What is a First Home Savings Account (FHSA)?
Saving for a down payment on your first home can be a challenging endeavour. To assist aspiring homeowners, the Canadian government has introduced the Tax-Free First Home Savings Account. This innovative savings vehicle combines features of both a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). Let’s discuss the ins and outs of the FHSA, including eligibility criteria, advantages over the home buyer’s plan, and how to take advantage of this tax-free savings opportunity.
How does the FHSA work?
The FHSA is a specialized savings account designed for first-time homebuyers in Canada. Combining the benefits of RRSPs and TFSAs, contributions to an FHSA are tax-deductible, similar to an RRSP, while qualifying withdrawals for a qualifying home purchase are tax-free. This unique blend of tax advantages makes the FHSA an attractive option for individuals looking to save for their first home, providing the opportunity to lower their taxable income and enjoy tax-free growth on their savings. By leveraging the benefits of both RRSPs and TFSAs, the FHSA offers a powerful savings tool to help Canadians achieve their homeownership goals.
Who is eligible for an FHSA?
To be eligible for the FHSA, you need to meet three key criteria. Firstly, you must be a resident of Canada. Secondly, you need to be at least 18 years old or the age of majority in your province or territory. Lastly, you (and your spouse) must not have owned a home in which you lived at any time in the year the account is opened or during the previous four calendar years.
When can you start contributing to an FHSA?
The FHSA allows you to save up to $40,000 for your first home, with an annual contribution limit of $8,000. It’s worth noting that there is no minimum amount required to open an FHSA. Even if you can’t contribute anything in the first year, you can carry forward up to $8,000 to the following year, maximizing your savings potential.
How does the FHSA differ from the home buyer’s plan?
The FHSA offers distinct advantages over the Home Buyer’s Plan (HBP) which is another option available to Canadians looking to access their RRSP funds for a down payment. Here’s how the FHSA differs from the HBP:
- No repayment required: With the FHSA, the funds withdrawn for the down payment do not need to be repaid, unlike the HBP, where repayments are mandatory.
- Higher contribution limit: The FHSA has a higher contribution limit than the HBP, allowing you to save more towards your home purchase.
- Flexibility: FHSA funds can be invested in various financial instruments, providing flexibility and potential growth opportunities.
- Tax-free withdrawals: Withdrawals from an FHSA for a qualifying home purchase are tax-free, providing significant savings compared to the taxable withdrawals under the HBP.
Can non-residents of Canada open an FHSA?
No, only residents of Canada are eligible to open an FHSA. Non-residents of Canada cannot open an FHSA. The FHSA is specifically designed to assist Canadian residents in saving for their first home.
What happens if I become a non-resident after opening an FHSA?
If you become a non-resident of Canada after opening an FHSA, you can still participate in the account with one exception. While you are a non-resident, you cannot make a qualifying withdrawal to build or buy a qualifying home. One of the requirements for a qualifying withdrawal is that you must be a resident of Canada throughout the period that begins with the date of the first qualifying withdrawal and ends with the date of acquisition of the qualifying home.
Are there any tax implications for non-residents who make withdrawals from their FHSA?
Yes, if you are a non-resident of Canada, any taxable withdrawal from your FHSA will be subject to withholding tax in the year of withdrawal. The withholding tax rate for non-residents is typically 25% unless it is reduced by a tax treaty between Canada and your home country.
At Shory Law, we understand the importance of informed decision-making when it comes to homeownership. Whether you have questions about eligibility, contribution limits, qualifying withdrawals, or any other aspect of the FHSA, our experienced corporate lawyers are here to assist you.
We understand the importance of maximizing the benefits of this specialized savings account for first-time homebuyers, and we will work closely with you to provide personalized guidance and support. Contact our team today to learn more about how you can benefit from the Tax-Free First Home Savings Account and to discuss your specific needs and goals.