When getting ready to buy your first house, you’re probably going to want to know all the resources available to you. You’ll also encounter a lot of new terminology during your research. One of the top terms you might hear is “the FHSA.”
The acronym stands for “First Home Savings Account,” and it’s a relatively new incentive Canada has implemented to help aspiring homeowners get into the market. What does it mean, and can it really help you buy your first home?
Searching for houses for sale in Hamilton or Burlington? Start here by browsing a few of our featured listings.
How Does a FHSA Work?
You could think of a First Home Savings Account as a hybrid of an RRSP (Registered Retirement Savings Plan) and a TFSA (Tax Free Savings Account) to create a highly advantaged tax investment account, but with a twist. All funds go towards a single purpose: the purchase of your first home.
Is an FHSA Tax-Free?
For Canadians, there’s nearly always a catch whenever we describe any investment as “tax-free.” It may seem like you catch a break when you contribute to an RRSP, but then you pay on the way out. There are no taxes when you take money out of a TFSA, but that’s because you pay before you invest in the first place.
With the FHSA, it really is tax-free as long as you follow the rules and use all of the money for its intended purpose.
The funds on the way in are exempt, as are any dividends they earn while the account is active. When you make a qualifying withdrawal to purchase your home, the funds remain in the clear. Your contributions also help reduce your taxable income for the year.
Looking for more tips to get the best value from your first home purchase? The posts below can help:
- Our Ultimate Handbook for First-Time Buyers
- Buying a House in Ontario Is a Team Effort
- What to Look for in a Home Inspection
Staying Within the FHSA Contribution Limits
As a tax-sheltered investment vehicle, an FHSA can seem like a dream come true, but there are limits. You can contribute up to $8,000 per year to a $40,000 maximum.
If you exceed this amount, the excess funds will be subject to a penalty, but there is one loophole. If you invest less than $8,000 one year, you can add the extra contribution room to the next.
Opening a First Home Savings Account as early as possible allows you to fully capitalize on its growth potential. The more years before your purchase, the more time you have to take advantage of compound interest even if you do reach your lifetime maximum of $40,000. Canadian citizens and permanent residents who have never purchased a home can open an FHSA anytime between the ages of 18 and 71.
Is someone you know and love about to buy their first home? Check out our Gift Guide for the First Time Buyer in Your Life.
Can I Have Multiple FHSA Accounts?
First-time home buyers are allowed to have as many FHSA accounts as they wish. However, it is not a way to add more contribution room.
The maximum for the year is $8,000 across all accounts, not per account. For example, if you invest $4,000 in one account, you’ll be limited to $4,000 total for all others so that you stay within the limit. The same principle applies to the lifetime cap of $40,000.
When Can I Withdraw From My FHSA?
FHSA withdrawal rules depend on whether you are making a qualifying purchase or an unqualified withdrawal. You can maintain the tax-free status if you meet Canada’s guidelines as a first-time buyer:
- You have a written agreement to purchase a home.
- You have not owned the home for more than 30 days before withdrawing from your account.
- You must also plan to occupy that home as your primary residence within 12 months of taking ownership.
Once your purchase is complete, you have until December 31 of the year following your first qualifying withdrawal to close your account. If you decide not to buy a house after all, you must close your account within 15 years after opening your first FHSA or by age 71, whichever comes first.
You can do this by making an unqualified withdrawal, which will be added to your taxable income for the year. Alternatively, you can defer taxes by transferring unused amounts into an RRSP or RRIF.
Can You Use FHSA and an RRSP Together?
This is where the FHSA really shines, when you combine it with other Canadian programs like the Home Buyer’s Plan, an incentive that has been around since 1992.
New guidelines allow you to withdraw up to $60,000 from a registered savings account without penalty as long as those funds go toward the purchase of a qualifying home. The difference with the Home Buyer’s Plan is you must repay those funds back to your RRSP within 15 years.
If you already have a healthy nest egg, the Home Buyer’s Plan allows you to use it to get into the market. If you have yet to begin your savings, an FHSA is a valuable tool.
First-Time Home Buyers Are Loving Hamilton! Find out why in the posts below:
- Hamilton Vs. Toronto: Which Ontario City Should You Choose?
- Is Hamilton a Good Place to Live?
- Must-Visit Hamilton Hiking Trails
Other Canadian Incentives
There is some excitement still over the FHSA even though it was originally introduced in 2023. That said, you have access to even more programs to make your first purchase more accessible.
Land Transfer Tax Rebate: In Ontario, home buyers must pay a percentage of the final selling price to cover provincial land transfer taxes. This is the most significant closing cost in most cases. As a first-time buyer, you can take advantage of a rebate of up to $4,000.
First Time Home Buyer Income Tax Credit: You are entitled to a $10,000 credit off of your income taxes in the year you purchase your first home. This reduces your tax burden by $1,500, which often results in a refund.
When buying your first home, almost nothing is more valuable than working with an experienced team of real estate agents. We will ensure you are aware of all possible advantages and resources available to you. Plus, you’ll get the best value when a skilled negotiator is working on your behalf.
Do you have questions about buying your first home in today’s market? Our top agents in Hamilton & Burlington are happy to guide you every step of the way. Contact us here to learn how we can help, or call 905-332-9223 to connect with our office.
