Canada’s new Tax-Free First Home Savings Account

If you’re a first-time home buyer, you’re getting a little bit luckier when it comes to your incentives. 

At some point in 2023, Canada’s federal government plans to implement a new Tax-Free First Home Savings Account (FHSA) to give first-time home buyers the chance to save on a tax-free basis. 

If you think about combining a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA), this is exactly what you’d get. With the FHSA, like an RRSP, all your contributions will be tax-deductible, and any money you pull out from the account to buy a first home is also non-taxable.

How much can you contribute?

This new tax-free savings account will have a $8,000 annual contribution limit and a lifetime $40,000 limit. These contributions are also applied within calendar years, and you can carry forward unused portions, up to a maximum of $8,000. 

That means if you only contributed $5,000 one year, you can carry forward the $3,000 you didn’t contribute into the next year and contribute up to $11,000. You can also have more than one First Home Savings Account, but the total amount in all accounts cannot exceed the maximum limits set. 

Similar to a TFSA, for any over-contributions made to an FHSA, there will be a 1% tax for each month (or part of a month). However, when your annual contribution limit is reset, these over-contributions may stop being viewed as over-contributions. 

How you can qualify for this account

Like many other first-time home buyer incentives, there are criteria that need to be met to qualify for this new perk. To open an FHSA, you must be: 

• A resident of Canada 
• At least 18 years old 
• A first-time home buyer, which means that you have never owned a home that you lived in during the calendar year before you open your account, or the four calendar years before that–this also includes beneficial ownership 

It’s important to note that First Home Savings Account will also stop being an FHSA–or you’ll be unable to open an account–if any of these events occur after December 31 within the calendar year of: 

• The 15th anniversary of when you first opened an FHSA, or 
• You turn 71 years old

At this point, if you have savings within the account that you haven’t used to buy a home, you can transfer the funds into an RRSP or a Registered Retirement Income Fund (RRIF). Or you can also withdraw the money on a, now, taxable basis. 

However, if you withdraw money to purchase a home, you can transfer any of your leftover savings in your FHSA on a tax-free basis to an RRSP or RRIF until December 31 the year after the year of your first qualifying withdrawal. 

What counts as a qualified withdrawal? 

For any withdrawals from your FHSA to be considered qualifying–or non-taxable–you must: 

• Be a first-time home buyer at time you pull out some money 
• Not have owned a property prior to the withdrawal 
• Have a written agreement to buy or build a qualifying home before October 1 in the year after you withdraw the funds–however, there is an exception to perform a qualifying withdrawals within 30 days of moving into your home
• Occupy the home as your principal place of residence one year after buying or building it–and it must be located in Canada 

If you know you’ll check all of these boxes, you can withdraw your full savings amount tax-free in one or multiple withdrawals. But, if you pull money for any reason other than those mentioned above, this would be included in your income and treated as a taxable withdrawal. 

Can you transfer the funds? 

You can transfer funds from your First Home Savings Account to another FHSA, RRSP, or RRIF on a tax-free basis–however applicable rules will apply for the last two. You can also transfer funds from an RRSP to an FHSA on a tax-free basis, as long as the amount is within the contribution room parameters. 

However, doing this does not change your contribution room amount for each year. For example, if you already contributed $2,000 to your FHSA and transferred it to your RRSP, you still only have an available $6,000 annual contribution room for the year. 

You can find more information about the FHSA on the Government of Canada website. 

And if you’d like to learn more about first-time home buyer incentives–and if you’ll qualify–you can get in touch with our mortgage experts today.