Understanding FHSA Contribution Rules, Withdrawals, and Benefits
Jordan Clermont, BRX Mortgage INC. FSRA #13463
226 582 4983
Opening a FHSA Account
To open a First Home Savings Account (FHSA), you must be at least 18 years old and a Canadian resident. You must also be considered a first-time homebuyer.
To meet the definition of a first-time homebuyer for this program, you must not have lived in a home you owned in the current calendar year or the preceding four calendar years. If you currently live with a spouse who owns their home, you are not considered a first-time homebuyer.
However, an exception applies: if you opened your FHSA account before moving into your spouse's home, you may still contribute to the account and make a withdrawal for a qualifying home purchase.
FHSA Contribution Rules
It is possible to contribute a lifetime amount of $40,000 to your FHSA. The annual contribution limit is $8000. The first year that you open your account you will have $8000 in contribution room. If you do not make a contribution or contribute less than the $8000 maximum, you will be able to carry forward your unused contribution room to the next calendar year. The most you can contribute in any calendar year is $16,000. So the contribution room can not be stacked up over multiple years.
Transfer from a RRSP
You can also fund your FHSA by transferring funds from your RRSP. These transfers are subject to the same contribution limits, meaning the combined total of your transfers and new contributions cannot exceed $8,000.
However, unlike new contributions, transfers from an RRSP do not provide the same tax benefits, as your taxable income will not be reduced. The primary advantage of these transfers is the ability to effectively withdraw up to $40,000 from your RRSP without the repayment obligation associated with the Home Buyers' Plan (HBP).
What if I never purchase a home?
The FHSA offers flexibility even if you don't purchase a home. You can maintain the account for a maximum of 15 years or until you turn 71. If you haven't bought a home by then, you have two primary options: either transfer the funds to your RRSP or withdraw them, in which case the withdrawn amount will be considered taxable income.
In my opinion, it is advantageous for anyone with first-time home buyer status to open and contribute to an FHSA before contributing to an RRSP. This effectively grants you an additional $40,000 in RRSP contribution room. If you never end up purchasing a home, this money can be rolled into your RRSP, providing you with an extra $40,000 of contribution room.
Making a Withdrawal to Purchase your Home
To be eligible for an FHSA withdrawal, you must meet the following criteria:
You have not owned or co-owned a home in the current year or the preceding four years.
You have a signed agreement to purchase a home.
You have no more than 30 days after closing of your home to make the qualifying withdrawal
You are a Canadian tax resident.
You intend to occupy the home within one year of the purchase date.
You must submit Form RC275 to your FHSA Issuer.
If you fulfill all these conditions, you can make a withdrawal from your account. If you are purchasing a home with another first-time home buyer, each individual can withdraw up to $40,000, for a combined total of $80,000.
What is The Benefit of Opening an FHSA Account
An FHSA serves as a tax-sheltered account where investments, such as stocks and bonds, grow entirely tax-free. You can buy and sell investments within the account without triggering capital gains taxes. Additionally, contributions lower your taxable income, which can increase your refund at tax time. Additionally money can be taken out tax free for a qualifying purchase or rolled into your RRSP.
FAQ
1. What is a First Home Savings Account (FHSA)?
The FHSA is a registered, tax-sheltered savings plan designed to help eligible Canadians save toward the purchase of their first qualifying home. It allows contributions to grow tax-free and be withdrawn tax-free for an eligible purchase.
2. Who is eligible to open an FHSA?
To open an FHSA, an individual must be a Canadian resident, be at least 18 years old, and qualify as a first-time homebuyer.
3. What is the definition of a "first-time homebuyer" for the FHSA?
An individual qualifies as a first-time homebuyer if they did not live in a home they owned during the current calendar year or the preceding four calendar years.
4. Can someone open an FHSA if their spouse owns the home they live in?
No. If an individual currently lives with a spouse who owns their home, that individual is not considered a first-time homebuyer and cannot open an FHSA.
5. What happens if an FHSA was opened before moving into a spouse-owned home?
An exception applies in this scenario: if the account was opened before moving into the spouse’s home, the account holder may still continue contributing to the FHSA and make a qualifying withdrawal for a future purchase.
6. What is the annual contribution limit for an FHSA?
The annual contribution limit is $8,000.
7. What is the lifetime contribution limit?
The maximum lifetime contribution limit is $40,000 per person.
8. Does FHSA contribution room begin accumulating automatically at age 18?
No. Contribution room only begins accumulating in the specific calendar year the FHSA is opened, starting with $8,000 of room in that initial year.
9. How does unused contribution room carry forward?
If an account holder contributes less than the $8,000 annual maximum, the unused amount carries forward to the following calendar year.
10. What is the maximum amount an individual can contribute in a single year?
The maximum contribution in any single calendar year is $16,000, which consists of the current year’s $8,000 limit plus up to $8,000 in carried-forward room. Contribution room cannot be stacked beyond that cap.
11. How do FHSA contributions affect personal income taxes?
Contributions are tax-deductible, meaning they reduce taxable income for the year, which can lead to a larger tax refund.
12. What types of investments can be held inside an FHSA?
An FHSA can hold various investment vehicles, including individual stocks and bonds.
13. Are investment earnings or trading activity inside an FHSA taxable?
No. Investments grow tax-free, and buying or selling assets within the account does not trigger capital gains taxes.
14. Can money be moved from an RRSP into an FHSA?
Yes, direct transfers from an RRSP to an FHSA are allowed. However, transfers and new contributions combined cannot exceed the annual limit.
15. Does transferring money from an RRSP to an FHSA create a tax deduction?
No. Because RRSP contributions already provided a tax deduction when originally contributed, transfers to an FHSA do not reduce taxable income further.
16. What is the main advantage of transferring RRSP funds to an FHSA?
The primary benefit is that an account holder can effectively withdraw up to $40,000 from an RRSP for a home purchase without the mandatory repayment obligations required under the Home Buyers' Plan (HBP).
17. What conditions must be met for a tax-free home purchase withdrawal?
To make a qualifying withdrawal, the individual must:
Maintain first-time homebuyer status (no home ownership in the current or prior four calendar years).
Be a Canadian tax resident.
Have a signed agreement to purchase a qualifying home.
Intend to occupy the home within one year of purchase.
18. What is the withdrawal deadline and administrative procedure?
The qualifying withdrawal must be executed no later than 30 days after the closing date of the home, and the account holder must submit Form RC275 to their FHSA issuer.
19. Can a couple combine their FHSA accounts to buy a home?
Yes. If two individuals buying together both meet the first-time homebuyer criteria, each can withdraw up to $40,000 from their respective FHSAs, providing up to $80,000 in combined tax-free capital toward the home.
20. What happens if the account holder never buys a home?
An FHSA can remain open for up to 15 years or until the account holder turns 71. If no home is purchased, the funds can either be withdrawn as taxable income or rolled directly into an RRSP tax-deferred. Rolling the funds into an RRSP does not require existing RRSP room, effectively creating an additional $40,000 in lifetime RRSP contribution room.
Do you see any mistakes or think this should be updated sendme an email at mortgages@jordanclermont.ca