New benefit when buying a first property – Tax-Free First Home Savings Account (FHSA)

Starting in 2023, the government is introducing a new type of account for the first-time home buyers.

Tax-Free First Home Savings Account (FHSA)

This account works like an individual pension program RRSP (Registered Retirement Savings Plan), it allows to reduce taxable income, but the earnings on this account are not taxable at the time ofтwithdrawing the funds for the purchase, similar to TFSA (Tax Free Savings Account).
In a sense, it is a combination of RRSP and TFSA, but much more interesting than each individually. You contribute the funds to this account, reduce your tax payable, similar to RRSP, withdraw accumulated amount for the down payment at the time of purchase and not pay taxes on initial contributions or any earnings over the years.

Eligibility

You must be a Canadian resident and at least 18 years of age to open an FHSA/li>
You must be a first-time home buyer, meaning you, or your spouse or common-law partner did not own a qualifying home that you lived in as your principal residence at any part of the calendar year before the account is opened or the preceding four calendar years/li>
You will be limited to making non-taxable withdrawals in respect of a single
property in your lifetime.

Contributions

You can make an annual contribution limit of $8,000 in any year, including 2023
There is a lifetime contribution limit of $40,000
You can carry forward up to $8,000 of your unused annual contribution amount to use in a later year
If you open more than one FHSA the total amount contributed to all the FHSAs cannot exceed the annual and lifetime contribution limits

Withdrawals and transfers

Qualifying withdrawals from the FHSA made to purchase a first home will be tax-free
Non-qualifying withdrawals for other purposes will be taxable
Like with other registered accounts, a tax on overcontributions applies to the FHSA for each month or part-month the account exceeds the limit. A 1% tax applies to the highest amount of the excess that existed in that month.
You are permitted to make both an FHSA withdrawal and a withdrawal under the Home Buyers’ Plan (HBP) in respect of the same qualifying home purchase
You may transfer money from RRSP to FHSA. For example, you have a lot of funds in your RRSP but for HBP you can use only $35,000. You can make a partial transfer to FHSA and withdraw money during purchase of the property from both programs. Of course, during transfer from RRSP to FHSA you will not receive tax reduction.
You may transfer funds from an FHSA to a registered retirement savings plan (RRSP) or to a registered retirement income fund (RRIF) on a tax-free basis.
Transfers do not reduce or limit your available RRSP contribution room.
Withdrawals and transfers will not replenish FHSA contribution limits. You can carry
forward up to $8,000 of your unused annual contribution amount to use in a later
year (subject to the lifetime contribution limit).
For example, if you open an FHSA in 2023 and contribute $5,000, you can contribute up to $11,000 in 2024. Carry-forward amounts do not start accumulating until after opening an FHSA. This is important.
FHSA was opened in 2023 so starting 2024 max amount to be deposited into FHSA is $16,000, $8,000 for 2023 and $8,000 for 2024.
If you have not used the funds in your FHSA for a qualifying first home purchase within 15 years of first opening an FHSA, your FHSA must be closed. Unused funds in the FHSA can be transferred to an RRSP or RRIF on a tax-free basis or would otherwise have to be withdrawn on a taxable basis.
You will be allowed to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the $40,000 lifetime and $8,000 annual contribution limits
Same as with RRSP if you contribute to your FHSA, you do not have to claim a deduction for that year. You will be able to carry forward undeducted contribution indefinitely and deduct them in a later year.
Qualifying investments are similar to those held by RRSPs and TFSAs and include mutual funds, exchange-traded funds (ETFs), publicly traded securities, government and corporate bonds and guaranteed investment certificates (GICs).
Only the FHSA holder can claim a deduction for contributions made to their own FHSA. You cannot contribute to your spouse’s and claim a deduction.
Unlike RRSPs, contributions made within the first 60 days of a calendar year cannot be attributed to the previous tax year. Annual contribution limits apply to contribution made within the calendar year.
Funds for some reason left over after making a qualifying withdrawal can be transferred to another FHSA or RRSP or RRIF on a tax-free basis. During transfer funds are not taxable. Once transferred, the funds are subject to the rules of the applicable accounts, including that the funds will be taxable when you withdraw them from the account.
The FHSA must be closed by December 31 of the year you turn age 71, by December of the 15th anniversary of first opening the account if the funds have not been used to purchase a qualifying home or by December 31 of the year following the year of the qualifying withdrawal. Unused funds in the FHSA can be transferred to an RRSP or RRIF on a tax-free basis before either FHSA closure or withdrawn, but the withdrawal will be taxable.

Example

The family plans to buy property in 5 years. In 2023, the husband earned $120,000 and the wife earned $70,000. Both spouses opened FHSA, and each contributed $8,000 per year (the annual maximum) in their own FHSA. Both were able to deduct the contribution from taxable income. Annual tax refund is 43.41% of $8,000 ($3,472) for one spouse and 29.65% ($2,372) for another spouse.

Therefore in 5 years their combined FHSA amount is $80,000 plus $10,000 of tax-free investment income earned in the plan. Each year they also had tax refund of $5,844 which in 5 years gives them $29,220.

As a result, in 5 years, they can have around $120,000 in savings available for down-payment on their first home.

The most important thing is that this amount can be withdrawn tax-free if all necessary conditions of FHSA are fulfilled.