The newly introduced First Home Savings Account (FHSA) provides a tax-advantaged method to accelerate down payment savings specifically for your first home. Buying a first home is an exciting milestone in one’s financial journey. However, saving up enough for the down payment amid rising home prices can be a daunting challenge for many first-time home buyers in Canada.
We will explore all aspects of the game-changing FHSA, including eligibility requirements, contribution rules, tax implications, withdrawals, account duration, and more. You’ll also learn how the FHSA differs from existing options like the RRSP and TFSA to decide what works best for your financial situation. Let’s get started!
What is an FHSA?
A First Home Savings Account (FHSA) is a new registered tax-advantaged savings account introduced by the Canadian government in 2022 to help first-time home buyers save for a down payment on their first home.
The FHSA combines features of an RRSP and a TFSA into a single account to provide tax deductions on contributions and tax-free investment growth. Key benefits include:
- Annual TFSA-like contribution limit of $8,000 plus carry forward room
- Lifetime contribution limit of $40,000
- Income tax deductions on contributions to reduce tax payable
- All investment growth compounds are tax-free within the account
- Withdrawals used for first home purchase are tax-free
The FHSA provides a dedicated savings vehicle with preferential tax treatment to help accelerate down payment savings for eligible first-time home buyers in Canada.
Who is Eligible for a First Home Savings Account?
The FHSA eligibility requirements are specifically designed to benefit first-time home buyers in Canada. To open an FHSA, you must:
- Be a resident of Canada
- Have a valid Social Insurance Number (SIN)
- Be 18 years of age or older
- Be considered a first-time homebuyer
The last criterion merits a deeper look. You can only open an FHSA if you meet the first-time homebuyer designation. This means that you and your spouse or common-law partner have not owned a home that you lived in at any time in the current year or the preceding four calendar years.
For example, if you want to open an FHSA in 2023, neither you nor your partner should have owned and lived in a home in 2023 or between 2018 and 2022. The core intent is to provide access to dedicated savings accounts only for true first-timers, not existing homeowners looking to upgrade or invest in additional properties.
It is worth noting that eligibility starts at 18, but you must be over the age of majority in your province to open an account on your own. Those under the age of majority would need a parent or guardian to open the account on their behalf.
While the FHSA has no upper age limit to maintain an existing account, you cannot open an account in a given year if you are 71 or older as of December 31. For instance, you could open an account if you turned 71 in November 2022, but someone turning 71 in January 2023 would no longer be eligible to start an FHSA.
In summary, the FHSA eligibility criteria strike a prudent balance between helping first-time buyers get started early and restricting access only to those who need this dedicated savings tool. Let’s now look at how the account works.
How Does an FHSA Work?
The inner workings of an FHSA borrow concepts from both RRSP and TFSA accounts but provide additional flexibility tailored to first-time home buyers. Here is an overview of the eight key mechanisms:
- Annual contribution limit – This works similar to an RRSP. You can contribute up to $8,000 every year to your FHSA. The limit is not indexed to inflation currently.
- Carry forward room – If you don’t max out the $8,000 yearly limit, you can carry forward the unused amount to future years. The carried over room gets added to the $8,000 annual limit.
- Lifetime contribution limit – This works akin to a TFSA. There is a total lifetime limit of $40,000 on cumulative FHSA contributions.
- Tax deductions – Like an RRSP, you can claim tax deductions on your eligible FHSA contributions and reduce your taxable income.
- Tax-free growth – Similar to a TFSA, all investment gains, interest, dividends, etc. can grow tax-free inside an FHSA.
- Qualifying withdrawals – If used to buy your first home, withdrawals are made completely tax-free without any repayment conditions.
- Non-qualifying withdrawals – If withdrawn for other purposes, tax will be withheld and the amount counts as taxable income that year.
- Account duration – An FHSA must be closed by the end of the year you turn 71 or after 15 years since opening your first FHSA, whichever comes first.
