The Newly Proposed Tax- Free First Home Savings Account

In budget 2022 the government proposed a new savings program that will help Canadians purchase a home as a first-time home buyer.

Let’s look at what this new program is and what it means for Canadians.

What is a First Home Savings Account (FHSA)?

This new program will have the characteristics of an RRSP in which the contributions would be tax- deductible, but it will also have characteristics of a TFSA as the withdraws to purchase a first-time home would be non-taxable.

What are the key rules and key points?

It would be too good to be true if Canadians could just open this account with no rules. Unfortunately, just like all registered investment plans this plan will have rules and limitations, but also some unique characteristics. Here are the main points to keep in mind:

1. There is a lifetime contribution of $40,000 and an annual contribution of $8,000
2. The annual contribution limit would apply to contributions made within a particular calendar year
3. Unlike RRSPs, contributions made within the first 60 days of a given calendar year could not be attributed to the previous tax year.
4. You can hold multiple investments in this account, much like a TFSA, such as mutual funds, publicly trades securities, bonds and GICs.
5. You will be allowed to carry forward unused contribution portions to the following year, up to a maximum of $8,000
6. You can hold more than one FHSA, but you can still only contribution a combined lifetime amount of $40,000
7. You cannot make a withdrawal from both a FHSA and a home buyers plan for the same purchase.
8. To qualify you must be a Canadian resident, between the age of 18 & 71, and a first-time home buyer
9. The funds must be used within 15 years of you opening the account or before you turn 71; whichever comes first

How does a withdrawal work?

For a withdrawal to be considered qualifying or non-taxable, there are a few terms that must be met. The house you are purchasing must be in Canada, and it must be your primary residence. You must have written agreement to buy or build a home before October 1 of the year following the withdrawal.

What if I don’t purchase a home?

If 15 years has passed and you have not had the opportunity to purchase a home, or if you outweighed your options and using your Home Buyers Plan was the better option for you, then what do you do with those funds? You can withdraw the money in cash, but it will be taxable, however, they can be transferred to an RRSP or a RRIF on a tax free basis. If you chose to transfer the funds to an RRSP or RRIF, it will not impact your contribution room for the year.

Finally, what does this mean for Canadians? If you look at any listing these days, and the history over the past years you will notice that the housing market is continuously growing and becoming very pricey. That is the reason why the government came up with this program, it is aimed at helping first time home buyers secure a house in the pricey Canadian market. With the proposal being given during the 2022 Budget, the hopes are that Canadians can begin opening and contributing to these accounts at some point in 2023.

For up to date information on the latest with this program please check out the Government of Canada website.