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First Home Savings Account (FHSA)

First Home Savings Account (FHSA) In Canada

Buying a home is a dream for many Canadians. However, the current lack of affordable housing, increasing mortgage rates, and high cost of living in Canada make saving for a down payment challenging.

Fortunately, there are ways you can save for a downpayment and reduce your taxes at the same time. The most recent option is the First Home Savings Account (FHSA), introduced on April 1, 2023. In this article, we’ll look at government-approved programs designed to help you buy your first home.

Tax-Friendly Down Payment Options

Taxes are one of the largest expenses Canadians have. In 2023, the average Canadian household pays a hefty portion of their income in taxes. Taxes include federal, provincial and municipal taxes, as well as other taxes such as sales tax. High taxes and living costs can make it difficult to pay your rent or save for a down payment.

Government assistance is available for renters who qualify in the form of the Canada Housing Benefit. This program is a partnership between the levels of government to help offset high rents. The Canada Housing Benefit will pay qualifying renters the difference between 30% of their household income and 80% of the average market rent. This program is not open to the public. Potential recipients must be referred and on the Centralized Waiting List for social housing or be eligible to be on that list.

But what if you’re saving to buy your first home? Well, the government offers savings plans that have tax-deductible contributions, tax-free income or both. These plans can help put more money in your pocket to buy your first home.

Three programs to maximize your savings and reduce taxes are the First Home Savings Account (FHSA), the Tax-Free Savings Account (TFSA) and the Home Buyers Plan (HBP).

First Home Savings Account (FHSA)

The FHSA is a new initiative that became available to Canadians on April 1, 2023. Using the FHSA can help you save for your first home and reduce your taxes.

The account allows you to deposit up to $8,000 in the first year you open it and has a lifetime maximum contribution of $40,000. If you miss contributing or don’t contribute the maximum, you can carry the amount missed to the following year. However, you cannot exceed a deposit of $16,000 in any given year. Generally, you can deduct the amount you contributed, which will reduce the amount of tax you must pay on your income.

To open a FHSA, you must:

  • Be 18 or 19 (depending on the age of majority in your province or territory) and not more than 71 years old on December 31 of the year you open the plan.
  • Be a Canadian resident.
  • Be a first-time homebuyer.

You are considered a first-time home buyer if you haven’t owned and lived in a home as your principal residence in the last four calendar years before you opened the FHSA. If you have lived in a spouse’s or common-law partner’s principal residence, which they owned in the previous four years, you may not qualify to open a FHSA. However, you may be able to open an FHSA if you and your partner are no longer together.

Most financial institutions now offer the FHSA and will be happy to open an account for you. According to the Department of Finance, Canadians have opened more than 250,000 FHSAs since they became available in April 2023.

FHSA investments

Your FHSA offers a variety of investment options, depending on the type of account you open. Some typical investment options for the FHSA are cash, Guaranteed Investment Certificates, term deposits, corporate and government bonds, mutual funds, and public stocks.

Withdrawing from your FHSA

Most contributions to the FHSA will get a tax deduction, and you’ll pay no tax on the withdrawals as long as you use the money to purchase or build a qualifying home. A qualifying home is a home located in Canada. Qualifying homes include:

  • Single-family dwellings.
  • Semi-detached homes.
  • Townhomes.
  • Apartments in a duplex, triplex, fourplex or apartment building.
  • Mobile homes.
  • Units in a cooperative, but you must have equity in the co-op unit.

You must close your FHSA by December 31 of the year you turn 71, the fifteenth anniversary after opening it, or the year following your first qualifying withdrawal, whichever comes first. If you open the account but don’t use the money to buy a home, you can transfer the funds to your RRSP or RRIF and avoid immediate taxation on the money. You must include funds you withdraw from your FHSA for purposes other than buying a home or transferring them to your RRSP or RRIF on your income tax return.

Tax-Free Savings Account

The TFSA (Tax-Free Savings Account) doesn’t offer any tax deductions for contributions you make to the plan. Instead, it allows any money you deposit to your TFSA to grow tax-free. Interest, dividends, and capital gains are not taxable even if you withdraw them from the plan. Any money you contribute is also not taxable when you withdraw it because you don’t get a tax deduction when you deposit it. You can withdraw funds from your TFSA for any purpose, including a downpayment for your first home.

Here’s a basic comparison of the FHSA vs. the TFSA:

Contribution limit$8,000 per year$6,500 for 2023. Limits can change each year
Lifetime maximum contributions$40,000$88,000 for 2023

Increases each year by the contribution limit

Tax-deductible contributionsYesNo
Is investment income in the plan taxed?NoNo
Can I carry forward the unused contribution room?Yes, but you can only contribute a maximum of $16,000 in any one yearYes-no maximum limit to catch up on unused contribution room in any year
Can the funds withdrawn be used as a downpayment?YesYes
Can I withdraw the funds for other purposesYes, but unless you use them for a qualifying home purchase or transfer them to your RRSP or RRIF, they will be added to your taxable income.Yes, they are not taxable when you withdraw them.

Home Buyers’ Plan

The government introduced the  Home Buyers Plan in 1992. It allows first-time homebuyers to withdraw up to $35,000 from their RRSP to buy a home. To qualify for the program, you must be a resident of Canada, be considered a first-time home buyer, and intend to occupy the property as your principal residence.

You can deduct contributions to your RRSP from your taxable income. Like the FHSA, RRSP contributions are subject to maximum limits and allow you to make up missed contributions in the following years.  However, RRSP maximum limits differ from person to person and do not have a maximum that applies to everybody as the FHSA does.

Another difference between the Home Buyer’s Plan and the First Home Savings Account is that you must pay back the amount you withdraw from your RRSP to use as a downpayment. You have up to 15 years to repay the funds to your RRSP. Payments begin in the second year after withdrawing money from your HBP. That means, for example, if you use the HBP for a downpayment on a qualifying home in 2024, you will need to begin to repay the funds to your RRSP in 2026.

If you do not repay the funds, a portion of the amount you withdrew will be added as taxable income each year until you pay off the amount you borrowed from the plan. If you withdrew $15,000 and did not repay it, $1,000 will be added to your taxable income for 15 years or until you repay the amount owing to your RRSP. Money withdrawn from the FHSA does not need to be repaid.

All three of these accounts provide tax incentives to help you save for a downpayment to buy your first home. Another tax incentive the government offers is the First-Time Home Buyers Tax Credit. The First-Time Home Buyers Tax Credit gives a tax credit to eligible buyers who purchase a qualifying home. The tax credit can be as high as $1,500.00.

Preparing Your Finances For Canadian Homeownership

Having a downpayment is only one part of qualifying to buy a home. If you need to finance your home purchase with a mortgage, lenders will typically confirm your income, check your credit report and calculate the amount of debt you have. If you’re struggling with debt payments, our team at Adamson and Associates can help.

Being unable to pay your debts is very stressful. It can ruin your credit rating, make it challenging to save for your goals, and prevent you from getting a mortgage. Our Licensed Insolvency Trustees will work with you to find the best government-approved relief program for your debt. Call us today at 1-519-310-5646 for a free consultation to get rid of your debt and get back to pursuing your dreams.

John Adamson, Licensed Insolvency Trustee Ontario

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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