What is an FHSA

The FHSA is a government sponsored registered savings plan that allows eligible individuals the ability to save funds for the purchase of a home on a tax-free basis. There is a lifetime limit of $40,000 on contributions, and an annual contribution limit of $8,000. Contributions to an FHSA are tax-deductible and withdrawals made to buy a first home are not subject to taxation. Additionally, any earnings, losses, or gains from investments held within an FHSA are not included (or deducted) when calculating taxable income.

How to Open a FHSA

To open a FHSA, an individual must be: 

• a resident of Canada;
• at least 18 years of age; and
• a first-time home buyer, meaning they have not owned a home in which they lived at any time during the part of the calendar year before the account is opened or at any time in the preceding four calendar years. For this purpose, ownership is defined broadly and includes beneficial ownership, but excludes a right to acquire less than 10% of a qualifying home.

An individual can open a FHSA through eligible issuers which include:

• Canadian trust companies
• Life insurance companies
• Banks, and
• Credit unions

Contribution Limit

The annual contribution to the FHSA will be reported on an individual's personal tax return in the same year as the contribution. Just like an RRSP contribution, the individual is eligible for a tax deduction. The individual can decide which tax year to deduct the contribution, which is similar to an RRSP contribution. This also allows the individual to carry forward any unused FHSA annual contributions to future tax years.

Any unused annual contribution room accumulates for individuals for future years. For example, if you contribute $4,000 to your FHSA in 2023, you can contribute up to a maximum of $12,000 in 2024 (the $4,000 unused in 2023 plus the annual maximum of $8,000). However, it's crucial to keep track and ensure that you don't exceed your annual maximum contribution limits.

FHSA Withdrawals

To ensure that a withdrawal from a FHSA is non-taxable, it must fulfill specific requirements.

1. The taxpayer must be a first-time home buyer at the time a withdrawal is made
2. The individual must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal and intend to use the home as their principal residence within one year after buying or building it.

If any of the above conditions are not met, the withdrawal will be considered non-qualifying and will be included in the individual's personal income in the same tax year as the withdrawal. In such cases, non-qualifying FHSA withdrawals will be subject to the same tax treatment as taxable RRSP withdrawals.

Qualifying Investment Alternatives

FHSA account holders are allowed to invest in the same qualified options that are currently permitted in a TFSA. This includes investing in mutual funds, publicly traded securities, ETFs, government and corporate bonds, and GICs.

However, there are certain investments that are prohibited within an FHSA. These include land and real estate, shares of private corporations, and general partnership units.

Closing an FHSA Account

If an individual experiences the earliest occurrence of the following events, their FHSA will no longer be considered an FHSA, and they will be unable to open a new one after December 31 of that year:

1. The 15th anniversary of the individual's first FHSA opening.

2. The individual reaches the age of 71.

Any funds that remain unused and not applied towards a qualifying home can be transferred to an RRSP or Registered Retirement Income Fund (RRIF) on a tax-free basis. Alternatively, the funds must be withdrawn on a taxable basis. If an individual makes a qualifying withdrawal, any un-withdrawn savings can be transferred on a tax-free basis to an RRSP or RRIF until December 31 of the year following the year of their first qualifying withdrawal.

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Please note that this article is intended for general informational purposes only. It is important to seek advice from your trusted advisor for personalized guidance regarding your individual tax needs. This publication should not be considered a replacement for obtaining tailored advice.

If you require expert tax or accounting services, Versa is here to assist you. Contact us today to learn how we can help you minimize your tax liabilities and optimize your financial strategies.