With the release of the First Home Savings Account (FHSA) in 2023, many Canadians planning to buy a home opened an account before year end to begin accumulating contribution room. How you use an FHSA this year could be based on what you did last year. Here are some considerations:
Your contribution room in 2024 depends on what you did in 2023. Your personal contribution room is calculated as:
This year’s contribution room ($8,000)
- Contributions already made this year
+ Any contribution room carried over from last year
The FHSA rules allow you to carry-forward up to one year's worth of contributions, or $8,000. The actual amount of contribution room you have this year depends on several factors, such as:
Since 2024 is the second year of the FHSA, you could lose some contribution room if you contribute less than $8,000 before the end of this year. Since the maximum carry-forward amount is $8,000, if you opened an FHSA in 2023 but did not contribute to it, and you don’t contribute at least $8,000 this year, you will forfeit some room.
Zara opened an FHSA in 2023 and contributed $5,000 out of her available $8,000 contribution room for 2023. In 2024, she can contribute ($8,000-$5,000) + $8,000 = $11,000.
In 2024, Zara only contributes $1,000 to her FHSA, leaving $10,000 of remaining contribution room. Since the maximum carry-forward amount is $8,000, she will lose $2,000 of contribution room in 2025.
The impact of lost contribution room on your home purchase goal depends on when you plan to purchase a home (your time horizon). Since the FHSA can remain open for 15 years, if you have a longer time horizon, you still have an opportunity to contribute the maximum $40,000. If you plan to purchase a home in the next five years, however, you may not be able to maximize your FHSA room before you purchase your home.
Your FHSA contribution room will be reported on your Notice of Assessment (NOA) after opening your FHSA account.
The Government of Canada charges a 1% per month penalty on overcontributions. The 1% is calculated against the highest amount above the contribution limit every month until it is withdrawn.
If you overcontribute to an FHSA, you will need to make a "designated withdrawal.” The amount you designate to withdraw must be equal to your overcontribution.
If the reason for an excess amount in your FHSA is from a transfer from your Registered Retirement Savings Plan (RRSP), you will need to transfer a designated amount back to your RRSP (instead of making a designated withdrawal).
In other words, excess funds in an FHSA need to go back to their original source. Designated withdrawals and transfers are not taxable and are not reported as income.
Similar to RRSPs, you can save tax deductions generated by FHSA contributions for future years. This can be beneficial if you expect to be in a higher income tax bracket in the future.
Unlike RRSPs, you cannot deduct FHSA contributions made in the first 60 days of the year against the previous year's taxable income. If you contribute early in the year, your options are to deduct it against current year's income or carry forward the deduction to future years.
Funds transferred from your RRSP to your FHSA will use FHSA contribution room but will not generate a new tax deduction. This is because you already received a tax deduction when you contributed funds to your RRSP.
The government has not set a minimum investment period for the FHSA. However, short-term trading fees may apply depending on the underlying investment chosen.
A new tax reporting slip, the T4FHSA will report all transactions associated with your FHSA. Contributions, transfers from RRSPs, qualifying withdrawals, and taxable withdrawals will all be included on the T4FHSA.
If you make a contribution or withdrawal, you should receive your T4FHSA towards the end of February every year. Actual delivery dates depend on your FHSA provider.
Speak to your Edward Jones advisor to learn more about how a First Home Savings Account can help you achieve your home purchase goal, and how it fits your overall financial strategy.