Welcome back to the GBA-LLP.ca education series, ‘Special Tax Topics.’
The journey towards homeownership is laden with challenges, especially for first-time buyers. The Canadian government’s introduction of the First Home Savings Account (FHSA) seeks to ease this path. Today, we’ll uncover the intricacies of the FHSA, highlighting its benefits and some of its major rules.
What is an FHSA?
The FHSA is not just another savings account – it’s a savings vehicle for first-time homeowners. Here’s what it encapsulates:
Definition: An FHSA is a registered savings account designed to offer Canadians a tax-favourable avenue to accumulate funds for their first home’s down payment.
Eligibility: If you’re a Canadian aged 18 or above and haven’t owned a home or resided in one owned by your spouse or common-law partner in the present calendar year and the preceding four calendar years, then you are eligible to open a FHSA. For clarity, if you have a spouse, both of you must be eligible in order to open a FHSA. For example, if you never owned a home, but your spouse owns or has owned one within the last 5 years, then you are not eligible to open an account.
If you have opened an account, made contributions, then enter into a spousal relationship (marriage or common law) with someone who would not be eligible, you can make a withdrawal from your FHSA to fund your next home purchase.
Duration: You can keep your FHSA active for 15 years or until December 31st of the year you turn 71. Whichever milestone you hit first determines its tenure.
Withdrawals: Eligible Canadians can make tax-free withdrawals at any juncture for a single property acquisition.
Benefits at a glance
Contribution: Individuals can make tax deductible contributes up to $40,000 to their FHSA.
Joint Purchases: If you and a partner/spouse are buying a home, both of you can use your FHSA funds, effectively doubling the available amount for the home purchase.
Re-contribution: If, after withdrawing for a home purchase, you happen to sell the home, you can re-contribute the withdrawn amount back to the FHSA.
Tax-free Growth: Mirroring the advantages of a TFSA, investment income and growth within the FHSA are tax-exempt.
Flexibility: Should you decide against buying a home, you can transfer the FHSA into an RRSP, still making your savings work for you.
If the FHSA reaches the 15th year, or you turn 71, or you decide not to buy a qualifying property, you can transfer to a RRIF or RRSP, even if you do not have the room. It is like an additional $40,000 (plus any income growth) of additional contribution room. However, once you have done this, you do not generate any additional FHSA contribution room – like RRSP room, once used, it is gone.
Taxes
Contributions to your FHSA will be tax deductible like RRSP contributions. Unlike RRSPs, contributions made within the first 60 days cannot be deducted from the previous year’s income.
Withdrawals for the purchase of a qualifying property will be tax free, other withdrawals would be subject to inclusion in your calculation of taxable income in the year of withdrawal.
Unlike RRSPs, you cannot make a spousal contribution to your spouse’s FHSA and deduct it from your taxable income calculation.
Making Contributions and Carrying Forward
Starting April 2023, potential contributors can stash up to $8,000 annually, cumulating to a lifetime threshold of $40,000 over 15 years. It is important to note that the $8,000 annual contribution room only begins once the account is open/registered. *Planning opportunity*: open an account even though you might not be thinking of purchasing a qualifying home in the near term so that the lifetime limit can be reached sooner.
Over-contributions
There will be a 1% tax penalty per month for contributions over the FHSA contribution limit, similar to RRSPs and TFSAs.
Also like RRSPs and TFSAs, at the beginning of each calendar year an account holder’s contribution limit is reset, so over-contributions from the previous year may be reduced or completely eliminated by the current year’s FHSA contribution room.
In Conclusion
The FHSA is a commendable stride by the Canadian government, offering a tangible solution for aspiring homeowners. As this financial landscape continues to evolve, staying informed is paramount. When used with a Home Buyer’s Plan (HBP) it allows first time home buyers access to savings of up to $75,000 or up to $150,000 when combined with your spouse.
Continue to look for our ‘Special Tax Topics’ series for deeper dives into the ever-evolving financial terrain.
Disclaimer: This article is for general information purposes only, and is not meant to provide any specific, actionable advice. The information presented in this article is current at the time of publication – changes to legislation may affect this information, and GBA LLP is not responsible for updating this article with new information that may become available in the future. For advice tailored to your circumstances, a consultation with a professional is recommended.
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This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA advisor.
GBA LLP is a full-service accounting firm in the Greater Toronto Area, but we primarily service all of Ontario as well as the rest of Canada virtually, except Quebec. Our team of over 30, provides Audits and Reviews of financial statements, and Compilations of financial information, as well as corporate tax returns. We provide specialized corporate tax and succession planning for small and medium businesses, in addition to general advisory services.
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