one-size-fits-all solution, the First Home Savings Account (FHSA) offers significant financial support to those striving to purchase their first home. This program, which went live in 2023, lets first-time homebuyers save for their first home on a tax-assisted basis so long as they meet certain limits.
Making Contributions to an FHSA
Under the program's terms, any Canadian resident aged 18 to 71 who has not owned a home in the current or past four years can open an FHSA and make annual contributions. The maximum annual contribution is $8,000, regardless of income.
Contributions must be made by the end of the calendar year, but any unused portion can be carried forward, up to a maximum of $8,000. For example, if you contribute $6,000 in 2023, you can contribute $10,000 in 2024 (combining $8,000 for 2024 with $2,000 left from 2023). The lifetime limit for contributions is $40,000 per individual.
The real advantage of the FHSA lies in the tax treatment of contributions and their earnings. Contributions are deductible from income, similar to a registered retirement savings plan (RRSP).
While the funds are in the FHSA, they can be held in cash or invested in various vehicles, such as mutual funds, stocks, bonds, or guaranteed investment certificates (GICs). Importantly, any interest, dividends, or other investment income generated within the FHSA grows tax-free – no taxes are levied on this income.
Most significantly, when you withdraw funds from the FHSA to purchase your first home, neither your original contributions nor the investment income are subject to taxation.
In summary, FHSA contributions reduce your taxable income, investment income isn't taxed, and withdrawals for your first home purchase are tax-free. It's a triple win for taxpayers.
Withdrawing Funds From an FHSA
Given the favorable tax treatment of FHSA contributions, there are specific qualifications and restrictions on fund usage. Funds can be withdrawn tax-free only for "qualifying withdrawals," which means they must be used for a qualifying home purchase. To qualify, you must have a written agreement to buy or build a home in Canada, with acquisition or construction completed before October 1 of the following year. Additionally, you must intend to occupy the home within a year after purchase or construction.
If funds are withdrawn for any other purpose, they are fully taxable in the year of withdrawal.
While the goal of opening an FHSA is to buy a home, plans may change.
Fortunately, FHSA rules provide flexibility. You can transfer all FHSA funds to an RRSP or registered retirement income fund (RRIF) tax-free. Notably, this transfer won't affect your RRSP contribution room. However, these transferred amounts will be taxable upon withdrawal, just like any other RRSP or RRIF withdrawal.
The ability to transfer funds can also go the other way – individuals with funds in an RRSP can transfer them to an FHSA (within the contribution limits). No deduction is allowed for these transfers, but they occur tax-free and do not replenish RRSP contribution room.
It's not possible to transfer funds from an RRIF to an FHSA if you're an older taxpayer.
Closing an FHSA
You have 15 years from the FHSA's opening date to use the funds for a qualifying home purchase. Additionally, you must close your FHSA by the end of the year in which you turn 71.
While these rules impose some timing pressure, there's flexibility. If you haven't made a qualifying home purchase within the required 15-year timeframe (or by age 71), you must close the FHSA. However, you can still transfer the funds to your RRSP or RRIF tax-free.
The FHSA is a valuable new tax planning tool. Canadians who meet the criteria should seriously consider taking advantage of it. The federal government provides detailed information on the FHSA program at link. Don't miss out on this opportunity to make your dream of homeownership a reality.
Need more information? Get in touch with Koroll & Company today.
