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First Home Savings Account in Canada

First Home Savings Account in Canada

First Home Savings Accounts

The FHSA is a first-time home buyer savings account established by the Government of Canada as a tax-free program to make homeownership more affordable. It became effective on April 1, 2023

Introduction

Are you looking to buy your first home in Canada but struggling with the high home prices? Don’t worry, the Government of Canada has got you covered with several programs and incentives (including first home savings accounts) that are designed to make homeownership more affordable. And guess what? They are available exclusively for first-time home buyers like you.

Different regions in Canada have varying incentives for first-time home buyers. But fret not, there are certain incentives that are applicable across Canada (regardless of which province/territory you live in), like the First Home Savings Account (FHSA).

The FHSA is a tax-free savings account, meaning that you’ll be able to save more for your dream home without worrying about pesky taxes eating into your earnings. It can also be used in addition to other first-home buyer incentives making it easier for you to save up for your dream home.

Not sure which incentive suits your needs the best? Don’t worry, you may be eligible for multiple incentives simultaneously. We suggest you read on to learn more about the FHSA and other related incentives to see which one aligns best with your requirements. Your homeownership dreams can become a reality.

Who is a first home buyer, and what are First Home Buyers incentives?

First Home Buyers (FHB) incentives are programs offered by the Canadian government to make it easy for eligible home buyers to purchase their first home. Over the past several years, the Canadian government has been adding more incentives to the FHB program.

Currently, there are four incentives that any FHB can access in Canada. These four incentives include:

  • Home buyers plan
  • First home savings account
  • First-time homebuyer’s tax credit
  • First-time home buyers’ incentive

Apart from these four widely offered incentives, you may also qualify for provincial/territorial incentives. These incentives are specifically applied to homes that are bought within the jurisdiction of the respective province and/or territory in Canada.

For many Canadians, the definition of a first-time home buyer (FHB) can be a bit confusing, especially when it comes to determining eligibility for FHB incentives. While it may seem straightforward that an FHB is someone buying their first home, the definition is a bit broader.

In order to qualify as an FHB, you must meet the following criteria to be considered a first-time home buyer:

  • You have not owned a home in the four-year period before purchasing the current residential property
  • Your common-law partner has also not owned a home in the last four years

If you meet these criteria, chances are that you may qualify for a First Time Home Buyer Savings Account and other incentives.

What does the FHSA entail?

Saving up for the downpayment of your first home can be challenging for most Canadians. The First Home Savings Account (FHSA) is meant to make the process of saving for a new house easier.

FHSA also doubles as an investment account and has earning potential. You can hold mutual funds, securities, and even bonds in your FHSA, along with cash.

The amount you contribute to your FHSA, as well as the gains you make from the investments, are tax-free. Therefore, it is easy to determine how quickly you can reach your savings goal with the help of this tax-free account.  

As you contribute to this savings account and your investments grow, the closer you become to reaching your savings goal(s) for your first home. There is an annual contribution limit of $8,000 and a lifetime contribution limit of $40,000 for an FHSA.

With that said, a withdrawal from your FHSA without tax penalties is only possible if you use the withdrawn funds to buy your first home or if you transfer the funds to your Registered Retired Income Fund tax-free.

So even if you don’t plan on buying a house but you do qualify for a First Time Home Buyer Savings Account, you should still consider utilizing this incentive.

Eligibility criteria for the FHSA are similar to other first-home buyer incentives:

  • You must be 18 years of age
  • Must not have lived in a place that you or your partner owned during the past four years
  • Be a resident of Canada

How is the FHSA benefit calculated?

The good thing about the First Home Savings Account is that there are no complex calculations involved. However, you still need to understand the limits of this account and how it benefits you.

Every dollar you contribute to your FHSA is tax-deductible, and any income earned is tax-free. However, there are limits to how much you can contribute to your FHSA. You’re only allowed a maximum yearly contribution of $8,000, and a total lifetime contribution limit of $40,000.

But here’s the catch; any unused contribution room from one year is automatically carried over to the following year. For example, if you contribute $6000 to your FHSA in 2023, you’ll have $2,000 of contribution room left. The additional $2,000 contribution that was unused in 2023  will be added to your 2024 limit. This means that you could contribute up to $10,000 in your FHSA for 2024.

It’s also important to note that FHSAs have an expiration period of 15 years from the date of opening. You have 15 years to reach the maximum contribution limit of $40,000. Keep these details in mind while planning your savings strategy for purchasing your first home.

How to apply for the FHSA

If you meet the qualification criteria for the First Time Home Buyer, you can open a First Home Savings Account at any authorized issuer. A First Home Savings Account issuer could be a bank, credit union, trust, and even an insurance company. There are plenty of options to choose from when selecting an issuer for your First Home Savings Account.

