What is a First Home Savings Account?

February 14, 2024

Many Canadians dream of owning their own home. It is a significant milestone and there are many things to think about when buying your first home. One of the main considerations is how to save the money needed for a down payment. In April 2023, the Government of Canada implemented the First Home Savings Account (FHSA), a type of registered savings plan to assist first time home buyers save for their down payment.

The First Home Savings Account is available for any Canadian resident who is 18 years or older and 71 years or younger as of the December 31 of the year they open the FHSA. They must also meet conditions as a first-time homebuyer that include:

• having not lived in a qualifying home as their principal place of residence that was owned or jointly owned in the current calendar year or the previous four calendar years.

• having not lived in a qualifying home as their principal place of residence that their spouse or common-law partner owned or jointly owned in the current calendar year or the previous four calendar years.

How much can be contributed or transferred into your FHSA?

• the year the FHSA is opened the maximum contribution is $8,000.

• in following years, the limits include $8,000 annual contribution room (new room) plus unused participation room from previous years up to an additional $8,000, to a maximum of $16,000.

• The FHSA can remain open for up to 15 years, or until you turn 71 and lifetime contribution room is $40,000.

• funds can be directly transferred into your FHSA from your RRSP however, a transfer will not restore RRSP contribution room. Funds can be directly transferred into the FHSA from a Spousal RRSP (SRSP) as long as a contribution was not made into the SRSP within the same calendar year or two previous calendar years. This will not restore RRSP contribution room for your spouse or common-law partner.

• a 1% monthly tax is charged on any over contribution made until the FHSA excess in removed.

• individual participation room can be found on the latest notice of assessment or reassessment or Form T1028, your RRSP, HBP, LLP or FHSA information for 2024.

Tax considerations for the FHSA

The First Home Savings Accounts provide many tax advantages making them a great option to consider when saving for a down payment on a first home. These tax advantages include:

• contributions can be deducted from taxable income in the year of contribution or future years even past the closing of the FHSA account. Consider utilizing the contribution deduction when in the highest Marginal Tax Rate to create a greater tax break.

• while funds are invested within the FHSA, the growth is tax-free with no requirement to report this on the owner’s income tax return.

• withdrawals made for the down payment of a qualifying first home do not need to be reported on the owner’s income tax return.

What happens to the money if a first home is not purchased?

The funds within the FHSA must be used for the down payment on a first home by the 15th anniversary of opening the FHSA or when the owner of the FHSA turns 71 years of age. If there is money remaining within the FHSA then one of two options can be implemented:

• the funds can be directly transferred to the RRSP or RRIF of the FHSA owner. This will not affect RRSP contribution room.

• a withdrawal of remaining property from the FHSA will be considered taxable income and must be included on the income tax return of the FHSA owner. The FHSA issuer will provide a T4FHSA slip showing the amount redeemed.

Coordinating the FHSA and the HBP

The RRSP Home Buyers Plan (HBP) allows individuals to remove up to $35,000 from their RRSP to be included in the down payment of their first home. In the year of withdrawal and the following calendar year, there are no tax implications. After the second year of withdrawal, the funds must be repaid into the RRSP over a 15-year period. Repayments of at least 1/15 of the total amount annually are not tax-deductible and any outstanding amount not repaid is taxable income in the year it was due. The RRSP HBP and FHSA can be used to their fullest capacity at the same time.

There are many considerations when purchasing a new home and the down payment is a major area of deliberation. Consider the purchasing price of the home, the down payment and how the balance owing will translate into a monthly mortgage repayment. Is the mortgage amount feasible? In some cases, adjustments may be needed if the payments do not work with the budget. Changing expectations and finding a home with a lower purchase price or increasing the time horizon to purchase a home to help with saving a bigger down payment are two options. In either scenario, the First Home Savings Account offers many benefits and should be considered as a solution to save for the down payment on a new home.

FirstOntario Credit Union in partnership with Credential Securities and Credential Asset Management Inc. has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

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