Another tax shelter – First Home Savings Account

On April 1 2023, another tax shelter arrived for Canadian residents! First Home Savings Account – FHSA! Let’s dive right in. Here is the primer.

• Contribution to FHSA is tax deductible, just like RRSP.
• Annual contribution limit is $8K, lifetime contribution limit is $40K.
• You can invest in all kinds of securities such as bonds, stocks, mutual funds, ETF, etc. within the FHSA.
• All interests, dividends, capital gains within the FHSA are not taxed. Just like RRSP and TFSA.  That’s why it is a tax shelter.

Wait a second.  Don’t we already have the Home Buyer’s Plan – HBP?  Why do we need another one? In case you are not familiar with HBP? You can withdraw up to $35K from your RRSP to buy your first home without tax penalty. You have 15 years to pay back the money into your RRSP. Both HBP and FHSA got

I guessed with the fast rising property price in Canada, we need more tax relieve or beef up this existing HBP. Why not just increase the amount of HBP withdrawal limit? Good question. Here comes the key difference between HBP and FHSA. You don’t have to pay back the withdrawals of FHSA.

Things get complicated from here. You can transfer between RRSP and FHSA.

First, we will need to make sure it is direct transfer by filling out the right form with our financial institutions. Or it would be deemed as withdrawal from your RRSP which is taxable.

Second, the transfer from RRSP to FHSA reduce the contribution room of FHSA. We need to keep clear and detailed. record. Over contribution incur a tax of 1% per month on the highest excess FHSA amount in that month until the next calendar year when new contribution room is available.

Third, transfer from RRSP to FHSA doesn’t restore the contribution room for RRSP. Transfer from FHSA to RRSP doesn’t restore the contribution room for FHSA either.

There is so much to learn! I am sure some will make mistakes unfortunately.

Hope you can make good use of this tax shelter and buy your dream home soon.