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What is the FHSA and how does it work?

What is a FHSA?

The Tax-Free First Home Savings Account (FHSA) is a savings account meant for home purchases. It's a new registered plan that'll allow first-time homebuyers to save up to $40,000 tax-free. This new account is expected to be implemented in 2023, but there are still some unanswered questions about the details. 

 

Here's what we know so far:

  • Age limit: You should open your FHSA before reaching 71 years old or can be opened for 15 years.
  • Contributions, deductions and taxes: Unlike an RRSP which allows contributors within the first 60 days of the following year, all your FSHA contributions should be make before December 31 for current year deductions.
  • Deduction can be carried forward to future years to reduce taxable income.
  • Once you open the account, the unused contribution room can be carried forward to the next year.

 

How does it work, and what are the financial advantages? 

The FHSA is a mix between an RRSP, a TFSA and the Home Buyer’s Plan (HBP). 

Like an RRSP, your contributions are tax-deductible, so you’ll be able to reduce your taxable income when you file your tax return. However, unlike the RRSP where your withdrawals are taxable, withdrawals from the FHSA to buy a home won’t be taxable.  

Like the TFSA: Investment income isn’t taxable (if it’s used to buy a home).

 

Example 

If you contribute $8,000 per year to buy a home, it’s the equivalent of the government offering you a non-taxable gift. 

Unlike the HBP, you don’t need to pay back the amount, even if the withdrawals are not used on a down payment for a home. However, those withdrawals will be taxable.  

 

Good to know 

If you decide to use this amount for something other than a house, you can transfer the money to an RRSP or RRIF without affecting your contribution room.   

 

Should I wait for the FHSA before buying a home? 

Considering the account won’t arrive until 2023, and that annual contributions are capped at $8,000; it’s strongly recommended that you start saving now using a different savings account like a TFSA.  However, if you want to take advantage of the HBP, you’ll have to use your RRSP.  

 

Can I combine the HBP and FHSA to help me buy my first home? 

No, once (and if) the FHSA is available, you must choose between the two options. Withdrawals from both the FHSA and HBP to buy the same property are not permitted.  

Please note that you can transfer your RRSP to your FHSA at any time to avoid this issue. 

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