Yahoo Finance Tips to help you get the most out of your new tax-free First Home Savings Account
There’s no feeling quite like unlocking the front door of your new home and stepping into a space you can call your own… But it can be difficult for some to imagine that day, especially when the uncertainties of the Canadian housing market keep popping in to burst your bubble.
For many first-time home buyers, the prospect of saving up for a down payment in today’s market can seem challenging—which is one reason why the Canadian government introduced the First Home Savings Account (or FHSA) earlier this year. This new tax-free registered account was designed with aspiring homeowners in mind, to help make it easier for them to save towards their first home.
In collaboration with Fidelity, here’s a closer look at the details of this exciting new account and how first-time home buyers can make the most of it.
Introducing a unique new way to save for your first home
The FHSA is more than just another savings account—it’s a registered account that allows first-time homebuyers to save towards their first home in a more tax-efficient manner. And when it comes to saving up for the home you’ve always wanted, every dollar matters.
How to determine if you’re eligible
To be eligible to open an FHSA, you must be a Canadian resident, between 18 (or the age of majority in your province/territory) and 71-years-old, and, of course, a first-time home buyer.
Note: To be considered a first-time home buyer, neither you, nor your spouse or common-law partner, can have owned a qualifying home that you lived in as your principal residence at any time during the year before the account is opened, or the previous four calendar years.
Know your limits
The FHSA allows for a lifetime contribution limit of $40,000, with an annual cap of $8,000. But don’t worry: if you don’t contribute the maximum amount in any given year, similar to a Tax-Free Savings Account (TFSA), you can carry forward any unused annual contribution amounts for use in future years (up to a cumulative $8,000 maximum).
What’s more, your FHSA contributions are tax-deductible. So, just by contributing, you’re lowering your taxable income and reducing your annual tax bill. Just make sure to contribute before the end of the calendar year because, unlike a Registered Retirement Savings Plan (RRSP), contributions made within the first 60 days of a new calendar year cannot be attributed to the previous one.
That said, there’s also a limit on how long you can hold an FHSA. If you don’t end up buying a home within the 15-year limit or the end of the year you turn 71 (whichever comes sooner), funds can be transferred to your RRSP tax-free, which you can withdraw under the Home Buyers’ Plan at a later date.
Don’t just save with your FHSA, invest
Unlike a traditional savings account, you’re not limited to just holding cash in an FHSA. You also have a number of investment options at your disposal, similar to those available in an RRSP or TFSA. The new FHSA allows aspiring homeowners to invest in mutual funds, exchange-traded funds (ETFs), publicly traded securities, bonds and GICs, giving you plenty of ways to diversify your savings strategy and maximize your potential return.
And here’s the kicker: all those investments can compound tax-free. Any income and capital gains you earn in your FHSA are not included in your annual income for tax purposes, so it can continue to grow and compound on a tax-free basis, similar to a TFSA. (Keep in mind, though, that any capital losses can’t be used to offset your income for tax purposes.)
Make sure you understand, and follow, the withdrawal conditions
Once you’ve found the perfect home, saved up enough for your down payment and are ready to buy, it’s easy to withdraw your money from your FHSA. And, best of all, all qualifying withdrawals are tax-free—this includes any earnings growth in addition to the original capital you invested.
In order for your withdrawal to qualify, you’ll need to fill out Form RC725 (Request to Make a Qualifying Withdrawal from Your FHSA) and give it to your FHSA issuer. You’ll also need to meet the following conditions, according to the CRA:
You must be a Canadian resident from the time of the withdrawal to when you purchase your new home.
You’re a first-time home buyer.
The home you’re buying is located in Canada.
You have a written agreement in place to buy or build a qualifying home before October 1 of the following year.
You have not acquired the home more than 30 days before making the withdrawal.
You intend to live in your new home as your principal place of residence within one year after buying or building it. (In other words, you can’t use your FHSA to purchase an investment property.)
While most buyers will likely end up withdrawing the full amount, if you have any funds leftover in your FHSA after purchasing your new home, you’re able to transfer these tax-free to an RRSP (without limiting your available RRSP contribution room). You can also choose to take the remainder in cash—which would be taxed.
Just remember that all non-qualifying withdrawals are taxed, so the best way to use your FHSA is what it’s meant for: buying your first home!
How an FHSA compares to the Home Buyers’ Plan
With the Home Buyers’ Plan (or HBP), any withdrawals are essentially a loan from your RRSP that you must repay over 15 years—unlike qualifying FHSA withdrawals, which are tax-free and don’t need to be repaid.
However, both can be used for the same home purchase, offering aspiring first-time buyers increased flexibility and more avenues to save towards their first home.
Explore your options with Fidelity
If you’re looking to learn more about an FHSA, Fidelity is here to help. Whether you’re buying on your own or have family assisting you on the journey, home ownership may be closer than you think—especially with an FHSA.
Visit Fidelity.ca to learn more about how you can use an FHSA to save towards your first home.
This article has been sponsored by Fidelity Investments Canada ULC.
Commissions, trailing commissions, management fees, brokerage fees and expenses may be associated with investments in mutual funds and ETFs. Please read the mutual fund or ETF’s prospectus, which contains detailed investment information, before investing. Mutual funds and ETFs are not guaranteed. Their values change frequently, and investors may experience a gain or a loss. Past performance may not be repeated.
The statements contained herein are based on information believed to be reliable and are provided for information purposes only. Where such information is based in whole or in part on information provided by third parties, we cannot guarantee that it is accurate, complete or current at all times. It does not provide investment, tax or legal advice, and is not an offer or solicitation to buy. Particular investment strategies should be evaluated according to an investor’s investment objectives and tolerance for risk. Fidelity Investments Canada ULC and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered.
Information about the Tax-Free First Home Savings Account is based on information available from the Government of Canada as at April 1, 2023, and may be subject to change.
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