Canadians looking to buy a home can tap into a new way save, while receiving a tax break, with the new First Home Savings Account. Slated for introduction in 2023—which means parameters are subject to change dependent on legislation—here’s what to know so far.
FHSAs will be available to Canadians residents, who are 18 years old or older and have not owned a home in the year the account is opened or the preceding 4 calendar years.
The annual tax-deductible contribution limit is $8,000 up to a lifetime contribution max of $40,000. Unused contribution room does not carry forward and the plan must be closed after 15 years.
Funds withdrawn to make a qualifying home purchase are not subject to tax. Any funds not used towards a home purchase can be transferred to an RRSP or RRIF, penalty free and tax deferred, without impacting the taxpayer’s contribution room. Once an individual has made a non-taxable withdrawal to purchase a home, they would be required to close their FHSAs within a year from the first withdrawal and would not be eligible to open another FHSA. Additionally, multiple FHSA accounts can be opened by one person individually, but the contribution limits are per person, not per account.
On the flip side, funds currently held in an RRSP can be moved into a FHSA but will be subject to the FHSA contribution limits. Although the taxpayer will not be eligible for an additional tax deduction, a transfer will allow for a tax-free withdrawal. This could allow for a lot of flexibility.
The main advantages of the FHSA are tax related for both contributions and withdrawals, with features parallel to RRSPs and TFSAs.
Like RRSPs, contributions are tax deductible, meaning that if you contributed $8,000 a year, your taxable income would decrease by the same amount. And, like the TFSA, withdrawals, including any capital gains or income earned, are also tax free, if used towards the purchase of a qualifying home.
While the Home Buyer’s Plan allows first-time buyers to withdraw up to $35,000 from their RRSP tax free, the total must be paid back within 15 years. Also, amounts repaid to an RRSP will be subject to tax as funds are withdrawn from the plan. So, a FHSA provides more of a tax advantage since contributions are deductible and withdrawals are not taxed if conditions are met. Notably, the HBP and FHSA cannot both be used at the same time, so it’s important to establish which account would work best for you.
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Full article here: https://www.cpacanada.ca/en/news/canada/first-home-savings-account