A quick example can help solidify these rules. Let’s take the case of Jordan, who opened his first-ever FHSA account in January 2023. Here is how it works:
- Jordan can contribute up to $8,000 to his new FHSA in 2023. He contributes $6000.
- The unused $2000 contribution room from 2023 will carry forward to 2024.
- In 2024, Jordan can now contribute $8000 (annual limit) + $2000 (carried over) = $10,000 to his FHSA.
- He can keep contributing to his accounts until he hits the $40,000 lifetime limit for FHSA contributions or turns 71, whichever is earlier.
- The account must be closed by December 2038, which marks 15 years since Jordan opened the first FHSA in January 2023.
The FHSA provides ample flexibility to maximize your savings in preparation for that exciting first home purchase! Now that we understand the basics, let’s compare it side-by-side with existing options.
How is an FHSA Different from other Savings Accounts?
The FHSA resembles long-standing accounts like the RRSP and TFSA that Canadians have traditionally used to save for primary goals like retirement or a home. However, key differences are worth noting when using the accounts specifically to purchase your first home.
Compared to an RRSP:
- FHSA has a lifetime contribution limit of $40,000, but RRSP contributions have no lifetime cap.
- RRSP allows more significant lump sum contributions based on your earned income, while FHSA has a fixed annual limit.
- You can only deduct RRSP contributions until the end of the year you turn 71. The FHSA lets you keep contributing beyond 71 until you hit the lifetime cap.
- The popular RRSP Home Buyer’s Plan requires any withdrawals to be repaid into the RRSP within 15 years. The FHSA does not require you to repay withdrawals.
- RRSP accounts can be maintained indefinitely, whereas the FHSA has a maximum duration of 15 years.
Compared to a TFSA:
- FHSA contributions get tax deductions, but TFSA contributions do not.
- Both accounts provide tax-free growth on investments.
- TFSA withdrawals are always tax-free, irrespective of usage. FHSA withdrawals must be used to buy your first home tax-free.
- The TFSA has no lifetime contribution limit, while the FHSA is capped at $40,000 in cumulative room.
This table summarizes the key differences between the accounts:
Attribute | FHSA | RRSP | TFSA |
---|---|---|---|
Contribution Deductions? | Yes | Yes | No |
Tax-free Growth? | Yes | No | Yes |
First Home Withdrawals Tax-free? | Yes | Yes (with HBP) | Yes |
Lifetime Contribution Limit? | $40,000 | None | None |
Age Limit for Contributions? | 71 | 71 | None |
Account Duration Limit? | 15 years | None | None |
The FHSA fills a clear gap between the benefits of an RRSP and a TFSA for first-time home buyers. The tax refunds on contributions provide immediate savings similar to an RRSP while the tax-free investment earnings facilitate long term growth akin to a TFSA. Overall, the FHSA offers the best of both worlds!
What are the Benefits of Using an FHSA?
It is abundantly clear that the FHSA offers compelling advantages explicitly tailored for first-time home buyers. Let us look at 6 of the top benefits:
Tax Deductions – The immediate tax deductions on FHSA contributions provide tangible savings that can significantly reduce your annual tax burden. This extra savings can be redirected to accelerate your down payment fund.
Tax-Free Growth – The tax-exempt growth inside an FHSA is a massive long-term compounding boost. Your investment earnings are not eroded by annual taxes allowing your savings to grow faster.
Flexibility – The FHSA provides more latitude than traditional accounts. You can use it with an RRSP like the Home Buyer’s Plan. The carry forward room also allows you to maximize the lifetime $40,000 contribution limit.
No Repayment Rules – A sizeable RRSP withdrawal under the Home Buyer’s Plan has to be repaid on rigid timelines. The FHSA does not impose any repayment requirements as long as the withdrawal is used to purchase your first qualifying home.
Matches Timeline – The 15 year maximum duration is well aligned with the typical first home buying timeline for young savers. This is more flexible than anticipating home ownership goals decades in advance while saving in an RRSP.
Ease of Use – Canadian banks have simplified setting up and managing an FHSA seamlessly with your existing accounts. The familiarity and convenience are a bonus.
