Buying a home is an impressive yet challenging milestone for anyone. This is especially true for first-time buyers without equity, and even more so in Toronto where housing prices have been on the rise for decades. All is not lost, however, because help is available!  There are a few provincial and federal programs designed to make buying that first house a little more achievable. Today, we’ll shine a spotlight on the First Home Savings Account.

Searching for your perfect home in Toronto’s West End? You may just find it while browsing our latest listings.

What Is the First Home Savings Account?

Shortly after the federal government cancelled the well-intended but restrictive First Time Home Buyer’s Incentive, the First Home Savings Account (FHSA for short) was introduced.

It’s like an RRSP, but its single purpose is to help you save for your first home. How is this better than simply placing your funds in a regular bank account? Think of what it would take to save enough for a down payment in Toronto. If you’re paying rent each month, it can be challenging to put money aside. When you do, you’ll earn minimal growth from interest.

The FHSA is an investment account. You’re not just putting money aside; you’re earning dividends as your account (hopefully) grows in value. If you start while you are young, this nest egg could increase substantially over time, giving you greater purchasing power when the time to buy your home arrives. Canadian citizens and permanent residents can start an FHSA as early as 18 years of age.

If you’re in the research stage of buying your first home, here are some informative posts that can help:

• What Does Closing Date Mean in Real Estate?
• Is Title Insurance Mandatory in Ontario?
• How Much Is Land Transfer Tax in Toronto?

FHSA Tax Benefits

As a relatively new program, the FHSA opens up a long list of questions, particularly when it pertains to taxes. Is the FHSA tax deductible? Does FHSA reduce taxable income? The FHSA is tax free, but only when you stay within the guidelines.

Like an RRSP, your FHSA is a tax-sheltered investment. The money you put in reduces your taxable earnings for that year, resulting in a lower amount owing to the government. That’s one advantage.

If you end up making a withdrawal for any reason other than buying your first qualifying home, those funds are added back to your income, potentially putting you into a higher tax bracket.

However, if you use the account for its intended purpose, you can withdraw the funds to buy your house without ever paying taxes on either your contributions or the income they have generated. In this sense, the FHSA can rightly be considered tax-free.

How Much Can You Contribute to an FHSA?

Before going any further, it’s essential to understand the rules of how to contribute to your FHSA. Knowing how the account works allows you to achieve the maximum financial benefit without incurring any penalties.

The FHSA contribution limit is $8,000 each year to a lifetime maximum of $40,000. As long as you stay within these limits, all FHSA contributions are tax deductible. If you exceed them, you will trigger a penalty of 1% on the excess for each month until you remove the over-contributed amount.

You can correct this by making a withdrawal from the account. This gets added to your income and will increase your taxes for that year.

Alternatively, you can transfer the excess into another tax-sheltered investment, presuming you have contribution room in those accounts.

Lastly, you could simply wait until the following year when your contribution room renews. The downside of this option is that you will pay the penalty every month until then.

If you contribute less than $8,000, you can carry it forward to the following year. For example, let’s say you open an account as soon as you reach 18. Perhaps you are not yet working, and you do not make any contributions. That $8,000 limit carries forward to the next year, increasing your contribution room to $16,000.

Looking for the right neighbourhood? A few of our spotlights can help you narrow down your options:

• Buying Your First Home: A Guide to Toronto’s West End
• What Is a Loft in Toronto? 
• Interview With a First Time Home Buyer

FHSA Withdrawal Rules

When you’re ready to buy your home, there is a right way to withdraw from your FHSA to avoid tax penalties.

Essentially, you must be a qualified first-time buyer who is purchasing a qualified home under the program. Let’s take a closer look at these rules in more detail.

The CRA’s definition of a first-time buyer is more flexible than many people realize. You may qualify if you do not and have not lived in a home that either you or your spouse own or have owned in the last four calendar years.

• Next, you’ll need a written agreement to buy or build a qualified home in Canada that you plan to occupy as your principal residence within one year after getting possession.
• A qualifying home must be located in Canada, and can include a detached home, semi-detached, townhouse, condo, or mobile home.
• Once you’ve made your first withdrawal, you have until December 31 of the following year to close your account. You can either transfer any remaining funds to a tax-sheltered retirement account or make a taxable withdrawal.

Better yet, use the entirety of the First Home Savings Account to purchase your home. Paying more up front reduces the amount of your mortgage, which means less interest over time. With a little patience and a lot of strategy, you might soon be turning the keys to your first Toronto home!

Our West Toronto Realtors® are happy to guide you, whether you’re searching for your first home or moving up the property ladder. Contact us today at 416-788-1823 or email kim@kimkehoe.com to take the first step.