The recent federal Budget in March 2023 introduced Canadians to a new financial tool meant to make the entry into residential home ownership more of a reality for many.
The FHSA will allow eligible Canadians to make a tax-deductible contribution to a savings vehicle geared solely for their first home purchase.
Who qualifies for the program?
- Canadian residents aged 18 or older.
- Can not have lived in a home they own (including a spouse or common law partner) the year the account is opened, or in the previous four years.
- Those new to Canada must meet the same criteria regarding previous home ownership status.
- Deposits must come from the person whose name the plan is registered in, it cannot be made by another family member or friend. However, money can first be gifted to the individual, who then makes the contribution to the account.
- A spouse can have their own FHSA, thus allowing a couple to have up to a total of $80,000 in both accounts. However, the source of the funds must not be from the spouse or another family member, unless it is gifted outright to them prior to the deposit into FHSA.
What are the allowable contributions to the plan?
- Starting April 1st, 2023, eligible Canadians can contribute $8,000 annually to a lifetime maximum of $40,000.
- Once an FHSA is established any unused allowable contribution room (up to $8,000) can be carried forward to a future year.
- Deposits are tax deductible, reducing one’s taxable income for the year, working much the same way as an RRSP contribution.
- Funds grow tax deferred, and if withdrawn for the home purchase are considered non-taxable, much like TFSAs.
How are the funds accessed when needed?
- If the home purchase qualifies under CRA’s rules a form RC725 would be completed and submitted to the issuer of the account.
- The principle plus all growth can be withdrawn tax free, assuming the home purchase meets all the requirements.
- Proceeds can be used for the down payment or for other expenses related to the purchase, such as closing costs and moving expenses.
- A commitment must be made to live in the home for a minimum of one year or the tax benefits will be reversed.
How will the deposits be invested?
- Rules guiding investment options will follow the same as what is available for RRSPs, RRIFs and TFSAs.
- The range will be from conservative investments such as Daily Interest Accounts, Term Deposits and GICs through to Mutual/Segregated Funds all the way to buying individual qualifying stocks and bonds.
- These various investment vehicles can be purchased from banks, credit unions, life insurance companies, brokerage firms or self-directed online platforms; as long as they are registered in Canada.
Can I have a named beneficiary if I die prematurely?
- Yes, and a spouse can transfer to their own FHSA if they qualify, or to an RRSP or RRIF in their name without tax consequences.
- For anyone other than a spouse it will be treated much like RRSPs/RRIFs in that it is taxable in the estate of the deceased in the year of death.
Does an FHSA ever expire?
- Yes, they do, either on the 15th year from the date it was first opened OR at age 71, whichever comes first.
- At expiry the proceeds can be rolled tax free into one’s RRSP/RRIF without tax consequences, but the amount does not qualify as another tax-deductible contribution like the original deposit.