Canada’s First Home Savings Account (FHSA) is a government initiative designed to help Canadians save for their first home. Initially launched in 2009, the FHSA provides individuals with a dedicated, tax-advantaged savings account to build up funds for the purchase of their first home.
Along with other incentives and benefits, the FHSA has made the dream of homeownership more accessible for many first-time home buyers.
In this post, we’ll cover the value of this unique program and what you’ll need to know about getting started on the journey toward your first home.
Your Financial Roadmap
Similar to a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA), First Home Savings Accounts operate as registered bank accounts. An FHSA allows Canadians to save up to a certain limit each year, with contributions made on a tax-deductible basis, and the earnings on the savings grow tax-free.
The intention of this account is that the funds saved within it will be used towards the down payment or other associated costs of purchasing a qualifying home. For first-time buyers (or prospective first-time buyers), getting started with an FHSA creates a solid financial foundation for what is ultimately a fairly substantial purchase.
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Protecting Your Savings
One of the key benefits of the First Home Savings Account is the tax advantage it offers. Contributions made to an FHSA are tax-deductible, which means that they can be deducted from the individual’s taxable income for the year. This can result in a reduction in the amount of income tax owed, helping first-time buyers keep more of their hard-earned money in their pocket.
Another significant advantage of FHSAs is the untaxed growth of earnings. Similar to other registered accounts, such as RRSPs and TFSAs, the earnings on the savings in an FHSA are not subject to tax. This means that the investment gains made within the account can compound over time without being eroded. Once again, this helps you accumulate and hold onto more funds that you’ll use toward your first home purchase.
Dynamics & Flexibility
While the tax protections are advantageous, FHSAs have other benefits as well. For example, they offer a greater degree of flexibility compared to other registered accounts.
Unlike RRSPs, which are primarily designed for retirement savings and are subject to restrictions, the FHSA allows individuals to withdraw funds at any time for the purpose of buying a qualifying home. Further, there is no minimum holding period for contributions to be deductible or eligible for withdrawal.
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Magnifying the Fine Print
Like any savings plan, First Home Savings Accounts do come with some ground rules. First, only Canadian residents are eligible to hold an FHSA. Additionally, they can be held for up to 15 years, or until you turn 71. Finally, you may only open an FHSA if you (and your spouse) do not already own a home in Canada.
The maximum contribution limit on an FHSA is $8,000 per year, with a lifetime contribution ceiling of $40,000. Of course, your financial contributions to the account may exceed these parameters, however, they will be subject to taxation.
Inevestments & Withdrawls
Unlike RRSPs or TFSAs, which offer a wide range of investment options, an FHSA is more limited in terms of the types of investments that can be held within the account. Currently, only cash, savings deposits, term deposits, guaranteed investment certificates (GICs), and certain government bonds are considered to be eligible investments.
Additionally, the funds withdrawn from an FHSA must be used to purchase a qualifying home. A qualifying home is defined as a home located in Canada that is intended to be the individual’s principal residence within one year of purchase. Alternatively, should you decide to use the funds differently, you can transfer the money to an RRSP without impacting your contribution room.