The government is Canadians an extra hand when it comes to saving up for their first home. The Tax-Free First Home Savings Account (FHSA) is a new initiative that kicks in on April 1st, 2023.
According to the government, this new account gives prospective first-time home buyers the ability to contribute up to $40,000 on a tax-free basis.
Like a Tax-Free Savings Account (TFSA), withdrawals from the FHSA would be non-taxable and, like a Registered Retirement Savings Plan (RRSP), contributions are tax-deductible.
To open an FHSA, you must be 18 or older and a resident of Canada, as well as a first-time homebuyer.
The account can stay open for a maximum of 15 years or until the end of the year that you turn 71, whichever comes first.
Alternatively, if you make a qualifying withdrawal from the account to purchase your first home, you will have to close the account at the end of the following year.
The account has a participation room limit of $8,000 in the year that you open your first FHSA, and the lifetime limit is $40,000.
In the years that follow, your FHSA participation room varies based on the maximum amount that you can contribute or transfer from your RRSP without creating an excess FHSA amount.
You can also open more than one FHSA, but your participation room for the year applies to all of the FHSAs that you open.
It’s important to know your participation room, because if you exceed the amount you may need to pay taxes on it.
Generally, the tax is 1% per month on the highest excess amount within that month.
There are ways to remove and prevent excess contributions. However, there are many do’s and don’ts when it comes to this process, and you can find all of the details on the federal government’s overview of the FHSA.
It’s hard to save up for a home in this day and age, and the Tax-Free First Home Savings Account definitely makes it easier.