If you following everything that has to do with financial matters in Canada, chances are you’ve heard of the FHSA (First Home Savings Account). Set to arrive in 2023 to facilitate Canadians buying their very first home, many are confused about the way the FHSA will work. Below, we’ve outlined everything you need to know.
What is the First Home Savings Account?
Earlier this month, the Liberal Government of Canada announces its plans to introduce the First Home Savings Account to Canadians. Part of the reason as to why this was introduced was to help Canadians with the steep rise in home prices. With its expected arrival some time next year, the savings account has one sole purpose: helping Canadians purchase their first home. Those that will make use of the FHSA will be able to save up to a total of 40,000$ with an annual contribution limit of 8,000$ to put towards buying their first property.
Unlike TSFAs and RRSPs, unused contribution limits cannot be carried over. However, the FHSA does offer tax deductions and tax-free withdrawals. Your contributions will also lower you total taxable income. Although you don’t get taxed on any amount that you take out of the account, you do have to close the account within the year that you withdraw money to purchase your home. Moreover, if you haven’t purchased a home after 15 years of contributing to the account, you will need to close the account, at which point your funds will be converted back to RRSP savings.
Is it Completely Tax-Free?
The First Home Savings Account is completely tax-free, but you could face some penalties if you withdraw money unrelated to purchasing a home. That means that though you’ll see your money growing tax-free, if you withdraw money for a purpose unrelated to purchasing a house, that withdrawal will count as taxable income. Also, if the money needs to be transferred to your RRSPs after 15 years of disuse, and you’ve already surpassed your RRSP yearly contribution limit, then you may be taxed on that amount.
Who is Eligible?
Although nothing is set in stone as of yet, according to Sunlife Global Investments, the requirements to be able to contribute to a FHSA are as follows:
You must be a resident of Canada and at least 18 years of age You must not have lived in a home that you owned in the year the account is opened or during the preceding four years.
Evidently, since the account is meant for people who are buying their first home, you can only contribute and withdraw money once in your lifetime. Those who are looking to contribute in order to purchase investment properties are not eligible. Though you can have more than one First Home Savings Account, you cannot contribute more than your yearly limit. For example, if the limit is 8,000$ per year and you have two accounts, the sum of contributions in both accounts can equal to only 8,000$ per year.
What can be invested in the First Home Savings Account?
The FHSA is more than just a savings account. In fact, it’s more like an investment account, because you can contribute a lot more than cash to your FHSA. You can contribute in the form of stocks, bonds, mutual funds, guaranteed investment certificates, and exchange-traded funds. However, keep in mind that when you contribute your money in allowable investment assets, growth isn’t guaranteed. If the stocks you invested in goes down, so too will your FHSA contribution. But if the value of your stocks go up, your capital gain will be tax-free!
Is it Worth it?
There’s a lot of buzz going around about the new First Home Savings Account. Some believe it will help them put a downpayment on a new home, and others think it’s just “voter candy for millennials” and won’t make much of a difference. Canadians already are able to take out 35, 000$ out of their RRSPs penalty-free through the Home buyer’s Plan, but most choose not to. It might be that the trouble isn’t that Canadians need more opportunities to watch their savings grow, but instead that they need more money to save. Granted, if you take money out of your RRSPs, you’ll have to reimburse it down the line. The FHSA might be beneficial for those that can’t do so.
However you choose to save money for a downpayment on a new home, the important thing is that you’re actually saving. If you find yourself struggling to pay all of your bills and don’t have any means of setting any money aside, then you should try to examine your budget and see if you can cut expenses or raise your income. Allevia’s online budgeting tool can help you do that by allowing you to track all of the money coming in and out of your account. It analyzes the state of your finances in order to find the best solution for your personal situation so that you can live debt-free — and finally start a life in the home of your dreams.
