How Canada's New Tax Free Home Savings Account Works

Canada’s Tax-Free First Home Savings Account (FHSA) is a savings tool introduced in 2023 to help Canadians save for their first home. It combines features of both the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP), allowing for tax-deductible contributions and tax-free withdrawals when used for a first home purchase.

Here’s a breakdown of how it works:

1. Eligibility

• Age Requirement: You must be at least 18 years old.
• Residency: Must be a Canadian resident.
• First-Time Homebuyer: You cannot have owned a home in the year the account is opened or in the previous four calendar years.

2. Contributions

• Annual Contribution Limit: You can contribute up to $8,000 per year.
• Lifetime Contribution Limit: The lifetime contribution limit is $40,000.
• Tax Deductibility: Like an RRSP, contributions are tax-deductible, meaning you can reduce your taxable income by the amount you contribute.

3. Growth

• Tax-Free Growth: Investments within the FHSA (such as stocks, bonds, mutual funds, etc.) grow tax-free, similar to a TFSA.

4. Withdrawals

• Tax-Free Withdrawals: You can withdraw funds tax-free when purchasing your first home, provided certain conditions are met.
• Use for a First Home: Withdrawals must be used for a qualifying home purchase, typically within 15 years of opening the account.
• Unused Funds: If you don’t use the funds to buy a home, you can transfer the balance to your RRSP or RRIF without affecting your RRSP contribution room. Withdrawals from an RRSP or RRIF will be taxed at the time of withdrawal.

5. Contribution Carry-Forward

• Carry-Forward Unused Contribution Room: If you don’t contribute the full $8,000 in one year, you can carry forward unused contribution room to future years, up to a maximum of $8,000 in carry-forward room.

6. Combining with the Home Buyers' Plan (HBP)

• You can combine the FHSA with the Home Buyers’ Plan (HBP), which allows first-time homebuyers to withdraw up to $35,000 from their RRSP for a home purchase. However, unlike the HBP, FHSA withdrawals don’t need to be repaid.

Example:

If you save $8,000 annually for five years, you'll contribute $40,000 into your FHSA. Over those five years, your investments grow, and the entire amount (contributions plus growth) can be withdrawn tax-free when buying your first home.

The FHSA is designed to help Canadians save more efficiently for their first home while offering both tax relief and growth potential.

To ensure you are getting the maximum benefit from a FHSA, contact our office for advice.