Did you know Canada just got a new way to pay less tax? The First Home Savings Account or FHSA rolled out earlier this year in April and is the only account that gives you 100% tax free money.
If you're looking like Andy from Parks & Rec let me explain to you everything you need to know about the FHSA to take advantage of this.
HOW!?
The FHSA does this by combining the benefits of a RRSP with a TFSA.
Like a RRSP you get a tax deduction for the money you contribute dollar for dollar.
Then you can invest the money in your account into stocks, bonds, ETFs, etc like in a RRSP or TFSA with no tax on any of the gains, dividends or interest earned.
Lastly, when you withdraw money from the account for your downpayment it is also tax free, including any of the growth and gains, like a TFSA.
Who can participate:
Any resident of Canada ages 18 and above that is a first time home buyer.
A first time home buyer means you or your partner have never purchased a home OR you or your partner have not lived in a home they owned at any time in the preceding four calendar years.
If you are married or common-law and your partner would not be considered a first time home buyer then unfortunately you also do not qualify as a first time home buyer.
Contribution Limit:
Like with the TFSA and RRSP there is a limit to how much money you can contribute to your FHSA each year. The limit is $8,000 to a lifetime maximum of $40,000.
❗IMPORTANT: Unlike a TFSA or RRSP if you do not use all your contribution room in a certain year it DOES NOT CARRY FORWARD. You either use it that year or lose it.
That means that if you were to open an account today you would have to contribute the yearly maximum of $5,000 for 5 years continuously to max out your FHSA at $40,000 in the quickest time possible.
There is one exception to this, for 2023, the first year of the program, as long as you have an open FHSA with money in it you will be able to carry forward any unused contribution room into 2024. This is a one year only exception.
Once you open the account you have 15 years to contribute to the account. After that you are no longer able to contribute.
The Purpose of the FHSA:
As the name implies the purpose of this account is to use the money towards a downpayment of your first home. By withdrawing the money in your FHSA for your downpayment you pay no tax on the withdrawl. That is how you get the tax break on the back end while also getting it on the front end with the tax deduction.
The Best Part of the FHSA
Combining the RRSP Home Buyers Plan & the FHSA
If you know about the Home Buyers Plan (HBP) through your RRSP you might be extra excited right now. Why? Because thanks to a recent policy update you can now you can participate in the RRSP HBP to use up to $35,000 of your RRSP towards a downpayment of your first home AND you can use the money in your FHSA towards the down payment as well. That's $75,000 tax free to go towards your first home!
Once you withdraw the money from your FHSA for your downpayment your FHSA will close, excess contributions not used towards your downpayment can be rolled into your RRSP and you do not have to repay the money. There is also no minimum holding period that the money needs to be in your FHSA before you can withdraw it for a downpayment.
If you also choose to participate in the HBP through your RRSP you must pay back the money you withdrew from your RRSP for the HBP within 15 years. The repayments start 2 years after the withdrawal. Unlike the FHSA you must have the money in your RRSP for at least 90 days before you can withdraw it under the HBP.
Now that you know about the FHSA I hope you or someone you know can take advantage of it's great benefits to get 100% TAX FREE money. 🤑
All my best,
Laura
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