New benefit when buying a first property – Tax-Free First Home Savings Account (FHSA)

Starting in 2023, the government is introducing a new type of account for the first-time home buyers.

Tax-Free First Home Savings Account (FHSA)

This account works like an individual pension program RRSP (Registered Retirement Savings Plan), it allows to reduce taxable income, but the earnings on this account are not taxable at the time of withdrawing the funds for the purchase, similar to TFSA (Tax Free Savings Account).
In a sense, it is a combination of RRSP and TFSA, but much more interesting than each individually.You contribute the funds to this account, reduce your tax payable, similar to RRSP, withdraw accumulated amount for the down payment at the time of purchase and not pay taxes on initial contributions or any earnings over the years.

Eligibility

• You must be a Canadian resident and at least 18 years of age to open an FHSA
• You must not have lived in a home that you owned either at any time in the year the account is opened or during the preceding four calendar years
• You will be limited to making non-taxable withdrawals in respect of a single property in your lifetime. Once you have made a non-taxable withdrawal to purchase a home, you will be required to close your FHSA within a year from the first withdrawal and will not be eligible to open another FHSA

Contributions

• You can make contributions of up to $8,000 per year to an FHSA starting in 2023
• There is a lifetime contribution limit of $40,000
• If you contribute less than $8,000 in a given year, the excess will not be carried forward
• If you open more than one FHSA the total amount contributed to all the FHSAs cannot exceed the annual and lifetime contribution limits

Withdrawals and transfers

• Qualifying withdrawals from the FHSA made to purchase a first home will be non-taxable
• Non-qualifying withdrawals for other purposes will be taxable
• You will not be permitted to make both an FHSA withdrawal and a withdrawal under the Home Buyers’ Plan (HBP) in respect of the same qualifying home purchase
• You may transfer funds from an FHSA to a registered retirement savings plan (RRSP) or to a registered retirement income fund (RRIF). Transfers to your RRSP or RRIF would be on a tax-deferred rollover basis, however, these amounts when withdrawn from your RRSP or RRIF will be taxable in the usual manner
• Transfers to your RRSP and RRIF will not reduce, or be limited by, your available RRSP room
• Withdrawals and transfers will not replenish FHSA contribution limits
• If you have not used the funds in your FHSA for a qualifying first home purchase within 15 years of first opening an FHSA, your FHSA must be closed
• Any unused savings may be transferred into an RRSP or RRIF, or would otherwise have to be withdrawn on a taxable basis
• You will be allowed to transfer funds from an RRSP to an FHSA on a tax-deferred basis, subject to the $40,000 lifetime and $8,000 annual contribution limits. These transfers will not restore your RRSP contribution room

Example

You and your spouse each contribute $8,000 per year (the annual maximum) in your own FHSA starting in 2023. Both of you can deduct the contribution from your taxable income each year. The tax savings on your federal tax return each year will be based on your marginal tax rate. For example, if each of you make between $50,000 and $100,000, the FHSAs allows each of you to receive an annual federal tax refund of $1,640 (i.e. $8,000 x 20.5 percent). At the end of 2027, when you are ready to buy your first home, your combined FHSA amounts to $90,000, which includes $10,000 of tax-free investment income earned in the plan. You can withdraw this amount tax-free for a down-payment on your first home.