Are you a first-time home buyer? A First Home Savings Account (FHSA) may help you achieve your dreams!

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The FHSA, also known as the First Home Savings Account, is a tax-free registered plan that provides a great opportunity for prospective first-time home buyers. With the FHSA, individuals can contribute up to $40,000 towards their first home purchase, with an annual contribution limit of $8,000.

Similar to RRSP, the FHSA allows individuals to deduct their contributions from their income each year. Additionally, any income generated within the FHSA and qualifying withdrawals are tax-free.

Who is Eligible?

To be eligible for opening a FHSA, individuals must meet certain requirements. These include being a Canadian resident, at least 18 years old but under the age of 71, and not having lived (you, or your spouse or common-law partner) in a qualifying home in the year of account opening and up to 4 years before.

How does the FHSA account works?

Once a FHSA is opened, it works similarly to an RRSP or TFSA account, allowing individuals to purchase and hold investments such as mutual funds, publicly traded securities, and GICs. However, certain prohibited investments, like land or shares of private corporations and general partnership units are not allowed in a FHSA.

Contributions to the FHSA must be made by December 31st of each year to be deductible for that tax year. Withdrawals from the account are tax-free if they meet the criteria for a qualifying withdrawal.

What are qualifying withdrawals?

To be a qualifying withdrawal the following the following conditions are to be met:

  1. You must be a resident of Canada when you withdraw the funds.
  2. You are a first time home buyer and have not purchased a qualifying home 30 days prior to withdrawing.
  3. You must have a written agreement to purchase or build a qualifying home, and the completion date must be before October 1 of the year following the withdrawal.
  4. It is mandatory for you to either occupy or have the intention to occupy the qualifying home as your primary residence within one year after the purchase or completion of the construction.

Once all the above conditions are met, individuals need to complete Form RC725 and submit it to their FHSA issuer to process the withdrawal.

However, if the conditions are not met, withdrawals may still be made but will be subject to income tax.

Time limits associated with the FHSA

The FHSA needs to be closed by December 31st of the year in which the earliest of the following events occur:

  • The year you reach the age of 71
  • 15 years after opening the FHSA
  • Or, the year following the first qualifying withdrawal.

If the time limit is reached and the account remains open, the funds must be transferred to an RRSP/RRIF on a tax-deferred basis or withdrawn, with taxes being paid on the withdrawal.

First Home Savings Account (FHSA) and Home Buyer’s Plan (HBP):

It's worth noting that the FHSA can be used in conjunction with the Home Buyer's Plan (HBP), which allows first-time home buyers to withdraw up to $35,000 tax-free from their RRSP for purchasing or building a home. By utilizing both plans, individuals can save up to $75,000 without triggering any income taxes.

Conclusion

When it comes to choosing the best investment options among the various registered plans available, it's important to consider individual circumstances and seek guidance if needed. If you have any questions or need assistance in determining your eligibility for these savings plans, please feel free to reach out to Qmulus CPA.