What is the FHSA?
The First Home Savings Account (FHSA) is a new registered account introduced in Canada’s 2022 federal budget to help first-time homebuyers save for their down payment.
The purpose of the FHSA is to provide tax-assisted savings to help first-time home buyers achieve homeownership sooner. The government designed it to combine features of both an RRSP and a TFSA – contributions receive a tax deduction like an RRSP, but investment growth and withdrawals are tax-free like a TFSA.
The FHSA allows first-time home buyers to save up to $40,000 tax-free for their first home. Contributions to the FHSA are deductible and the money can grow tax-free. When it comes time to buy their first home, individuals can withdraw their savings tax-free to put towards their down payment.
The FHSA aims to help address some of the challenges first-time home buyers face when trying to come up with a down payment and reduce the amount they need to borrow. The tax incentives are designed to help first-time buyers boost their savings faster.
Overall, the FHSA gives first-time homebuyers a new dedicated vehicle to accelerate their savings by receiving an upfront tax deduction plus tax-free growth and withdrawals for their down payment. The program launched in 2023 and is expected to provide meaningful savings and support home ownership aspirations for future generations of first-time buyers in Canada.
Who Qualifies for the FHSA?
To be eligible to open and contribute to a FHSA, you must meet the following criteria:
- Canadian resident – You must be a resident of Canada to open and contribute to a FHSA.
- 18 years or older – You must be at least 18 years old. There is no maximum age limit.
- First home buyer – You must qualify as a first-time home buyer. This means neither you nor your spouse owned a home that you occupied as your principal residence in the four calendar years prior to opening the FHSA.
- Valid SIN – You must have a valid Canadian Social Insurance Number (SIN).
- Income tax return filed – You must have filed a previous year’s income tax return to be eligible to open a FHSA.
- Annual TFSA limit available – Contributions to a FHSA will count against your total TFSA contribution room. You must have available TFSA contribution room to open and contribute to a FHSA.
How to Open an FHSA
Opening a FHSA is a straightforward process. Here are the key steps:
- Decide which financial institution you want to open the account with. Most major banks and credit unions in Canada will offer FHSAs. Shop around to compare interest rates and fees.
- Gather the required documents. You’ll need government-issued ID and your social insurance number. The financial institution may also request proof of income.
- Fill out an application with the financial institution. This can usually be done online or by visiting a branch. The application will collect your personal information and details about the account you want to open.
- Make an initial deposit (optional). You don’t need to deposit any funds when first opening the account, but you may want to make an initial contribution.
- Submit the application and activation is usually instant. Once approved, you can start contributing up to the annual limit.
- Track your contributions. Log any deposits to ensure you stay within the yearly and lifetime limits. The financial institution should provide regular statements detailing contributions and any growth.
FHSAs can be opened at most banks and credit unions. Take time to find an institution that offers a competitive interest rate and low fees. Opening the account is straightforward once you have the required documents and fill out an application.
Contribution Limits
The FHSA has defined limits on how much can be contributed each year and over the lifetime of the account. Understanding these limits is important for maximizing the tax-deferred growth potential of the FHSA.
Annual Contribution Limit
The annual contribution limit for the FHSA is $8,000. This means each year an individual can contribute up to $8,000 to their FHSA. Couples can each have their own FHSAs and contribute up to $8,000 to each account per year.
Contributions to an FHSA cannot exceed the annual limit. Any excess contributions will be subject to a 1% tax per month on the highest excess amount in that month.
Lifetime Contribution Limit
The lifetime contribution limit for FHSAs is $40,000. This means that over the lifetime of the account, a maximum of $40,000 can be contributed. Once the $40,000 lifetime limit is reached, no further contributions can be made.
This lifetime limit applies individually. Spouses can each contribute up to $40,000 over their lifetime to their own separate FHSAs.
Reaching the lifetime limit does not prevent the funds already in the FHSA from continuing to grow and accrue tax-deferred. However, no new contributions can be added after hitting the $40,000 limit.
Understanding these annual and lifetime FHSA contribution limits is key to maximizing the tax-deferred growth potential while avoiding excess contribution penalties.
Making Contributions
You can contribute up to $8,000 annually to your FHSA. Contributions can be made by you, your spouse or common-law partner, or a combination of both of you. The annual contribution room accumulates each year if unused and can be carried forward indefinitely.
Contributions to an FHSA must be made in cash, not in kind. This means you cannot contribute securities or other property to the account directly. You must sell the property first and contribute the proceeds in cash.
The contributions made to an FHSA reduce the amount of TFSA contribution room available for that individual. The TFSA annual contribution limit for 2023 is $6,500. If you contribute the full $8,000 to an FHSA in 2023, you would only have $1,500 of TFSA contribution room left for the year.
There is no deadline for contributing to an FHSA each year. You can contribute any time up to December 31 and have it count towards that year’s contribution room. Unused contribution room can be carried forward indefinitely to future years.
