The First Home Savings Account (FHSA) has been accessible to Canadians since April 2023. You can open an FHSA if you are 18 years and above, not more than 71 years by the end of the tax year, and are a resident of Canada. Also noteworthy is that you must be a first-time home buyer.
As a first-home buyer, you must not have lived in a principal place of residence at any time in the calendar year you opened the account or in the preceding four calendar years. Note that the principal home criteria is one that you either solely own or jointly own with your spouse or common-law partner.
The legal age to open a bank account in British Columbia is 19. Due to this, you can only open a first home savings account from when you turn 19. Like most registered accounts, you can open an FHSA with an issuer, which can be a bank, credit union, trust or insurance company.
When you open a first home savings account, you can open it as a depository FHSA with a financial institution, a trusteed FHSA with a trust company, or an insured FHSA with an insurance company.
In your FHSA, you can hold your money as cash or invest in term deposits, guaranteed investment certificates (GICs), government and corporate bonds, mutual funds, or other securities listed on a designated stock exchange, such as the Toronto Stock Exchange.
The First Home Savings Account Contribution Room
In the year you open a first home savings account, you can save and invest up to $8,000. This is the annual contribution limit for the FHSA. You can keep your FHSA open for 15 years; within those years, you can only make a total contribution of $40,000.
If you do not contribute the total annual $8,000 limit in a year, you can carry forward your contribution room for up to a year. The maximum carry-forward amount is $8,000.
For example, if you open a first home savings account in 2023 but do not contribute until 2025, you can only carry forward your $8,000 contribution room for 2024. Your total contribution room in 2025 will be $16,000, the total contribution room for 2024 and 2025.
Benefits of Opening an FHSA
Tax Deductible Contributions: Amounts you contribute to your first home savings account are tax deductible. However, transferring from your registered retirement savings plan (RRSP) account to your FHSA would not be tax deductible as your RRSP contributions were already tax deductible. It is also important to note that if you make FHSA contributions above your annual and lifetime contribution room, you cannot deduct the excess amount on your income tax and benefit return. Unlike the RRSP rules, contributions you make in the first 60 days of the year are not tax deductible for your prior year’s income.
Tax-free Withdrawals: When you withdraw from your first home savings account to buy a qualifying first home, you will not pay taxes on the withdrawn amount. You also do not pay taxes on your investment income and capital gains in an FHSA.
An excess FHSA contribution amount will result in a one percent tax on the highest excess FHSA amount in the month for each month until you correct this.
Closing a First Home Savings Account
A first-home savings account is helpful to save and buy a first home, but you need to close the account at some point. You can only keep an FHSA open for 15 years after you open the account, by the end of the year you turn 71, or by the following year after you withdraw to buy a home, whichever comes first.
The Canada Revenue Agency (CRA) allows Canadians to transfer FHSA contributions to a registered retirement savings plan account on a tax-deferred basis.
If you leave your contributions in a first home savings account beyond the participation period, you must report the income tax and benefit return amount and pay the applicable taxes.
You can find details about your first home savings account on your tax notice of assessment (NOA) or reassessment.
Contact DW & Associates Chartered Professional Accountants to strategize using the first home savings account to minimize your taxes.