First Home Savings Account for Newcomers in Canada

After initially renting for a few years, you could have ambitions to buy your own house in Canada. Although owning a home is the ultimate aim for many immigrants, the rising cost of real estate in Canada has caused many of the nation’s newer inhabitants to postpone their desire of doing so. Canada’s federal government introduced the First Home Savings Account (FHSA) in 2023. This is to make it simpler for citizens to finance the purchase or construction of their first house. Everything newcomers in Canada need to know about the First Home Savings Account (FHSA) in Canada is covered in this article.

First Home Savings Account (FHSA) in Canada

A new registered savings plan called the First Home Savings Account (FHSA). This was introduced by the Canadian federal government in the budget for 2022. Those who intend to purchase their first house in Canada for the first time, including new permanent residents, will be able to open FHSA accounts on April 1, 2023. 

The First Home Savings Account offers tax benefits on your contributions and the interest you earn on savings stored in this account, much like other registered plans. You are only permitted to contribute a certain amount to your FHSA both cumulatively and annually.

Features of First Home Savings Account (FHSA)

Potential first-time house buyers can use an FHSA to save money. Additionally, they can develop their savings tax-free specifically for their first home purchase in Canada. Your FHSA can be used to pay for the down payment on your first house in Canada. Furthermore, you can pay remodeling or construction fees for your new home, or monthly payments for a residential property.

After you open a First Home Savings Account, you can make contributions. These are tax deductible up to a maximum yearly (and lifetime) limit. This implies that any contributions made in FHSA during a given year may be subtracted from your taxable income.

Furthermore, withdrawals from your FHSA will be tax-free. This will be when you’re prepared to buy your first house in Canada. However, you cannot withdraw money for a different use. This means that if you utilize these funds to purchase a house, your initial investment or earnings will be subject to taxation.

You can hold money in your FHSA as you can in an RRSP or Tax-Free Savings Account (TFSA). It can be in cash, Guaranteed Investment Certificates (GICs), stocks, options, bonds, Exchange-Traded Funds (ETFs), or mutual funds. Nevertheless, this could change based on your issuer.

When does a Newcomer become eligible for FHSA?

You must meet the requirements for first-time home buyers. You have to be eligible together with your spouse or common-law partner to open a First Home Savings Account. If you or your spouse or partner did not reside in a qualifying house as your primary residence at any point during the calendar year in which you open an FHSA or during the four calendar years prior to it, you will be regarded as a first-time home buyer.

An existing or unfinished dwelling unit in Canada that you can buy is referred to as a qualifying home. This includes single-family homes, semi-detached homes, townhouses, condominium units (or condos), apartment units, and mobile homes. A rented property is not regarded as a qualifying residence.

You must continue to meet the requirements of a first-time home buyer up until the point at which you withdraw money from your account in order to be qualified for the tax benefits offered by the FHSA. However, you can move into your new house up to 30 days before taking money out of your FHSA. You can use this fund for more building, remodeling, etc.

To open a First Home Savings Account, you have to meet all of the following conditions:

You are a Canadian resident:

This includes citizens, permanent residents, and certain temporary residents who meet the residency requirements for income tax purposes. Typically, temporary residents, including work permit holders and international students, must reside in Canada for at least 183 days in a tax year.

You are 18 years of age or older:

In some provinces and territories where the age of majority is 19. Therefore, you must be at least 19 years old to open an FHSA account.

You are a first-time home buyer in Canada:

You, your spouse or your partner have not individually or jointly owned your principal residence in the last four to five years.

Contribution Limits for FHSA

To save for your dream home in Canada, you can make contributions of up to $8,000 annually. For the First Home Savings Account, the lifetime maximum contribution is $40,000. The annual and lifetime restrictions apply to you as an individual. Additionally, there are aggregate contribution limits for all of your FHSA accounts, even if you have multiple FHSA accounts. 

You will not have to file an income tax return prior to opening and making contributions to an FHSA. So even before you find employment in Canada, you can open an FHSA.

For illustration, if you start an FHSA account in 2023, you can make a maximum contribution of $8,000 this year. If you only make a contribution of $2,000 in 2023, the remaining $6,000 in the contribution room will roll over to 2024. This will make your total 2024 contribution room to be $8,000 + $6,000 = $14,000. However, $8,000 of the remaining contribution capacity will transfer over to 2025 for your further contribution in 2024. (Your room for lifetime contributions will be reduced by $4,000).

Avoid exceeding your annual FHSA contribution cap. It is because doing so will result in a monthly overcontribution penalty of 1% of the excess money deposited.

How to Open a First Home Savings Account (FHSA)?

With an FHSA issuer, such as a bank like Royal Bank of Canada (RBC), a credit union, a trust, or an insurance company, you can open a First Home Savings Account. 

Once you’ve established that you are eligible to form an FHSA, you can speak with your financial institution to find out more about the many types of FHSAs they provide and the types of investments you are allowed to hold in an FHSA.

You must deliver the following records to your bank or financial institution in order to open an FHSA:

  • Your Social Insurance Number (SIN)
  • Date of birth proof
  • Any other supporting documents to show that you’re a qualifying individual, such as your (and your spouse/partner’s) PR card or another residence permit, address proof, and lease documents.

Withdrawing Funds from First Home Savings Account

If you utilize the money to purchase your first house, any withdrawals you make from your FHSA are not subject to taxes. If you take money out of your FHSA account for other uses, you might have to pay taxes.

The following requirements must be satisfied by qualifying withdrawals in order for them to be tax-free:

  • You (and your spouse or common-law partner) are a first-time home buyer.
  • You have a signed contract or agreement to purchase or complete construction of a qualifying home before October 1 of the year following the withdrawal date.
  • You haven’t acquired the home more than 30 days before the date of withdrawal.
  • You’ve provided your FHSA issuer with a filled-out Form RC725 Request to make a Qualifying Withdrawal from your FHSA.
  • You are a resident of Canada at the time of the first qualifying withdrawal and when you purchase or build the home.
  • The home must serve as your principal residence within one year of purchase or construction completion.

By the end of the year following your first qualified withdrawal, you must close all of your First Home Savings Accounts. For example, if your first withdrawal from an FHSA is made on May 2, 2023, you must close all of your FHSAs by December 31, 2024. After making a qualifying withdrawal, you cannot open another First Home Savings Account.

Hopefully, this information will help you to get the full privilege of a First Home Savings Account in Canada. As a newcomer in Canada, you may be facing various challenges, but, this scheme will certainly help you in the long run. Keep on visiting our blog space to learn many other things that will make your stay in Canada a pleasant experience.

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