Using the Funds
The main benefit of the FHSA is being able to withdraw funds from the account tax-free for eligible home purchases. Here’s what you need to know:
Qualifying Home Purchases
Funds can be used for the purchase of a qualifying home for the account holder or for a related person with a disability. A qualifying home must be located in Canada and can include:
- Existing homes
- Newly constructed homes
- Certain mobile homes
- Shares in a co-op housing corporation
- Land intended for use in building a qualifying home
The home must be intended to be occupied by the account holder within one year of purchase.
Withdrawal Rules
- You can make multiple withdrawals from your FHSA as long as you have sufficient funds in your account.
- Unlike the Home Buyers’ Plan, you do not have to repay withdrawals from your FHSA.
- You can withdraw funds as a lump sum or through periodic payments.
- Withdrawals must be made within 15 years after the year the FHSA was opened to avoid tax penalties.
Taxes on Withdrawals
- Funds withdrawn for eligible home purchases are completely tax-free.
- If you withdraw funds for other purposes, investment income and contributions will be taxed.
- If unused contributions remain in your account after 15 years, your contributions will be taxable.
The key benefit of the FHSA is being able to make tax-free withdrawals for eligible home purchases. Make sure to follow the rules to fully benefit from the program.
Unused Funds
If you don’t end up using the funds in your FHSA within 15 years for the purchase of your first home, you have a few options:
- You can withdraw the funds and include them as income on your tax return for the year you make the withdrawal. Any investment income earned will be taxed at your marginal tax rate. Your original contributions will not be taxed.
- You can transfer up to $40,000 tax-free into your RRSP if you have contribution room. Any amount over $40,000 will need to be withdrawn as income.
- You can use the funds for rental housing expenses if you choose to rent instead of buying. You can withdraw up to $40,000 tax-free. Any amount over $40,000 will be considered income.
- You can transfer the funds tax-free to a RDSP if you qualify.
- You can carry forward the funds if you want to purchase a home later. There is no limit on how long you can carry forward an FHSA.
The key is that if you don’t use the funds within 15 years for your first home purchase, you have options to withdraw or transfer the funds without penalty. Just be aware that any investment income earned will be taxed if you withdraw instead of transferring to an RRSP or RDSP.
Tax Benefits
The FHSA provides attractive tax benefits that make it advantageous for first-time homebuyers to use for saving. Contributions to an FHSA are made with after-tax dollars, so there is no tax deduction. However, the funds grow tax-free while inside the account. When withdrawals are made to purchase a first home, the funds come out completely tax-free.
This differs from an RRSP, where contributions are tax deductible but withdrawals are taxed as income. With an FHSA, you don’t get a tax deduction upfront but the funds come out tax-free in the end.
Any investment income earned inside the FHSA is not subject to annual taxes. The growth accumulates tax-deferred until withdrawals are made.
If any funds remain in the account after a home purchase, they can be transferred to an RRSP account without being taxed. This provides an opportunity to get a tax deduction on the amounts later when withdrawing the funds from the RRSP.
The main tax advantage of the FHSA is the tax-free withdrawal of funds for a first home purchase. This enables first-time buyers to save more efficiently for a down payment compared to saving in a regular, taxable account.
Impact on Other Programs
The FHSA can impact other tax credits, benefits, and grants you may be eligible for. Here are some key points:
- The FHSA does not affect your RRSP contribution room. You can contribute to both your FHSA and RRSP in the same year.
- Withdrawals from the FHSA are not taxed, so they do not count as income. This means an FHSA won’t impact income-tested benefits like the Canada Child Benefit.
- However, FHSA contributions do reduce the amount of tax you pay. This means it can impact non-refundable tax credits that are calculated based on your tax payable, like the tuition tax credit.
- The FHSA homebuyer amount can also reduce grants and credits through provincial down payment assistance programs. Most provinces will reduce grants based on the FHSA amount.
- Overall, the tax-free nature of the FHSA reduces the impact on income-tested benefits compared to other programs like the RRSP. But it can still affect some non-refundable tax credits. Check with your province as FHSA amounts may impact certain down payment assistance grants.
Comparison to Other Plans
The FHSA has some similarities and differences compared to other common savings plans used by Canadians for major purchases like education and retirement. Here’s how the FHSA compares:
RRSP
- Both offer tax-deferred growth on investments
- RRSP is for retirement savings, FHSA is for first home purchase
- RRSP has contribution room based on income, FHSA has a fixed $8,000 annual limit
- RRSP contributions are tax deductible, FHSA contributions are not
- RRSP withdrawals for non-retirement use are taxed, FHSA withdrawals for home purchase are tax-free
RESP
- Both are focused on major life goals – education and home ownership
- RESP has a lifetime contribution limit of $50,000, FHSA has an annual limit of $8,000
- RESP grants from the government require the funds to be used for education, FHSA has no restrictions
- RESP investment gains are taxed on withdrawal, FHSA gains are tax-free if used for first home
TFSA
- Both offer tax-free growth on investments
- TFSA is completely flexible, FHSA is just for first home savings
- TFSA has a higher annual limit of $6,000 currently vs $8,000 for FHSA
- TFSA withdrawals aren’t restricted to a purpose, FHSA must be used for first home
The FHSA provides another option for tax-advantaged savings targeted specifically for first time home buyers. The limits, restrictions, and tax implications differ from other common savings plans.