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As we approach the end of the year, there’s a new deadline to keep in mind for your tax and investment planning: FHSA contributions. The First Home Savings Account (FHSA) is new this year (2023) and offers another great opportunity for Canadians to save and invest with tax advantages.
The annual contribution period for the FHSA is January 1st to December 31st. This means that you must contribute before December 31st to have your contribution amount deducted from your taxable income for 2023. Note that this is different from the deadline for your Registered Retirement Savings Plan (RRSP). Unlike RRSPs, any contributions you make to an FHSA in the first 60 days of the year can’t be deducted from the previous year’s income.
Get to know the FHSA
Now that the deadline is on your radar, let’s review the basics of the account. Launched in April 2023, the newest registered plan is designed to help more people get into the housing market. It allows eligible Canadian investors to deposit up to $40,000 over a 15-year period. From a tax perspective, it combines the advantages of two existing registered plans — the registered retirement savings plan (RRSP) and the tax-free savings account (TFSA). Like an RRSP, contributions to an FHSA can be used to reduce your taxable income. Like a TFSA, if you are making a qualifying withdrawal, you won’t pay tax on that withdrawal (including the principal amount and any potential investment growth).
You can contribute up to $8,000 per year to an FHSA, up to a lifetime maximum of $40,000. Unused room can be carried over to the next year (to a maximum of $8,000). Remember, the carry-forward amounts start accumulating only after you open the account. You can open multiple FHSAs, but the annual and lifetime contribution limits apply to the combined accounts, so be careful with your contributions. There is a one-per-cent tax applied to over-contributions for each month the excess amount stays in the account.
You have 15 years to save within an FHSA. If you decide not to buy a home during that time, you can transfer the money you’ve saved (and any investment income earned) directly to an RRSP or a RRIF without penalty or tax at the time of transfer. Keep in mind that funds transferred from an FHSA to an RRSP or RRIF account may be taxable when withdrawn.
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Financial planning services and investment advice are provided by Royal Mutual Funds Inc. (RMFI). RMFI, RBC Global Asset Management Inc., Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities which are affiliated. RMFI is licensed as a financial services firm in the province of Quebec.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.