The FHSA truly moves the needle when supercharging your first home savings. That said, mindlessly rushing to open an FHSA is not prudent. You must assess your situation to ensure it aligns well with your goals as we’ll explore next.
What Should You Consider Before Opening an FHSA?
Jumping on the FHSA bandwagon without due diligence can backfire. Before opening an account, consider factors like your home buying timeline, savings habits, investing experience, etc., to ensure the FHSA matches your profile. Five aspects to examine:
Home Buying Timeframe – Are you reasonably confident about purchasing your first home within the next 10-15 years? The account is limited, so you must act before the savings clock expires.
Meeting Lifetime Limits – Based on your current income and savings rate, can you max out the $40,000 lifetime FHSA contribution limit? Crunch the numbers.
Savings Acceleration – How much will the tax refunds accelerate your savings rate compared to non-deductible options?
Investment Experience – Are you comfortable investing the funds to benefit from tax-free growth? Low-risk products like GICs have limited return potential.
Advisor Guidance – Consult a financial planner to assess if the FHSA synergizes well with your debt repayment plans, retirement goals, and overall financial milestones.
You stand to gain tremendously by optimizing the FHSA as part of your first home strategy. Being thoughtful about aligning it to your financial roadmap is crucial.
Which Financial Institutions Offer FHSAs?
Since the FHSA launched in 2022, the availability is still expanding as Canada’s major banks roll out their offerings. Here are 8 of the top financial institutions providing FHSA accounts so far:
RBC – As Canada’s largest bank, RBC was one of the first to offer FHSAs the flexibility to open self-directed investment accounts or have advisors manage the funds. Their NOMI Find & Save tool also provides AI-powered insights to optimize savings.
TD – TD has also made it easy to open FHSAs online and access their specialized TD GoalAssist tool to plan your home savings strategy. You can choose from various investment options, from cash to mutual funds.
Scotiabank – Scotiabank provides FHSA eligibility checks on their website and allows funding of the account via three methods – lump sum, recurring contributions, or transfers from existing Scotia accounts.
CIBC – CIBC Smart Account is specifically designed to combine daily banking features with FHSA savings. Seamlessly contribute to your FHSA, TFSA, and personal savings in a single integrated account.
BMO – BMO offers FHSA accounts with various investment options, from GICs to mutual funds. Their advisor guidance helps create a personalized home savings plan.
HSBC – HSBC provides easy online applications for FHSAs. You can monitor account performance and contribute more through their digital banking platform.
Wealthsimple – Known for simplified investing, Wealthsimple allows you to open online self-directed or managed HSFA accounts. They offer free access to financial planners for guidance.
Questrade – As a low-cost online brokerage, Questrade enables the opening of self-directed FHSA investment accounts with access to ETFs, stocks, bonds and more.
In addition, many credit unions like Coast Capital Savings, affiliate banks like Tangerine, and robo-advisors like WealthBar also offer FHSA accounts. Check eligibility requirements and investment options before selecting a provider.
How Does Closing an FHSA Account Work?
When it comes time to close your FHSA account, there are key steps and rules to follow:
An FHSA must be closed by December 31 of whichever of the following is earliest:
- The year you turn 71.
- 15 years after opening your first ever FHSA.
For instance, suppose you opened your inaugural FHSA in 2023 at age 22. Then the account has to be closed by December 31, 2038 which marks the end of the 15 year term.
If unused FHSA savings remain when closing your accounts, you have 3 options:
- Transfer the funds to your RRSP without impacting your contribution room.
- Transfer the amount to a Registered Retirement Income Fund (RRIF)
- Withdraw the funds and pay taxes on the accumulated savings.
Ideally, you should plan your contributions so that the bulk of the FHSA funds can be utilized to buy your first home within the 15-year timeframe. But the flexibility to move leftovers into your retirement nest egg is an excellent fallback option.
The key benefit of the FHSA is realizing the dream of home ownership. So, what does the process entail when you are finally ready to make that first purchase?
