Tax-Free First Home Savings Account is coming! What do you need to know? The federal government has moved one step closer to launching the Tax-Free First Home Savings Account (FHSA) as draft legislation and request for comments. At some point in 2023, the FHSA is expected to launch. Here’s what you need to know in order to be prepared. This new registered plan gives prospective first-time homebuyers the ability to save $40,000 on a tax-free basis towards the purchase of their first home in Canada. The contributions to the FHSA are tax deductible, similar to a RRSP; however, withdrawals including any investment income or growth earned in the FHSA, would be non-taxable, like a TFSA (tax-free savings account). To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. You must be a first-time homebuyer, meaning you have not owned a principal residence in which you lived at any time during the part of the calendar year you open the account in nor at any time in the preceding 4 calendar years. The FHSA can remain open for up to 15 years or until the end of the year when you turn 71 years of age. At this point in time, any savings in the FHSA that has not been used to buy a qualifying home by this time could be transferred on a tax-free basis into an RRSP or RRIF, or withdrawn on a taxable basis. Annual contributions are capped at $8,000 annually, up to a max of $40,000 lifetime contribution limit. There is a penalty tax of 1% per month for overcontributions. Remember, this is draft legislation; however, there is flexibility in that, if you do not contribute the max of $8000 in the previous calendar year, the remaining unused amount can be contributed the following year. Similar to RRSP contributions, you won’t be required to claim the FHSA deduction in the tax year in which a contribution is made. The amount can be carried forward indefinitely and deducted in a later tax year, which may make sense if you expect to be in a higher tax bracket in a future year. To withdraw the funds, remember there are certain requirements that must be met – you must be a first-time homebuyer at time of withdrawal, you must have a written agreement to purchase or build a qualifying home before Oct 1 of the year following the withdrawal and you must occupy the home as a principal residence. Of course, the home must be in Canada. This is the only opportunity you will have to have an FHSA, you are not permitted to another another in your lifetime. To add to this, the Home Buyers’ Plan, currently in place, which allows first-time homebuyers to withdraw up to $35,000 from an RRSP to buy a first home, will still be available; however, you cannot combine the HBP and FHSA for the same home purchase. Should this legislation pass, it is one step the government will have made to help first time homebuyers. Comments can be sent to Consultation-Legislation@fin.gc.ca by September 30, 2022. I love to help First-time Homebuyers, let’s have a coffee and chat!
Photo by Towfiqu barbhuiya on Unsplash