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What is Canada’s new First Home Savings Account?

Between persistently high purchase prices and rising interest rates on mortgage borrowing, it’s a tough time to be shopping for a home in many parts of Canada. That’s why many first-time buyers are making use of a new financial tool designed to help them save for a down payment: the First Home Savings Account, or FHSA.

Canadian financial institutions have been permitted to offer the FHSA since April 1, 2023. The contribution maximum is $8,000 per year, up to a lifetime limit of $40,000.

Contributions to an FHSA are tax deductible on your annual personal tax return, just like contributions to a Registered Retirement Savings Plan (RRSP). That means the more money you’re able to contribute to an FHSA each year, the more likely you are to receive a federal income tax refund.

That’s not all. The FHSA is tax-free, meaning savers don’t have to pay a single cent tax on any income they earn within their account. That means more money in your pocket when the time comes to withdraw funds for a home purchase.

If you’re interested in opening an FHSA, here are a few important things to know:

What are the basics of FHSAs?

If you’re a Canadian resident who’s older than 18 but not older than 71, and you qualify as a first-time buyer, you can open an FHSA. In some provinces and territories, the minimum age to open an FHSA is 19.

To qualify as a first-time buyer, you cannot have lived in a home you own in any of the five years prior to the year in which you open an FHSA. The same applies to homes owned by spouses and common-law partners of prospective account holders.

You can contribute up to $8,000 to your FHSA each year, up to a lifetime maximum of $40,000. If you have unused contribution room in any year, you can carry it forward to the following year, up to a maximum amount of $8,000.

Once you open an FHSA, you have 15 years to put the savings towards a home purchase. If you turn 71 before the 15 years is complete, you can’t use your FHSA and should close the account to avoid tax consequences.

What happens if I’m out of time with my FHSA and haven’t been able to buy a home?

Account holders can transfer funds from an FHSA to an RRSP or a Registered Retirement Income Fund (RRIF) without tax consequences. As a result, the FHSA is an excellent way to backstop your retirement savings while also putting money aside for a potential property purchase.

What can I do with the money in my FHSA?

Contributions to an FHSA don’t have to just be kept as cash. As with RRSPs and TFSAs, the best way to make use of these accounts is by investing in stocks, bonds, GICs, mutual funds and exchange-traded funds, or ETFs. The idea is to find investments that will generate strong, reliable returns and help your savings grow more quickly.

Can I combine the FHSA with the Home Buyers’ Plan?

Yes! In a previous blog we wrote about the Home Buyers’ Plan, which lets first-time buyers withdraw up to $35,000 from their RRSP to contribute to the purchase or construction of a home. Savings and income from an FHSA can be combined with the Home Buyers’ Plan, helping maximize the amount you contribute to your first-home purchase. Just remember, of course, that whatever amount you withdraw from your RRSP has to be paid back within 15 years to avoid tax penalties.

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