October 27, 2023 | Danny McMullen and Ema Marcheska
Buying your first home is an exciting time in your life. Northview Law is here to support and help you with this milestone. We help you with making that purchase easy and simple, but we understand that the saving process is not as easy. Some good news: on April 1, 2023, Canada launched the First Home Savings Account (FHSA) initiative, to make it easier for individuals saving for their first home. Here is what you need to know about the FHSA and how to get started.
Who is eligible?
To be eligible for the FHSA account you must:
- Be a resident of Canada.
- Be at least 18 years old (19 in provinces where 19 is the age of majority), but not have reached age 71. This means you need to be at least 18 in Ontario.
- Not lived in a home owned by you or your spouse/common-law partner in the year that the account is opened, or the previous four years.
- Not have had a previous FHSA used to buy a home.
Individuals will be required to self-certify eligibility when applying to open a FHSA.
If eligible you would be able to contribute up to $8,000 per calendar year and up to a lifetime maximum of $40,000 over 15 years. Contributions by the holder are tax-deductible. There will be a 1% tax penalty per month for contributions over the FHSA contribution limit. However, if you do not contribute for a few years the FHSA does not allow for a carryover, meaning that if you do not contribute one year, the next year you will still be limited to $8,000, and not $16,000. Overall all the contributions do seem limited, with only $40,000 but you can use your FHSA with the RRSP First Time Homebuyers Plan, which allows you to borrow up to $35,000 from your RRSP to buy your first home, making your total $75,000.
What about the taxes on those contributions? Contributions will be tax deductible, but you can choose to deduct from the contribution year or carry it forward and deduct in the future. FHSA investment income, losses and gains will not be included when determining income for tax purposes, or to determine eligibility for income-tested benefits and credits.
Transfers between FHSA and other accounts
As long as they are direct transfers, meaning the transfer is completed directly between the financial institutions of the two plans or accounts involved, you can transfer between your FHSA and other accounts. You can transfer property from your RRSPs to your FHSAs without any immediate tax consequences, as long as it is a direct transfer and does not exceed your unused FHSA participation room at the time of the transfer. You can also transfer from one of your FHSAs to another of your FHSAs, once again if it is a direct transfer. You can also transfer from your FHSAs to your RRSPs or RRIFs without any immediate tax consequences, as long as it is a direct transfer and you do not have an excess FHSA amount. Caution: you cannot transfer property from your RRIF to your FHSA.
Only the account holder is allowed to contribute to the FHSA, however, the good news is that if your spouse opens their account, you both could be looking at $80,000 in tax-deductible savings for your first home.
Using funds to purchase a home
If you meet the qualifying withdrawal conditions, you can withdraw all of the property from your FHSAs tax-free. You will have 15 years from account opening to use the funds in the FHSA toward the purchase. Once the funds are used, you will need to close the account
What happens if funds aren’t used toward a home purchase?
Funds must be used toward the purchase of a home. However if they are not used within 15 years or if the account holder has reached the age of 71, the account must be closed and the fund withdrawn. The account holder can have the option to transfer the accumulated funds into their RRSP/RRIF, even if they don’t have contribution room, without these transfers being taxed.
The funds must be withdrawn to be used toward the purchase of a qualifying first home, such as: a housing unit in Canada or a share in a co-operative housing corporation that affords the individual an equity interest in a housing unit in Canada. However, this home must be your, as the account holder, principal home.
Death of a FHSA holder
As the holder of the FHSA, you can designate a successor holder of the account. This can be a spouse or common-law partner. The surviving spouse or common-law partner can then receive the FHSA on a tax-free basis if they are considered eligible under the FHSA eligibility criteria. The inherited FHSA would assume the surviving spouse’s termination date. If the successor holder is not eligible, they will have two options to withdraw the funds: EITHER a direct transfer on a tax-deferred basis to your RRSPs or RRIFs OR a taxable distribution. Where there is no successor holder or the successor holder is not a spouse or common-law partner, there will be tax triggered when the funds are withdrawn from the account.
What happens if I go bankrupt?
If you declare bankruptcy, unfortunately, your FHSA account and the savings within it will not be protected from creditors.
Here at Northview Law, we would be happy to help you when you are ready to purchase your first home. If you have any questions you can contact our office.