Last month the 2022 Federal budget was announced, and with it came many measures affecting Canadians. One of the more popular measures was the new Tax-Free First Home savings (FHSA), which is expected to be in place sometime in 2023.
What is the Tax-Free First Home Savings Account?
The FHSA offers the benefits of a Registered Retired Savings Plan (RRSP), a Tax-Free Savings Account (TFSA), and the Home Buyer’s Plan (HBP). The FHSA works like an RRSP in that taxpayers will be able to receive a tax deduction when they contribute a certain amount each year. It works like a TFSAsince most withdrawals from an FHSA will be tax-free, and it’s like the HBP because Canadians will be able to use the funds in an FHSA to purchase a home.
How does the FHSA work?
| Who qualifies? | An 18-year-old Canadian resident who has not lived in a home they owned in the year that the account is opened or four prior years. |
| How much contribution room? | $8,000 annually to the maximum of $40,000 during your lifetime. |
| If I skip a year can I make up for the lost year? | No. |
| What happens if I use the money for something other than purchasing a home? | It will be considered a tax withdrawal. |
| Can the FHSA be used for more than one home? | No. |
| How long can the account stay open? | 15 years. |
| After 15 years, what can I do with the funds? | The assets can be transferred to an RRSP or RRIF on a tax-free rollover basis. Note: It would be a fair assessment to consider the FHSA as granting additional contribution room if you do decide not to buy a home. |
3 What Ifs
- What if there are no funds to contribute to an FHSA? An option will be to transfer funds from an RRSP to an FHSA (subject to the $8,000 limit); the advantage of doing this is that you will be able to make a tax-free withdrawal from the FHSA and not have to repay the funds over time as you would under the HBP. You will not be able to use both the FHSA and the HBP when purchasing the same home, but in most instances it will likely make more sense to use the FHSA.
- What if you want to contribute to the FHSA and withdraw the amount contributed in the same year, thus receiving a deduction and withdrawing the funds to purchase a home in the same year? We will have to wait for the draft legislation to know whether this is permissible.
- What if you are a parent or grandparent and you want to contribute to your children’s or grandchildren’s FHSA; can you do so without any tax implications? This has also not been decided, and it is something most parents will be waiting to see when the draft legislation is revealed. As more information is released, I will provide more information.
Ultimately, until the draft legislation is revealed we won’t know the fine details of the FHSA. However, based on the information provided in the budget, this might be a great account for first-time homeowners or for someone who hasn’t owned a home for several years and is looking to reenter the market. Let’s hope the details of the plan don’t have too many drawbacks.
