Saving for Your First Home? Understanding How the First Home Savings Account (FHSA) Works
As an overview, an FHSA allows you to save up to $8,000 per year (to a lifetime maximum of $40,000) and shares beneficial features with both a TFSA and a RRSP. As with a TFSA, you typically do not pay taxes on growth earned within an FHSA, and withdrawals are tax free (as long as the funds are used towards a qualifying home purchase). The FHSA is similar to a RRSP in that contributions can be deducted against your taxable income, which can help reduce your tax bill. As an added bonus, investors are able to combine withdrawals from both their FHSA and their RRSP (following the existing rules under the Home Buyers Plan ) when making a home purchase.
Opening the FHSA
To open a FHSA, you must be a resident of Canada, at least 18 years of age, and not turning age 72 or older in the year. In addition, you must be a first-time home buyer, which means you and your spouse must not have owned a home in which you lived, as your principal residence at any time during the part of the calendar year before you opened the account or at any time in the preceding four calendar years.
Income earned
Income, as well as capital gains (and capital losses) earned in a FHSA are not included in your annual income (or deductible) for tax purposes. This means income and capital gains can continue to grow and compound in the FHSA on a tax-free basis. Income, capital gains, and capital losses will also not be taken into account in determining your eligibility for income-tested benefits or credits delivered through the income tax system, such as the Canada Child Benefit and the Goods and Services Tax (GST) credit.
Conclusion
First-time home buyers can consider opening an FHSA and taking advantage of the tax-deductible contributions, plus the tax-free compounding growth on any income earned and capital gains realized within the account. This account may help you save tax efficiently towards the purchase of a home. And if you don’t end up buying or building a qualifying home, you can direct the funds towards your retirement by transferring any unwithdrawn savings on a tax-free basis to an RRSP or a RRIF.
To discuss more about the First Home Savings Account, I can be reached at 604 981 2306.
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