The Tax-free First Home Savings Account (FHSA) offers future Canadian home buyers the opportunity to save for their first home while providing tax benefits and other incentives to ease home affordability.
Are you tired of your rental life and thinking of buying your first home but not having enough savings? Then, the FHSA is the right account for you.
FHSA is designed to offer Canadian home buyers flexibility, ease of use, tax-free advantages, and the ability to track their progress toward their home purchase goals. It allows first-time home buyers to combine the tax advantages of a TFSA and RRSP towards purchasing their first home in Canada.
This article provides a key overview of FHSA, how it works, eligibility criteria, contributions, withdrawals, and answers to top questions surrounding FHSA.
Without skipping a bit, let’s get right into it.
What is the Tax-Free First Home Savings Account (FHSA)?
In Budget 2022, the government of Canada proposed creating a new registered account to help Canadians tackle the issue of home affordability. The Canadian government introduced the First Home Savings Account (FHSA) to help individuals save up to $40,000 toward the purchase of their first home.
The FHSA combines the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). Contributions to your FHSA will be tax-deductible, like an RRSP, and withdrawals you make to purchase your first home will be non-taxable, like a TFSA.
This FHSA is a great saving vehicle for Canadians looking to save towards their home-buying goals. This account will help them save money without worrying about a tax bill.
How Does FHSA Work?
With the new registered account, First Home Savings Account (FHSA), Canadians can save up to $40,000 towards purchasing a single-family home. This account has an annual contribution limit of $8,000.
However, unused contribution rooms can be carried forward to the next year. This is similar to RRSP and TFSA contribution space. For example, if you contribute $5,000 in 2023, you will have $11,000 contribution room available to you in 2024.
FHSA offers saving opportunities on a tax-free basis. The money in your FHSA can be used for investments like mutual funds, bonds, stocks, and GICs. You don’t have to worry about paying taxes on capital gains or interest earned. You don’t have to pay back the funds you withdraw from your FHSA account.
Also, you must use your contributed funds within 15 years of opening your FHSA account or before your turn 71 (whichever comes first). If you don’t, your account will be closed. If you don’t intend to use your FHSA savings within the first 15 years, you can transfer it to your RRSP.
When you want to purchase your first home, you will submit a request to your account issuer to confirm if you meet the criteria to make a qualifying withdrawal. If you qualify for a withdrawal, your money will be sent to your bank account, and you can put the full money towards your down payment.
And once you make a withdrawal to purchase your home, you must close your FHSA account within one year of your first withdrawal.
Who is Eligible for the First Home Savings Account?
As good as the FHSA might sound, not everyone can open a First Home Savings Account in Canada. It is important to know the requirement needed to open this account. Some of the eligibility requirements include the following:
- You must be a Canadian resident (Immigrants who want to open an FHSA account must be residents of Canada).
- You must be at least 18 years old at the time of your application.
- You must be a first-time home buyer. You cannot have your own home in the year that the account is opened or in the four years before that year.
- The account is meant for primary residences, not investment or leisure properties.
- You can have more than one FHSA, but you must not exceed your yearly or total contribution limit.
Talking with a financial advisor before you open your FHSA account is best. A financial advisor will help and guide you on the investments that best fit your financial needs and goals while considering your risk tolerance.
If you find that FHSA isn’t right for you now, consider other registered accounts like the TFSA, RRSP, RESP, or RRIF.
Benefits and Downsides of FHSA Canada
THe First Home Savings Account (FHSA) has many attractive features that help first-time home buyers save and finally purchase their first home. However, there are also some drawbacks to this FHSA account which makes the account not the right choice for every Canadian.
It’s important to carefully consider the pros and cons of FHSA before deciding on whether to open an account or not. Let’s look at the pros and cons.
- FHSA is tax-deductible, which helps you reduce your income tax amount
- It allows carry-over amount. This can be beneficial if you expect to earn more in the future, as your future taxes can be heavily reduced
- You have 15 years to use the account; young Canadians will find this attractive
- Qualifying withdrawals are tax-free
- You can hold investments in your FHSA account, and they will grow tax-free
- Unfortunately, FHSA is only available to first-time home buyers
- The $40,000 contribution limit might be a good starting point for a down payment but won’t be enough to cover the down payment for most houses in Canada
- FHSA comes with very strict withdrawal rules, and this makes it difficult to get immediate access to your savings, unlike TFSA
- You cannot combine FHSA with your Home Buyers Plan
- You can only open FHSA for 15 years, which might not be enough time for most people due to life circumstances.
