Last year, the Canadian government announced the creation of a registered account that can help you save money, tax-free, for your first home purchase. In this article, we invite you to learn about the ins and outs of the new Tax-Free First Home Savings Account, the TFSA, which will be available as of April 1st .

What is a FHSA?

Located somewhere between a RRSP, TFSA and HBP, the FHSA is a savings account that allows you to reduce your taxable income. Specifically, eligible withdrawals from a FHSA for the purchase of a property are not taxable. Just like a TFSA, the returns generated by this investment are also tax-free. And unlike the HBP, there are no repayments required or limits imposed when withdrawing money.

What are the eligibility requirements for the FHSA?

To be eligible to open a FHSA, you must be a Canadian resident in good standing of at least 18 years old. You must be a first-time home buyer, which means that you have not owned a home during the segment of the calendar year prior to opening the account or at any specific time during the previous four years.

What is the annual contribution limit for a FHSA?

The annual limit has been set at $8,000 and the maximum lifetime limit has been set at $40,000. Therefore, if the maximum contributions are made annually, this amount will be reached after five years.

Please note that the annual limit applies to contributions made in a particular calendar year. This means that you may be able to claim an income tax deduction for your contributions made in a particular year. Unlike the RRSP, your contributions collected in the given calendar year can not be allocated to the previous tax year.

You should also be aware that any unused savings to purchase a qualifying home can be transferred tax-free to an RRSP, or a Registered Retirement Income Fund (RRIF), and can be withdrawn on a taxable basis.

The investments available for a TFSA are the same as those permitted for a FHSA. You can hold a wide range of investments including mutual funds, stocks, government and corporate bonds, and guaranteed investment certificates.

As with the TFSA, a 1% tax on over-contributions to the FHSA applies to the excess amount. Lastly, you can carry forward unused portions of your annual contribution limit up to $8,000. For example, an individual who contributes $5,000 to a FHSA for 2023 will be allowed to contribute $11,000 the following year.

What are the limits for contributing to a FHSA?

If the money you invested was not used to purchase your first property, your FHSA will no longer be active after December 31 of the year in which the earlier of the following events occurs: the 15th anniversary of the opening of the original FHSA or when you turn 71.

The amounts can then be transferred to an RRSP or RRIF, as the case may be, without affecting the RRSP contribution room and without paying tax in the year of transfer. Otherwise, these same amounts will have to be withdrawn in a taxable manner.

It is therefore the date you open your first FHSA that determines your maximum participation period. You should therefore consider when to open a FHSA based on your plans to acquire a property.

The FHSA has many tax advantages. However, depending on when you want to become a homeowner and on your existing savings, a personalized approach could be advantageous. Evaluate your options carefully so that you can implement the best strategy for updating your real estate project. In this way, the FHSA could make a significant contribution to the realisation of your dream!

Rest assured that our advisors at Mortgage Planners are able to direct you to qualified professionals who can advise you on the relevance of contributing to a FHSA.