December 11, 2023
How The Tax-Free First Home Savings Account Can Help You Buy A House
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Manzeel is an award-winning Mortgage Broker and the Owner of the Toronto-based mortgage, Everything Mortgages.
With 16 years of experience in the Canadian mortgage industry and a formal background in mortgage underwriting, Manzeel’s lending expertise gives him unique insight into whether a deal is feasible which empowers his clients to make more informed lending decisions faster.
He has been recognized as one of Canada’s Top 10 Mortgage Brokers by the national Canadian Mortgage Professionals (CMP) Association. Him and his team of 18 mortgage agents are proud to offer a mortgage experience that's built on honesty, trust, and integrity. He prides himself on the brokerage’s dedication to deliver an excellent client experience throughout the entire home loan process from pre-approval to post-funding.
Since moving to Toronto in 1998, Manzeel has successfully launched and scaled several businesses from the ground up, ranging from a mortgage brokerage and a vast real estate investment portfolio to a private financing eCommerce platform. He continues to be a leader in the real estate industry as he uses his analytical expertise to seek new real estate investment opportunities.
As a tech junkie and avid sports enthusiast, when Manzeel’s not working with clients, you can find him reading technology blogs, playing squash or watching tennis with his two boys.
The journey to homeownership in Canada has become more accessible with the introduction of the First Home Savings Account (FHSA). Launched on April 1, 2023, this innovative savings tool combines the benefits of Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP) to assist first-time homebuyers in saving for their initial home purchase. In this blog post, we will delve into the workings of the FHSA, its eligibility criteria, and how it can bring you closer to owning your dream home.
Understanding the First Home Savings Account
The FHSA is a registered account that allows eligible Canadians to save up to $8,000 per year, with a lifetime contribution limit of $40,000. Contributions to this account are tax-deductible, similar to an RRSP, providing immediate tax relief. Additionally, any investment gains generated within the account, be it from mutual funds, stocks, bonds, or guaranteed investment certificates, are tax-free.
When it’s time to purchase your first home, you can withdraw the funds tax-free, provided they are used for a qualifying home purchase. This includes the down payment, deposit, or closing costs. To ensure a smooth process, you will need to submit a request to your FHSA issuer, confirming your eligibility for a qualifying withdrawal.
Eligibility and Contribution Rules
To open an FHSA, you must be a resident of Canada, at least 18 years old, and a first-time homebuyer. The government defines a first-time homebuyer as someone who has not owned a home in which they lived at any time during the calendar year before opening the FHSA or in the preceding four calendar years.
It’s important to note that the annual FHSA contribution limit applies to a calendar year and does not include the first 60 days of the following year. Unused contribution room can be carried forward to future years. For example, if you contribute $4,000 in 2023, you will have $12,000 of contribution room in 2024.
Withdrawing Funds from Your FHSA
To make a qualifying withdrawal from your FHSA for a home purchase, you must:
1. Be a first-time homebuyer.
2. Reside in Canada at the time of the withdrawal.
3. Have a written agreement to buy or build a home in Canada before October 1 in the year following the year of withdrawal.
4. Intend to use the home as your principal residence within one year of buying or building it.
Non-qualifying withdrawals will be added to your taxable income for the year, and a withholding tax will be applied, similar to taxable RRSP withdrawals. However, you can transfer funds from your FHSA to an RRSP or a registered retirement income fund (RRIF) on a tax-free basis.
Comparing FHSA to Other Home Buying Programs
The FHSA presents a unique advantage over the Home Buyers’ Plan (HBP), which allows you to withdraw up to $35,000 from your RRSP for a home purchase. Unlike the HBP, the FHSA does not require repayment, and it offers a higher contribution limit. However, due to the FHSA’s annual contribution limits, it may take time to accumulate significant savings, making it a more long-term savings strategy.
Will the FHSA Help You Buy a House?
While the FHSA offers various tax advantages and the potential for investment growth, its impact will depend on individual circumstances and the housing market. The account’s modest contribution limits may not cover significant portions of a home purchase in high-priced markets, but it can be a valuable tool for closing costs, deposits, or augmenting other savings and investment strategies.
At Everything Mortgages, we strive to help first-time homebuyers, small business owners, and hardworking professionals navigate their mortgage journeys. Whether it’s securing a loan or seeking better solutions, our team is here to guide you toward becoming mortgage-free sooner and building wealth faster. Reach out to us today to explore these strategies and more.
Note: This article is intended for informational purposes only and does not constitute financial advice. Please consult a financial advisor or mortgage professional before making decisions about your mortgage.
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