For many people, owning a home is a big financial achievement. But with increasing prices, it’s hard for first-time homebuyers to make that dream a reality. Luckily, there’s a specific savings account designed to help people buy their first home.
Let’s explore first home savings accounts (FHSAs), including what they are, who is eligible for one, and other considerations you should keep in mind before opening an account.
What is an FHSA?
An FHSA is a savings account designed for first-time homebuyers in Canada. A tax-advantaged account allows you to save money toward purchasing your first home, which means that any interest earned on the account is tax-free. You can withdraw funds tax-free when you’re ready to purchase a qualifying property.1
What Are the Rules of an FHSA?
An FHSA can be an excellent way for first-time homebuyers to save money for their future home, but you must follow some specific rules and criteria to take advantage of this type of account. Here are some of the most important rules of an FHSA:
- Only Canadian residents who have not owned a home before can open an FHSA.
- The annual contribution limit is $8,000, and the lifetime contribution limit is $40,000.1
- Contributions are generally tax deductible unless they are transferred from an RRSP, and any interest earned on the account is tax-free.
- You can only withdraw money from your FHSA to purchase a qualifying home, and you have 30 days after taking ownership of the property to make the withdrawal.
- If you take money out of your FHSA for any other reason, you’ll have to pay taxes on the amount withdrawn.
- To open an FHSA, you need to file Form T1036 with the Canada Revenue Agency (CRA).2
Types of FHSAs
There are three types of FHSAs: depository accounts, insured accounts, and trustee accounts:3
This type of FHSA holds funds at a financial institution such as a bank, credit union, or trust company. Depository FHSAs earn interest at a set rate determined by the financial institution, and any interest earned on the account is tax-free.
This type of FHSA is similar to a depository account. Still, the funds in the account are insured by a government agency, such as the Canada Deposit Insurance Corporation (CDIC) or the Credit Union Deposit Insurance Corporation (CUDIC).
A trustee FHSA is similar to an insured or depository account, but the funds in the account are held in trust by a trustee who is responsible for managing and investing the funds on behalf of the account holder. The trustee can be a financial institution, a trust company, or an individual approved by the CRA.
An FHSA is a great option for first-time homebuyers in Canada looking to save for a down payment. With tax-free interest and a lifetime contribution limit of $40,000, an FSHA can help make your dream of owning a home a reality. However, following the rules and regulations surrounding FHSA accounts is essential to avoid taxes and penalties.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.