Tax-Free First Home Savings Account (FHSA)
/The Tax-Free First Home Savings Account (FHSA) is one of the biggest tax changes in years. It combines the benefits of a TFSA with an RRSP, and can be a key tool for first-time home buyers.
FHSAs launched in April 2023. Keep in mind, this is just a summary so make sure you check the official rules before jumping in.
How it works
An FHSA is similar to a TFSA and RRSP, in that it’s a tax-advantaged way to save and invest. Like an RRSP, amounts you contribute are deductible. That means it reduces the tax you have to pay and you could get a tax refund. The amounts within your FHSA grow tax-free and qualifying withdrawals are tax-free, like a TFSA. This provides a “triple tax advantage” that no other home savings investment has.
Withdrawals are tax-free if the funds are used to purchase a first home. If you don’t end up using the funds to purchase a qualifying home, you can withdraw the amount and pay tax on it, or you can transfer it tax-free to your RRSP.
You can contribute up to $8,000 per year, up to a $40,000 lifetime amount. You can invest in your FHSA the same way you do in your TFSA. Things like stocks, bonds, ETFs, mutual funds and GICs all qualify.
To be eligible to open an FHSA, you have to be over 18, be a Canadian resident, and be a first-time home buyer. You’re considered a first-time home buyer if you haven’t lived in a home that you or your spouse (including common-law partner) own in the past five years.
Should you invest in an FHSA?
The FHSA is a great option to save for your first home and it should be the new default option for most people. You should open up an FHSA as soon as possible, as you’ll only start accumulating contribution room once you’ve opened an account.
The FHSA is superior in many ways to the Home Buyers’ Plan (HBP), which allows you to withdraw up to $35,000 tax-free from your RRSP. The FHSA features the same tax deduction for your contribution, but has a higher contribution limit, no withdrawal limit (which means you can withdraw the $40,000 you contributed, plus any investment income), and qualifying withdrawals are completely tax-free. Unlike the HBP, there’s no need to “repay” any withdrawals; remember that with the HBP, you need to repay your withdrawals based on a prescribed schedule or you’ll be taxed in subsequent years. There’s also limited downside to the FHSA, as you can transfer any unused amounts tax-free to your RRSP.
One disadvantage of the FHSA compared to the HBP is when it comes to quickly buying a home. With the FHSA, you need to stagger your contributions over a number of years, since there’s an $8,000 annual limit (or $16,000 including carryforward contribution room). That means you need to plan several years in advance. On the other hand, there’s no annual limit to contributing to your RRSP. So if you find yourself suddenly buying a home this year, contributing to your RRSP and withdrawing the funds – at least 90 days later – through the HBP might be a good supplement to the FHSA.
Some of the more complex rules
Contributions
Carryforward contributions – The contribution limit is capped at $8,000 per year. You can carry forward unused contribution room up to an additional $8,000; however, you only start accruing contribution room once you open your FHSA.
Example: Marissa opens an FHSA in 2023 and contributes $5,000. In 2024, she can contribute up to $11,000 ($8,000 plus $3,000 carried forward from 2023).
Deduction timing – Unlike RRSPs, contributions made in the first 60 days of the year can’t be deducted on the previous year’s tax return.
Carryforward deductions – Similar to an RRSP, you can deduct your FHSA contribution in the year you contribute or you can carry it forward to a future tax year. This is particularly helpful if your income is low in the year of contribution and you expect it to be higher in future years.
Contributions made after a qualifying withdrawal are no longer deductible.
Qualifying withdrawals
Withdrawal requirements – To make a tax-free qualifying withdrawal, you must have a written agreement to buy or build a qualifying home before October 1 of the following year, and you must intend to occupy the home as your principal residence within one year of buying/building it.
Withdrawal timing – You can make a qualifying withdrawal anytime from when you have a written agreement to buy/build, up to 30 days after acquiring the home.
Withdrawal amounts – You can make one withdrawal or a series of withdrawals.
Unused funds – Once you make qualifying withdrawal, you can transfer any unwithdrawn amounts to an RRSP tax-free by the end of the following year.
Non-qualifying withdrawals – If you make a non-qualifying withdrawal, you’ll be taxed on the withdrawn amount. Your FHSA contribution room won’t be reinstated.
Transfers
Transfer to an RRSP – You can transfer funds in your FHSA to your RRSP tax-free. These transfers won’t use up your RRSP contribution room, but won’t reinstate your FHSA contribution room.
Transfer from an RRSP – Funds can be transferred from your RRSP to your FHSA tax-free. This counts against your FHSA limit and doesn’t reinstate your RRSP room.
Other rules
Multiple FHSAs – You can have multiple FHSAs, including at different institutions, but the same contribution limit applies across all FHSAs you own.
Expiry – Your FHSA expires 15 years after opening it. If you don’t make a qualifying withdrawal, you’ll need to withdraw the funds (and be taxed on it) or transfer the funds tax-free to an RRSP.
Home Buyers’ Plan – You can withdraw from both your HBP and FHSA for the same property.
Spousal contributions – Unlike a Spousal RRSP, you can’t contribute directly to your spouse’s FHSA. However, you can provide them with funds for them to contribute to their own FHSA without the usual spousal attribution rules applying.