The Canadian housing market has become increasingly challenging for many, particularly first-time homebuyers facing escalating prices and stringent mortgage requirements.
To assist in overcoming these challenges, the Canadian government introduced the First Home Savings Account (FHSA) in 2023, providing a new tool to make homeownership more accessible through significant tax advantages and savings potential.
The FHSA combines the benefits of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA), offering tax deductions and tax-free growth on investments.
According to the Canada Revenue Agency (CRA), the program is available to Canadians aged 18 to 71 who have never owned a home or who haven’t in the past four years.
First Home Savings Account Details
- Annual Contributions: Eligible individuals can contribute up to $8,000 annually to their FHSA, with a lifetime contribution limit of $40,000.
- Tax-Deductible Contributions: Contributions to the FHSA are tax-deductible, reducing taxable income and offering immediate tax savings.
- Government Matching: The government matches 25% of contributions, up to a maximum of $10,000 over the lifetime of the account, adding extra savings.
- Carry-Forward Option: If the annual contribution limit is not met in a given year, unused contribution room can be carried forward to future years.
With average home prices around $716,000 in late 2023, the FHSA offers a valuable way for first-time homebuyers to save more quickly for a down payment, helping to ease the financial strain of purchasing a home.
Types of FHSAs
- Depositary FHSA: Holds liquid assets like cash or guaranteed investment certificates (GICs).
- Trusteed FHSA: Managed by a trust company and includes various qualified investments such as bonds and mutual funds.
- Insured FHSA: Operates under an annuity contract with a licensed provider, focusing on insured products.
Eligibility Requirements for the FHSA
- Age Limit: Applicants must be between 18 and 71 years old, with an adjustment to 19 in provinces where this is the legal age for entering contracts.
- Residency: Applicants must be Canadian residents.
- First-Time Homebuyer Status: To qualify, applicants must not have owned a home used as their primary residence in the current year or any of the past four years.
- This includes properties owned individually or with a spouse or common-law partner.
Contribution Limits and Tax Benefits
- Up to $8,000 annually: This amount helps accelerate savings for a down payment on a home.
Lifetime Contribution Limits
- Up to $40,000 lifetime: This ensures long-term support for saving towards purchasing a home.
Tax Benefits
- Tax-Deductible Contributions: Contributions reduce taxable income for the year, offering immediate financial relief.
- Government Matching Contributions: The government matches 25% of contributions, providing up to $10,000 in additional savings over the account’s lifetime.
Steps to Open an FHSA
- Verify Eligibility: Ensure you meet the age and first-time homebuyer requirements.
- Choose a Financial Institution: Select a bank, credit union, trust company, or insurance company that offers FHSAs.
- Provide Documentation: Submit necessary documents, such as your Social Insurance Number (SIN) and proof of date of birth.
- Open the Account: Follow the institution’s process to officially open your FHSA.
- Begin Contributions: Start contributing up to $8,000 annually to maximize your savings potential.
- Report Contributions: Use Schedule 15 to report your FHSA activities on your tax return.
The FHSA program is an essential tool for young Canadians and first-time homebuyers, offering a structured and tax-efficient way to save for a home.
It not only reduces immediate tax liability but also accelerates savings with the added benefit of government contributions, making it an attractive option for those ready to enter the housing market.
