Understanding the First Home Savings Account (FHSA) in Canada

The First Home Savings Account (FHSA) is a tax-free savings account designed to help first-time homebuyers save up to $40,000 for a home purchase. Introduced through Bill C-32 and receiving Royal Assent on December 15, 2022, the FHSA provisions came into effect on April 1, 2023, offering individuals a unique opportunity to save for their dream home. Let’s dive into the basics of the FHSA to understand how it works and who is eligible.

Who is eligible for the First Home Savings Account?

To open an FHSA, individuals must be at least 18 years old and reside in Canada. However, those who have owned a home, either individually or jointly with their spouse, in the year the account was opened or in the previous four calendar years, are not eligible.

How do you contribute to the First Home Savings Account?

Contributions to an FHSA are deductible, similar to an RRSP. The lifetime contribution limit is $40,000, with an annual limit of $8,000. Unlike RRSPs, contributions made within the first 60 days of a calendar year cannot be attributed to the previous year. Unused contribution room can be carried forward up to a maximum of $8,000, providing flexibility in saving for a home.

How do you withdraw money from the First Home Savings Account?

Qualifying withdrawals from an FHSA made to purchase a first home are non-taxable. To qualify, the withdrawal must be made by written request, indicating the intended location of the qualifying home. The individual must also be a resident of Canada at the time of withdrawal and must not have owned a home in the previous four years.

Individuals can transfer funds from an RRSP to an FHSA tax-free, subject to the contribution limits. Withdrawals for purposes other than purchasing a first home are taxable. However, funds from an FHSA can be transferred to an RRSP or RRIF on a non-taxable basis.

What are other considerations about the First Home Savings Account?

Assets held within an FHSA that are pledged as collateral must be included in income. A 1% overcontribution tax applies monthly, similar to RRSPs. FHSAs do not have creditor protection under the Bankruptcy and Insolvency Act.

Questions?

The FHSA offers a valuable opportunity for first-time homebuyers to save for a home purchase while benefiting from tax advantages. It provides a structured and tax-efficient way to achieve the dream of homeownership.

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