Thinking about buying a home? The First Home Savings Account (FHSA) is developed to assist you in saving for your first house. All you need to know about the FHSA, especially if you’re considering buying pre-construction homes and condos.
What is the First Home Savings Account (FHSA)?
The Canadian government introduced the First Home Savings Account (FHSA), a registered savings plan available to Canadians who are saving for their first home. Only Canadian residents who are above the age of 18 can set up an FHSA to save money for buying real estate (such as pre-construction homes and condos) in Canada.
Key points about FHSA:
- $8,000 yearly contribution limit
- $40,000 lifetime contribution limit
- If you are not able to pay the full amount, you can contribute the rest in the next year
- First-time home buyers who haven’t lived in a home they own in the previous four calendar years
Where Can You Get an FHSA?
You can get an FHSA from banks, credit unions, or any financial institution that issues Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs). These institutions will help you set up and manage your FHSA effectively.
What Can Go Into an FHSA?
An FHSA can hold savings or investments. The same qualified investments that are allowed in a TFSA can also be held in an FHSA, including:
- Mutual funds
- Bonds
- Guaranteed Investment Certificates (GICs)
Can You Have an FHSA Alongside a TFSA and RRSP?
Yes, you can hold an FHSA at the same time as a TFSA and an RRSP. Each of these accounts offers unique benefits:
- RRSP Home Buyers’ Plan: Allows withdrawal of up to $35,000 from your RRSP to help buy your first home, but the amount must be repaid within 15 years.
- TFSA: This can be used for any savings goal with tax-free withdrawals.
Are My FHSA Contributions Tax Deductible?
Contributions made to your FHSA are generally tax deductible. This means you can claim your annual contributions on your tax return, reducing your tax owing or increasing your refund at tax time. However, transfers from your FHSA to your RRSP are not tax deductible.
How Does the FHSA Compare to the RRSP Home Buyers’ Plan and a TFSA?
Here’s a comparison of the FHSA, RRSP Home Buyer’s Plan, and TFSA:
| Feature | FHSA | RRSP Home Buyers’ Plan | TFSA |
| Contributions are tax-deductible | Yes | Yes | No |
| Withdrawals for home purchase are non-taxable | Yes | Yes | Yes |
| Annual contribution amount is tied to income level | No | Yes | No |
| The account can hold savings or investments | Yes | Yes | Yes |
| Unused annual contributions carry forward to the next year | Yes | Yes | Yes |
| For first-time home buyers only | Yes | Yes | No |
| Total contribution amount limit | $40,000 | $35,000 | Cumulative |
| Check the contribution room in CRA MyAccount | TBD | Yes | Yes |
What If You Never Purchase a Home with Your FHSA?
If you change your mind about using the money in your FHSA to buy a home, you can transfer it tax-free into an RRSP or Registered Retirement Income Fund (RRIF). If you take it out for any other purpose, it gets counted as taxable income. Remember, a FHSA must be closed within 15 years or when you turn 71 (whichever comes first).
Why FHSA is Ideal for Buying Pre-Construction Homes and Condos?
The First Home Savings Account (FHSA) is perfect for those considering buying pre-construction homes and condos. The contributions are tax-deductible and withdrawals for buying homes are non-taxable too. And you can transfer unused funds to an RRSP or RRIF without tax penalties if you change your mind.
Conclusion
The FHSA is a great instrument to save for pre-construction homes and condos in Canada. It offers significant tax benefits and makes it easier to build up a corpus over several years. You get more leeway than other savings plans like the RRSP Home Buyers’ Plan and TFSA. If you still have doubts, seek the help of a financial advisor to ensure you make an informed decision.
