Understanding the Extension of the Foreign Ownership Ban on Canadian Housing: What it Means for…
Starting April 1, 2023, the FHSA offers a dynamic way for prospective first-time home buyers to save for their first home. This account combines the best features of both the RRSP and the TFSA, providing significant tax advantages.
Key Aspects of FHSA:
- Contribution Limits and Carry Forward: You can contribute up to $8,000 annually, with a lifetime limit of $40,000. Unused FHSA participation room can be carried forward, up to a maximum of $8,000, to use in the following year.
- Tax Benefits: Contributions can be deducted from your income, akin to an RRSP, while withdrawals (including any income earned) can be made tax-free when used to purchase a home, similar to a TFSA.
- Eligibility and First-Time Buyer Criteria: To be eligible, you must be a Canadian resident, at least 18 years of age, and a first-time home buyer. A “first-time home buyer” for withdrawal purposes is defined as someone who has not lived in a home they owned in the current year or the preceding four calendar years.
- Transfer Between Registered Plans: Direct transfers from your RRSPs to your FHSAs and vice versa are possible without immediate tax consequences, provided they don’t exceed your unused FHSA participation room. However, these transfers do not affect your unused RRSP deduction room and are not tax-deductible.
- Withdrawal Conditions: To qualify for tax-free withdrawal, several conditions must be met, including being a first-time home buyer and having a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal. The home must be occupied as the principal residence within one year after purchase or construction.
- Account Closure Post Withdrawal: It’s recommended to close your FHSA by December 31 of the year following your first qualifying withdrawal, as your maximum participation period ends then.
- Tax Implications for Non-Qualifying Withdrawals: Withdrawals that do not meet the qualifying criteria must be included as income on your tax return for that year and will be subject to income tax withholding.
- Penalties for Excess Contributions: Contributing or transferring more than your FHSA participation room results in an excess amount, attracting a 1% tax per month for each month the excess remains in the account.
The FHSA is a game-changer for first-time home buyers, offering a tax-efficient way to save for your dream home. By understanding and utilizing the unique benefits of the FHSA, you can make your path to homeownership smoother and more achievable.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2023 Shajani CPA.
Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning services.