How Much Can You Contribute to FHSA Account?
Starting in 2023, you will have a lifetime contribution limit of $40,000 in your FHSA, with an annual contribution limit of $8,000. The annual $8,000 contribution limit would be available to you in 2023, regardless of when you open your FHSA account during the year.
The annual contribution limit applies to only contributions made within the calendar year. In contrast to RRSP, contributions made within the first 60 days of any year cannot be attributed to the previous year’s taxes.
The Canada Revenue Agency (CRA) will be providing basic information to help Canadians determine how much contribution room they have each year. You can claim a deduction for contributions you make to your FHSA each year.
Every Canadian can hold more than one FHSA account, but their contributions for each FHSA can be within the annual and lifetime contribution limits specified by the government.
Like RRSP and TFSA, taxes on over-contributions applies to each month that your FHSA is over the limits. A rate of 1% tax applies to the highest amount of excesses each month. For over-contributions, you can request a transfer to your RRSP, a tax-free withdrawal, or wait for the following year, so your annual contribution room absorbs the excess contributions.
You can carry forward your unused annual contribution limits to the following year. So if you contribute less than $8,000 in one year, you can carry forward the unused amount to subsequent years (subject to your lifetime contribution limit of $40,000).
Carry-forward contributions only begin after you open your FHSA for the first time. If you are a first-time home buyer, you can open your FHSA immediately, even if you don’t have any funds to contribute right now.
If you open your FHSA in 2023 but don’t have any money to contribute, you could contribute up to $16,000 in 2024 ($8,000 annual contribution room for 2023 plus $8,000 annual contribution room for 2024).
Can you transfer funds out of your FHSA?
You can transfer your money from one FHSA to another FHSA, an RRSP, or an RRIF on a tax-free basis. Transferring your funds doesn’t from an FHSA to an RRSP or a RRIF will not reduce or limit your available RRSP contribution room. It would also not reinstate your annual of lifetime FHSA contribution limit.
When you transfer your funds, they will be subject to the rules applicable to RRSP and RRIF, including tax consequences of withdrawing them from the account.
Also, you can transfer funds from your RRSP to your FHSA on a tax-deferred basis, subject to the annual and lifetime FHSA contribution limit. The transfers wouldn’t be deductible and wouldn’t also reinstate your RRSP contribution room.
FHSA has some withdrawal rules that must be met before you withdraw. If your withdrawal doesn’t qualify, you will be taxed.
The First Home Savings Account was designed to help home buyers, and only withdrawals put toward purchasing your first home will qualify and receive tax-free benefits.
To make a qualifying withdrawal, you must follow the withdrawal rules:
- Be a first-time home buyer
- Reside in Canada at the time of your withdrawal
- Must have a written agreement to buy or build a qualifying home before October 1 of the year before the year of withdrawal
- You must intend to occupy the qualifying home within one year after purchase or building as your principal place of residence.
- The qualifying home must be a housing unit located in Canada
- If you owned a share of a cooperative housing corporation that gives you the right to own and have an equity stake in a home located in Canada, you could make withdrawals
- You can withdraw your total FHSA funds on one withdrawal or in series on a tax-free basis once you meet the qualifying withdrawal requirements
- You must make qualifying withdrawals of your FHSA money within 30 days of moving into your home
- Spouses can contribute from their individual FHSA funds if they are buying a home jointly
Your withdrawals will not qualify and can be subject to withholding taxes if:
- You are a non-resident of Canada
- You do not reside in the home you intend to purchase or build
- You are a citizen of the US. US citizens will be subject to US taxation rules and Canadian taxation rules.
- You withdraw and don’t use it towards purchasing a home.
Non-qualifying withdrawals would be included in your income, and the financial institutions will collect and remit withholding tax, consistent with taxable RRSP withdrawals. Non-qualifying withdrawals will not reinstate your annual or lifetime contribution limit.
What Type of Investment Can an FHSA Hold?
The investments allowed for FHSA are the same as that of TFSA. All the prohibited and non-qualified investment rules that apply to other registered plans will also apply to FHSA. These rules will help to disallow non-arm’s length investment and investment in assets.
