In the 2022 Federal Budget, the federal government proposed a new savings vehicle for first-time home buyers. The Tax-Free First Home Savings Account (FHSA) is a registered account designed to help individuals with savings for their first home.
You must be a Canadian resident and:
- Be 18 years of age or older,
- Have not lived in a home you owned in the year the account was opened or any of the four previous years.
- FHSA should be available sometime in 2023.
- The lifetime limit is $40,000.
- The annual limit is $8,000.
- You can’t carry forward unused annual contribution room.
- You can start to contribute some time in 2023 (once the financial institutions figure out how to process these).
- Contributions will be tax-deductible (like an RRSP).
- Income earned is not taxable within the plan.
- Withdrawals are not taxable if used for the purchase of a qualified first home.
- Any other withdrawals are taxed as income.
Transfers to an FHSA
- You can transfer up to $8,000 per year from an RRSP to an FHSA.
- The lifetime limit is $40,000.
Time frame to use an FHSA
If the proceeds are not used to buy a home within the first 15 years of opening, you can either:
- transfer it tax-free to an RRSP, or
- have it paid out as taxable income.
ISSUE: THE HOME BUYERS PLAN AND THE FHSA
- It should be noted that you are not able to use both the current Home Buyers Plan and the FHSA.
- As a reminder, with the existing Home Buyers Plan you can borrow up to $35,000 from your RRSP (tax-free withdrawal) to be used for a qualified first new home purchase, however, you must pay that back over 15 years.
- The FHSA allows up to $40,000 of withdrawals that do not have to be paid back to the plan, and the HBP allows you to borrow up to $35,000 but must be repaid back into the RRSP.
For younger people looking to perhaps buy a home in the next 15 years, they could:
- set up an FHSA rather than an RRSP, as both are tax-deductible. If not used, you can simply transfer to an RRSP after 15 years.
- If you can’t save the full $8,000 in 2023, you can transfer funds from an existing RRSP.
- The earliest year for the maximum benefit will be 2027 (5 years) so for a home purchase prior to then, you will have to review what plan is best for you depending on when and how much funding you will require.
You may wish to review with your CFP® professional to develop a strategy for you (and/or your children, and grandchildren!!)
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