Once you have selected which FHSA issuer you want to open an account with, simply contact them regarding opening your FHSA. You may be required to provide the following documents when opening an FHSA with an authorized issuer:

  • Your government-issued Social Insurance Number.
  • Proof of your date of birth.
  • Additional supporting documents to prove that you are a first-time home buyer.

The Canadian government allows you to open multiple FHSAs with different issuers, so you aren’t limited to a single account with just one issuer. However, you will have to keep track of contributions you make to each First Time Home Buyer Savings Account because you are not allowed to exceed your annual limit of $8,000 and a lifetime limit of $40,000 across all your FHSAs.

If you over contribute to your FHSA, you will pay a tax of 1% per month on the highest excess FHSA amount in that month. You will continue to pay this sum until the excess amount is eliminated.

Therefore, it is best to pick a limited number of FHSA issuers that you can trust to open your tax-free savings account. By maintaining a limited number of First Time Home Buyer Savings Account, it will be easier for you to keep track of your annual and lifetime contribution limits.

How to withdraw money from a FHSA?

Withdrawing money from your First Time Home Buyer Savings Account is a simple process. You can either get a qualified withdrawal or a taxable nonqualified withdrawal out of your First Time Home Buyer Savings Account.

Your issuer can also support you with the necessary information to guide you through this process when you are ready to buy your first home.

Qualified withdrawal

In order to benefit from a tax-free withdrawal, also known as a qualified First Time Home Buyer Savings Account withdrawal, you have to meet the following conditions:

  • Be a first-time home buyer.
  • Sign an agreement to buy a house or begin construction of a home before October 1 of the year after your withdrawal date.
  • The home must not have been acquired more than 30 days prior to the withdrawal date.
  • You must occupy or intend to occupy the qualifying home as your principal place of residence within one year after buying or building it.
  • You must be a Canadian resident from the time of making your first qualifying withdrawal until the earlier of the acquisition of the qualifying home, or the date of your death.

If you meet all the qualification criteria for a qualified withdrawal, you should fill out the RC725 Form and submit it to your First Time Home Buyer Savings Account issuer to make a withdrawal request. You have the option of withdrawing all of the funds in a single transaction or spreading it out over a series of withdrawals.

Transfers

First Home Savings Account in Canada - Transfers

You can transfer funds from your FHSA to your registered retirement savings plans (RRSPs) and vice versa without any immediate tax implication, as long as it is a direct transfer and does not exceed your unutilized FHSA room. However, you cannot transfer from your Registered Retirement Income Fund (RRRIF) to your FHSA.

A direct transfer is a transfer completed between financial institutions of two plans or accounts. For a transfer to be classified as a ‘direct transfer’, you have to fill out a transfer form provided by your financial institution for that purpose.

It is important to note that withdrawing funds directly from your FHSA yourself and contributing to another plan or account does not qualify as a direct transfer. Transfers initiated this way would have tax consequences.

Additional factors to note for transfers:

  • Although contributions to your FHSA are tax deductible, any transfers from your RRSP to your FHSA are not tax deductible.
  • Transfers from your RRSP to your FHSA would not restore your unutilized RRSP deduction room.
  • If you transferred the total fair market value (including the excess FHSA amount), you must include the excess FHSA amount as an income on your tax returns (in the year of transfer)

Nonqualified withdrawal

If you don’t fulfill the requirements for a qualified withdrawal mentioned in the previous section, you can still withdraw funds from your FHSA. However, a nonqualified withdrawal will have to be reported as income in your income tax and subjected to tax for the period.

In summary, any withdrawal from FHSA made for any purpose other than a home purchase will be considered as taxable.

Other first-home buyer incentives available to Canadians?

As stated earlier, the First Home Savings Account is just one of many FHB incentives available to Canadians. Here are some additional home buyer benefits you can take advantage of as a first-home buyer

First-time Home Buyers' Plan (HBP)

The Home Buyers Plan allows first-home buyers to use a portion of their registered retirement savings plan (RRSP) as a downpayment for a home purchase. As an added benefit, the money you get from your RRSP through HBP is tax-free as long as you pay it back within 15 years.

If you qualify for Home Buyers’ Plan, you can withdraw $35,000 from your RRSP as a downpayment for your new home.

In case both spouses qualify for Home Buyers’ Plan, they can both withdraw $35,000 each from their RRSP. So, their combined total goes up to $70,000, which is more than enough to cover the downpayment for most homes in Canada.