The investments allowed in your FHSA include the following:
- Mutual funds
- Government and corporate bonds
- Publicly traded securities
- Guaranteed investment certificates (GICs)
How to Open an FHSA Account?
To open your FHSA starting from 2023, you can go to banks, credit unions, or any financial institution that issues RRSP and TFSA in Canada. You must confirm your eligibility to an eligible issuer.
Financial institutions will file annual information returns with the CRA for every FHSA they administer. The CRA uses this information to provide the plans and basic information to Canadians to help them determine how much funds they can contribute to their FHSA each year. You must monitor your limits to avoid over-contributions.
For each withdrawal, you will submit your request to your FHSA issuer and confirms your eligibility. Your issuer will prepare an information slip stating the amount of the withdrawal when you make any withdrawals.
FHSA Vs. Home Buyers’ Plan
While each of them has pros and cons, it is important to consider them carefully to decide which best suits your goals and needs.
With Home Buyers Plan, you can withdraw up to $35,000 from your RRSP and pay back the funds to your RRSP over 15 years, subject to eligibility and conditions. However, funds withdrawn from your FHSA need not be paid back.
However, you cannot make an FHSA withdrawal and a withdrawal from your RRSP under the HBP for the same qualifying home purchase. You must decide which option suits you best.
You can transfer your FHSA funds to your RRSP if you don’t intend to buy a home within 15 years. You can withdraw the money under the HBP whenever you want.
If you contribute first to your RRSP and then transfer to your FHSA, you will lose that RRSP room. However, if you contribute to your FHSA account and transfer to your RRSP, the transfer doesn’t limit your RRSP room. You can create more RRSP rooms effectively when you start contributing first to your FHSA.
Final Thoughts on FHSA
If you plan on buying your first home within the next 15 years, the FHSA might be an excellent option. You can take advantage of its income tax deductions and investment opportunities and grow your money tax-free.
And if you do change your mind in the nearest future, you can transfer the money saved in your FHSA to your RRSP.
However, funds will be subject to taxes when you withdraw from the RRSP.
Top Questions About FHSA Canada
What Happens If I Don’t Purchase A Home With My FHSA Funds?
If you don’t purchase a qualifying first home with the funds in your FHSA by the earlier:
- The end of the 15th anniversary of your FHSA
- When you turn 71
Your FHSA will cease to exist, and the plan will be closed. Any unused balance in your FHSA will be transferred to your RRSP or RRIF or can be withdrawn on a taxable basis.
If your account is not closed after its ‘cessation date’ or loses its FHSA status, you will be deemed income inclusion equal to the fair market value of all FHSA property before the cessation of the FHSA status.
Can I Contribute to my Spouse’s or Child’s FHSA?
Only the FHSA holder can deduct contributions made to their FHSA. You cannot claim a deduction if you contribute to your spouse’s FHSA.
However, the legislation allows you to make FHSA contributions with funds your spouse provides without the attribution rules that apply to the income earned in the FHSA from these contributions.
What Happens to my FHSA on my Death?
Like TFSA, you can designate your spouse as your successor, and the FHSA would maintain its tax-free benefits after your death. If your designated successor meets the FHSA eligibility criteria, they will be the FHSA new holder when you die.
This transfer doesn’t affect your spouse’s FHSA contribution limit. If your spouse isn’t eligible for FHSA, the funds will be transferred to an RRSP or RRIF of the spouse and withdrawn on a taxable basis.
However, if your designated successor is not your spouse or common-law partner, your funds will be withdrawn and given to them. The withdrawn funds would be included in the income of your successor for tax purposes.
What Happens to my FHSA in the case of Marital Breakdown?
In case of a breakdown in your marriage or common-law partnership, an amount will be transferred directly from your FHSA to your spouse’s FHSA, RRSP, or RRIF. This transfer will not restore your contribution room or count against the contribution room of your spouse. If your spouse has over-contributed, the proposed amount will be reduced.
What Happens to my FHSA if I Emigrate from Canada?
If you leave Canada, you can continue contributing to your FHSA but cannot make a qualifying withdrawal. You must be a resident of Canada at the time of withdrawal and must reside in Canada up to the time the qualifying home is bought or built.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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