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Everything you need to know about the new FHSA

Posted on Friday September 23, 2022

Everything you need to know about the new FHSA

Have you heard about the FHSA? If you’re dreaming of buying your first home, you’ll definitely want to get acquainted with this new financial tool. And we’ve put together a quick deep-dive into the FHSA so you’ll have the skinny.

A new tool to help turn your real estate dream into reality

The FHSA, or tax-free first home savings account, is a new tax measure that was  announced on April 7 as part of the second federal budget tabled by Canada’s Deputy Prime Minister and Minister of Finance, Chrystia Freeland. It is slated to come into effect in 2023 and is already generating a lot of excitement.

In the current economic context, the government is trying to create conditions that make home ownership more accessible. For young households hoping to make their dream of buying their first home a reality, the program is welcome news.

What is the FHSA?

The rules of the new program are not yet fully known, but tax experts already seem to agree that it’s something of a hybrid between an RRSP and a TFSA. The initiative may spell the end of the Home Buyers’ Plan (HBP), which currently allows RRSP holders to use a portion of their RRSP toward the purchase of a first home provided that withdrawals are repaid over time.

Part RRSP, part TFSA

The main advantage the FHSA has over the HBP is that it provides tax relief but does not have to be repaid. Basically, FHSA contributions are tax deductible, like with an RRSP, and the income earned on the investment is not taxable, like with a TFSA.

We won’t know all the specifics until the full text of the law is released, but it looks like the new product will be as enticing as an ice cream cone on a hot summer day to aspiring homeowners!

Who will be eligible for the FHSA?

To be eligible for the program, you have to meet certain conditions: for example, you have to be at least 18 years old and able to show proof of residence in Canada. You must also not currently live in a home you own (or have done so in the past four years).

The FHSA can only be used once in a lifetime. After making a non-taxable withdrawal for the purchase of their first property, FHSA holders will be required to close all of their FHSAs within 12 months of the first withdrawal and will not be allowed to open another one thereafter.

What are the rules on contributions?

There are also a few key points to keep in mind regarding contributions.

  • There will be a lifetime contribution limit of $40,000, with contributions maxing out at $8,000 per year.
  • Unused contribution room cannot be carried forward from year to year.
  • Individuals can have multiple FHSAs, but the total contributions to all FHSAs cannot exceed the annual or lifetime limits.
  • Withdrawals to buy a first qualifying home will not be taxable, but withdrawals for other purposes will be.
  • People will be allowed to transfer funds from an RRSP to an FHSA without tax consequences, provided they stay within the annual and lifetime limits. However, such transfers will not restore an individual’s RRSP contribution limit for tax purposes.
  • If FHSA funds are not used within 15 years of the account’s opening, the FHSA must be closed. Unused amounts will have to be transferred to an RRSP or RRIF or be subject to a taxable withdrawal.

Saving up for a down payment

In the current climate of rising mortgage rates, this tax break will help future homeowners raise the down payment they need to buy a home. But to make this dream a reality, you’ll still need the wherewithal to grow that nest egg.

Since the maximum annual limit for a conventional TFSA in 2022 is $6,000 and you could be eligible to contribute $8,000 to an FHSA in 2023, this new account offers tax advantages. But if you rely solely on your FHSA to raise your down payment, it will be a few years before you can experience the joy of homeownership. To take advantage of the $40,000 lifetime contribution limit, you’ll have to invest the full $8,000 every year for five years starting in 2023, which means you’ll be ready to sign on the dotted line in 2027.

We have lots of helpful tips for future buyers. For example, we recommend setting up automated transfers to an account dedicated to saving up for your down payment. These funds can then be put into an FHSA. The bigger your down payment, the smaller your loan will be and the less interest you’ll have to pay!

Professional guidance on buying your first home

Whatever your lifestyle and financial situation, we encourage you to talk to one of our personal financial professionals for the right investment strategies for your projects. Our advisors can help you pick the best options for your needs. Our website also has a wealth of information to help you buy your first home.

With the experts in your corner, you’ll have the peace of mind you need to start looking for your dream house and purchase your first home!

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