Canada’s new tax-free First Home Savings Account takes effect April 1. Here’s what you need to know

By Joshua Chong

For many young Canadians, home ownership seems out of the question. Despite a softening housing market, prospective buyers still need more money this year than in 2022 to purchase a home, largely due to rising interest rates and the high bar set by the mortgage stress test.

A new federal plan, however, may soon help these potential buyers, allowing them to save for their first home tax-free. The First Home Savings Account (FHSA) comes into effect April 1 after it was initially proposed in the federal government’s 2022 budget.

Here’s what you should know.

How much money can I contribute?

Prospective homebuyers can contribute up to $8,000 of tax-free savings each year, up to a lifetime contribution limit of $40,000.

Canadians who start an FHSA but do not contribute the full amount each year are allowed to carry forward a maximum of $8,000 to use the following year. In addition, income earned on FHSA savings does not reduce the participation room for the subsequent year.

FHSA accounts have a maximum participation period of 15 years, meaning account holders must transfer all funds and close the account 15 years after opening it to avoid taxation.

Who can open an account?

Canadian residents who are at least 18 years old are eligible for the FHSA. Those who want to open an account cannot have owned a home at any time in the year that the account is opened, or during the preceding four calendar years.

Common-law partners and spouses are not allowed to participate in each other’s accounts. Only the person named in the FHSA can make contributions or transfers.

As well, if an FHSA account holder moves out of the country, they will not be allowed to make a qualifying withdrawal to purchase their first home. Withdrawals by non-residents may be subject to a withholding tax of 25 per cent, unless reduced by a tax treaty between Canada and their country of residence.

How can I withdraw funds from my FHSA?

Account holders will likely withdraw money from their FHSA to use toward the purchase of their first home. In most cases, that would be considered a qualifying withdrawal and can be completed tax-free.

There are some caveats, however. Using the savings towards an investment property would not qualify for a tax-free withdrawal; the home must be a principal residence and homebuyers must move in within one year of purchase.

FHSA holders can also make a tax-free withdrawal if they contributed more than their FHSA participation room of $8,000 (plus any additional carry-over amount). The excess amount, which is taxed while in the account, can be withdrawn without being taxed as income.

All other withdrawals — such as if you need to tap into the savings for a personal expense — must be declared as income during tax season.

Is the FHSA right for me?

Tony Sutey, senior financial adviser at Assante Capital Management Ltd. in Huntsville, Ont., said once the program is available, it will be “a no-brainer for someone who is seriously looking at buying their first home.”

“That’s mostly young people, but it can also be adults in their 40s or 50s if they’ve never had a home,” he told The Canadian Press.

However, the plan may not be best for Canadians with low incomes. “Someone who’s got a fairly low income, let’s say it’s $40,000, $50,000 or less, that person is not an ideal candidate because they might need money to fix their car or whatever it is. Then you have to worry about drawing money out and paying tax on it,” Sutey said.

For those individuals, Sutey recommends a tax-free savings account, which generally allows you to withdraw funds tax-free for any purpose.

Though the new federal rules governing the FHSA come into force April 1, Canadians may not be able to open an account until later this year.

Eight large Canadian financial institutions, including all Big Six banks, EQ Bank and Desjardins said they would not be ready to offer the FHSA by April 1. Some banks said they aim to launch the program in the summer, while others said they plan to start offering the plan “later in 2023,” citing a complex process that requires technological development and co-ordination with the Canada Revenue Agency.

When can I open an account?

Though the new federal rules governing the FHSA come into force April 1, Canadians may not be able to open an account until later this year.

Eight large Canadian financial institutions, including all Big Six banks, EQ Bank and Desjardins said they would not be ready to offer the FHSA by April 1. Some banks said they aim to launch the program in the summer, while others said they plan to start offering the plan “later in 2023,” citing a complex process that requires technological development and co-ordination with the Canada Revenue Agency.