Tax-Free First Home Savings Account
The Tax-Free First Home Savings Account (FHSA) is a registered plan introduced by the Government of Canada to help prospective first-time home buyers save for their first home.
What is the Tax-Free First Home Savings Account?
The FHSA is a new type of savings plan for first-time homeowners in Canada. It allows you to save up to $40,000 tax-free to buy your first home. The new account blends the best of the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA).
How does the Tax-Free First Home Savings Account work?
Canadians can contribute up to $8,000 per year until they reach the $40,000 contribution limit. This must be done within 15 years of opening their account. To help Canadians reach their savings goals, FHSA contributions are tax-deductible on annual income tax returns, like an RRSP. And, like a TFSA, withdrawals to purchase a first home—including any investment income on contributions—are non-taxable.
Eligibility for the Tax-Free First Home Savings Account
To be eligible to open an FHSA, you must be a prospective first-time home buyer. You can open an FHSA starting April 1, 2023.
Benefits of the Tax-Free First Home Savings Account
The FHSA offers several benefits to first-time home buyers:
- Tax Deductible Contributions: Contributions to the FHSA are tax-deductible, which can help lower your annual tax bill.
- Tax-Free Withdrawals: Withdrawals from the FHSA for the purpose of buying a first home are tax-free.
- Investment Growth: Any investment income or growth in the FHSA is tax-free.
- Flexible Repayment: There is no requirement to repay the withdrawals from the FHSA.
How to Open a Tax-Free First Home Savings Account
Opening an FHSA is a straightforward process. Here are the steps you need to follow:
- Check Your Eligibility: Make sure you meet the eligibility criteria for the FHSA.
- Choose a Financial Institution: You can open an FHSA at any financial institution that offers the plan.
- Fill Out the Application Form: You’ll need to provide some personal information and choose the type of investments you want for your FHSA.
- Start Contributing: Once your account is open, you can start making contributions.
Real-Life Example of Using the Tax-Free First Home Savings Account
Let’s say you’re a first-time home buyer who earns $50,000 per year. You decide to open an FHSA and contribute $8,000 per year. After five years, you’ve contributed $40,000 to your FHSA. Because your contributions are tax-deductible, you’ve also reduced your taxable income by $40,000 over those five years, saving you a significant amount in taxes. Plus, any investment growth in your FHSA is tax-free, so you could end up with more than $40,000 when you’re ready to buy your first home.
The Tax-Free First Home Savings Account is a significant step towards making homeownership more accessible for Canadians. It provides a practical and tax-efficient way for first-time home buyers to save for their first home. Reach out to our mortgage brokerage today and let us guide you on your journey to homeownership! We can be reached through our website or by calling (519) 252-9665.