Here are some qualification criteria for the HBP:

  • Must be a resident of Canada when applying for HBP up till the home purchase date.
  • Meet the criteria for a First Home Buyer.
  • Get a written agreement to purchase or build a home.
  • Have intentions of using the home as permanent residence within one year of purchase.
  • Close a home purchase within the last 30 days of your FHB application.

Paying back the borrowed funds from the HBP is simple. All you have to do is pay back 1/15th of the total amount you took from your RRSP every year.

First-Time Home Buyers Incentive

The First-Time Home Buyers Incentive (FTHBI) may be the push you need to make the downpayment for your first home. This program helps homeowners in making a larger downpayment that reduces their monthly mortgage payment amount.

This is a shared-equity mortgage with the Government of Canada that offers 5% or 10% of your home purchase amount if you qualify for the FTHBI.

The FTHBI is basically an interest-free loan that qualifying homeowners can receive and pay back within 25 years or when they sell their house. However, the repayment of the FTHBI loan is based on the value of the home at the time of repayment.

So, if your house increases in value over time, you may have to pay back more than when your house had a lower value.

To qualify for the FTHBI, you have to meet the following criteria:

  • Are a Canadian citizen, permanent resident or non-permanent resident authorized to work in Canada
  • Meet the criteria for a First Home Buyer
  • Be able to make the minimum downpayment for your home
  • Get approval for a mortgage that has mortgage insurance
  • Total annual income doesn’t exceed $120,000 ($150,000 if the home you are purchasing is in Toronto, Vancouver, or Victoria)
  • Total borrowing is no more than 4 times your qualifying income (4.5 times if the home you are purchasing is in Toronto, Vancouver, or Victoria)

First Home Buyer Tax Credit

First Home Buyer Tax Credit (FHBTC) is another great incentive for first-time home buyers. With the FHBTC, you can get tax savings of up to $1500 in the tax year when you purchased your home.

The total FHBTC amount is $10,000; however, you need to calculate it at the lowest personal tax rate, which is 15% in 2023. So, $10,000 x 15% comes out to a $1500 rebate that you can claim when filing for income tax for the year you purchased the home.

You must fulfill the following criteria to qualify for FHBTC:

  • Buy a qualifying home which can be a single-family house, townhouse, condo, apartment, or housing co-op.
  • Meet the criteria for a First Home Buyer.
  • Have intentions of using the home as permanent residence within one year of purchase.

Ontario Land Transfer Tax Refund

The Government of Ontario has implemented an incentive called the Land Transfer Tax (LTT) Refund, specifically for first-time home buyers in the province.

It’s important to note that this incentive is only available for land transfers that take place in Ontario and is not available to all Canadians. Additionally, other provinces such as British Columbia and Prince Edward Island also offer their respective land transfer tax refunds.

With the Ontario Land Transfer Tax Refund, eligible buyers can receive up to $4,000 in a refund. If you purchase a property under $368,333, you’ll receive a full refund for the LTT.

If the value of the property exceeds $368,333, you’ll still receive a $4,000 LTT refund but will be responsible for paying the remaining tax amount.

You must fulfill the following criteria to qualify for an Ontario Land Transfer Tax Refund:

  • You must be a resident of Canada 18 years of age or older.
  • Must never have owned a home before.
  • Your spouse shouldn’t have owned a house during the time they were your spouse.
  • Must use the purchased home as your primary residence within nine months of the transfer date.

To apply for a Land Transfer Tax Refund, you can either use electronic or paper registration. If you choose electronic registration, you will need to fill out all the forms under the Explanation section of the LLT affidavit.

If you prefer paper registration, fill out the LLT affidavit in the First-Time Purchasers of Eligible Homes form.

Frequently Asked Questions

Spouses can’t contribute directly to their partner’s FHSA. However, if a spouse adds funds to your FHSA, the amount may not be tax deductible. To avoid the tax deduction, you can give the money to your partner as a loan to contribute to their FHSA without the inherent tax liability.

The government officially launched the FHSA on April 1, 2023. However, only a few major Canadian banks currently offer an FHSA account.

Over time, I predict that the number of FHSA issuers partaking in this initiative will increase as more banks and financial institutions realize the importance of this service to their customers.

An FHSA can also hold investments as well as savings. FHB can use money in their FHSA to buy stock, bonds, and mutual funds. The investments that are not supposed to be in an FHSA include all nonqualifying investments as per Canadian law.

Yes. You should close all FHSAs before the maximum participation period ends.

The maximum participation period begins when you open your first FHSA and ends on December 31st in the year of the earliest of:

  • 15th anniversary of opening your FHSA or;
  • when you turn 71 years or;
  • the year following your first qualifying withdrawal from your FHSA.

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