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First-time buyers can be forgiven if they’re confused by the various programs available to help them with the purchase of their first home.

There’s the Home Buyer’s Plan and the First-Time Home Buyer Incentive. But prospective buyers can add a new program to that list: the Tax-Free First Home Savings Account, or FHSA for short.

The new registered savings plan for homebuyers was announced in the federal government’s 2022 budget and will take effect on April 1, 2023.

It will allow borrowers will be able to save up to $8,000 tax-free annually and will have a $40,000 lifetime contribution limit.

The account will function like a Registered Retirement Savings Plan (RRSP), where contributions are tax-deductible, while withdrawals to purchase a first home – including from investment income – would be non-taxable, like a Tax-Free Savings Account (TFSA).

Below, we’ll dive into some of the key details of the plan, including eligibility requirements and some of its limitations.

Who is eligible to open an FHSA account?

You can open a Tax Free First Home Savings Account as long as you are 18 or older, a resident of Canada, and a first-time homebuyer.

To qualify as a first-time buyer, you or your spouse cannot have owned a qualifying home that was used as a principal residence at any time during the year the account is opened or in the four preceding years.

What are the contribution limits?

As mentioned above, qualifying first-time buyers can contribute up to $8,000 per calendar year, up to a maximum total of $40,000. Any unused portions of the $8,000 contribution space can be carried forward to the following year.

Individuals can hold multiple FHSA accounts but cannot exceed the total contribution limits.

What kinds of investments are eligible within the FHSA?

 Rules governing investment options within the FHSA are identical to those that apply to TFSAs. Account holders can invest the funds in mutual funds, publicly traded securities, government and corporate bonds and guaranteed investment certificates (GICs).

Investments prohibited within the FHSA include non-arm’s length investments and investments in assets such as land, shares of private corporations, etc.

How can funds be withdrawn?

Funds can be withdrawn from the FHSA tax-free as long as they are being used for a qualifying home purchase.

To qualify, the purchase must meet these conditions:

  • You must be a first-time buyer at the time of the purchase.
  • You must have a written agreement to buy or purchase a qualifying home before October 1 of the year following the year of withdrawal and plan to occupy the home as your principal residence within a year after buying or building it.
  • The home must be located in Canada. Shares in a cooperative housing corporation that entitles the buyer to possess or have an equity interest in the housing unit would also qualify.

Withdrawals for qualifying purchases can be made in a single lump sum or in a series of withdrawals.

If there are remaining funds after the purchase, those funds can be transferred to a Registered Retirement Savings Plan (RRSP) or a registered retirement income fund (RRIF) tax-deferred and penalty-free. In this case, the leftover funds must be transferred by December 31 of the following year.

What happens if FHSA funds are not used to purchase a first home?

If the funds in the FHSA account aren’t used to purchase a first home by either a) the end of the 15th year after the plan was opened or b) the end of the year you turn 71 years old, the account will cease to be an FHSA and must be closed. The unused balance can then be transferred to an RRSP or RRIF or withdrawn on a taxable basis.

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More precise details of the FHSA are available on the Government of Canada’s website.

For those considering using an FHSA and have additional questions, we recommend reaching out to a mortgage broker.