Making an FHSA Home Purchase Withdrawal
When the exciting day comes that you’ve found your dream first home, there are specific steps and criteria required to make a tax-free FHSA withdrawal to fund the down payment:
Be a First-Time Home Buyer – To make a tax-free qualifying withdrawal, you and your spouse/partner must be first-time home buyers. Essentially, neither of you should have owned a home occupied as a principal residence in the last 5 years.
Provide Home Purchase Proof – You need a written purchase agreement proving you intend to buy a qualifying home. The purchase date must be before October 1 of the year after you withdraw.
Move-in Within a Year – You must occupy the home as your primary residence within 12 months of purchase. It cannot be merely an investment property.
Remain a Canadian Resident – You must be a Canadian resident on the date of the FHSA withdrawal and remain a resident until you own the home.
Close Accounts – All your FHSAs must be closed by December 31 of the year after your first qualifying home purchase withdrawal.
If you satisfy these conditions, the funds can be withdrawn tax-free, and you can enjoy the savings on your hard-earned first home. No tax withholding or income inclusion will apply to your withdrawal amount.
The FHSA provides a flexible savings platform tailored to first-time home buyers. Use it diligently in your early years to accumulate funds for your down payment. Before long, you can turn the dream of owning your place into an exciting reality!
Summary
The First Home Savings Account is a game-changing registered account for first-time home buyers in Canada. The ability to get immediate tax deductions on contributions and let investment earnings compound tax-free can accelerate down payment savings substantially compared to conventional options.
However, prudent financial planning is vital to utilize the FHSA effectively within the limited 15-year timeline. Diligently contribute each year and maximize carry forward room to reach the $40,000 lifetime contribution limit. Consult experienced advisors to incorporate the FHSA seamlessly into your overall financial plan based on home-buying goals, savings ability, risk appetite and more.
Canadians have long faced challenges saving for their all-important first home amid rising real estate prices. The FHSA finally provides a purpose-built savings vehicle with clear tax advantages to embark on this milestone journey. If used strategically from a young age, building up your down payment can be much more achievable.
FAQs about First Home Savings Accounts (FHSA)
What is the maximum amount that can be contributed to an FHSA annually?
The annual contribution limit for an FHSA is $8,000. Any unused contribution room can be carried forward to subsequent years, up to a maximum of $8,000.
When should you start contributing to an FHSA?
It's recommended to open and start contributing to your FHSA as early as possible once you turn 18 to benefit from tax-deductible contributions and tax-free growth over a longer period.
Can you have more than one FHSA account?
Yes, you can open multiple FHSA accounts across different financial institutions, but the total lifetime contribution limit shared across all accounts is $40,000.
How do FHSA withdrawals impact the contribution room?
If you make a qualifying withdrawal for a first home purchase, your FHSA contribution room is not restored. For non-qualifying withdrawals, no contribution room is restored.
Can you transfer funds from an RRSP to an FHSA?
Yes, you can transfer funds from your RRSP to an FHSA tax-free, but it will not restore the RRSP contribution room. Transferred amounts count towards your FHSA lifetime limit.
What happens if you withdraw FHSA funds but don't buy a home?
If you make a non-qualifying withdrawal and do not end up buying a first home, the withdrawn amount will be added to your taxable income and taxed at your marginal rate.
Do you have to repay FHSA withdrawals like the Home Buyer's Plan?
No, there are no repayment requirements for FHSA withdrawals, unlike the Home Buyer's Plan where withdrawn RRSP funds must be repaid.
Can self-employed individuals contribute to an FHSA?
Yes, self-employed Canadians are eligible for an FHSA provided they meet the age and first-time homebuyer requirements.
Is income tax deducted from FHSA withdrawals?
If used for a qualifying first home purchase, FHSA withdrawals are not taxed. For non-qualifying withdrawals, tax will be deducted similar to RRSP withdrawals.
What happens to your FHSA when you turn 71?
Accounts must be closed by December 31 of the year you turn 71. Any remaining funds can be transferred tax-free to your RRSP or RRIF.