First-Home Savings Account (FHSA)
By PAIP Canada staff
A little more than a decade ago, the Tax-Free Savings Account (TFSA) became part of Canada’s vernacular and with good reason: the plan allowed for tax-free growth of one’s investment dollars, and tax-free withdrawals. To make things even better, amounts withdrawn were added back to one’s annual contribution room as the calendar flipped into a new year.
Fast forward to 2023 and the First-Home Savings Account (FHSA) is about to become available for Canadians who qualify as first-time home buyers. Starting this calendar year, those aged 18 years old and above who haven’t owned a home in the current calendar year, or the previous four years, can open and contribute up to $8,000 per year into the plan and receive a tax deduction for the amount contributed. The lifetime maximum is $40,000.
For those who don’t open an FHSA, then no contribution room will be made available to them. Once the plan is opened however, there is a limited timeframe to make contributions – 15 years and no more.
The amounts contributed provide a tax deduction to the plan holder. In addition, investment gains and qualifying withdrawals are not taxed. Withdrawals are “qualifying withdrawals” as long as the plan holder purchases a home in the year of the withdrawal, or by October 31st of the following year. Withdrawals made for reasons other than to purchase a home must be included in one’s income, meaning that additional taxes may be owed at the end of the year. Compounding this headwind, one’s contribution room will not be returned to them. Once it’s lost, it’s lost for good.
Comparing the FHSA and the TFSA
As many young Canadians are familiar with the TFSA, these two plan types are often competed. The good news is the comparison is an easy one. Although there is no difference in the tax-free growth inside the plan, or the withdrawals (assuming they’re qualifying withdrawals), the main difference is in the tax savings provided by the FHSA plan. The TFSA does not provide any deduction for the amounts deposited which makes the FHSA much more attractive to first-time home buyers.
The downside of the FHSA is the amounts contributed are not accessible unless it’s for the purchase of a one’s first home. Should withdrawals be made for any other reason, there are negative tax consequences for the plan holder. Clearly having an appropriate amount of cash flow is an important consideration for those who want to benefit from the FHSA.
For more information on FHSA plan (including a comparison to the Home Buyers Plan), the eBook First Home Savings Account (FHSA) Explained can be found here. The link is also below.
https://a.co/d/9OlKLXq