What is the First Home Savings Account (FHSA)?

Key Points:

• The First Home Savings Account (FHSA) is a tax-advantaged account introduced by the Canadian government to provide tax incentives for first-time homebuyers, combining the advantages of RRSP and TFSA to offer tax savings for homeownership.
• To open an FHSA account, you must be a Canadian resident aged between 18 and 71, and neither you nor your spouse have owned a principal residence in the current year and the previous four calendar years.
• FHSA allows annual contributions of up to $8,000, with a lifetime contribution limit of $40,000. Eligible contributions made to the FHSA account are tax-deductible, and withdrawals for the purchase of eligible properties are tax-free.
• If the funds in your FHSA account are not ultimately used for the purchase of a qualifying first home, you are required to close the account or transfer it to an RRSP or RRIF account by the end of the 15th year from the account’s opening or by the end of the year in which you turn 71.
• FHSA can also be used in conjunction with the RRSP Home Buyers’ Plan (HBP) to maximize tax advantages during the first home purchase process.

The Canadian government officially introduced the First Home Savings Account (FHSA) plan this year (2023), and FHSA accounts are now available through major financial institutions and insurance companies. With less than two and a half months left until the end of the year, some prospective homebuyers have inquired whether they should open an FHSA account before year-end. The answer is yes. In this blog post, we will address common questions about this account.

What is the First Home Savings Account (FHSA)?

The First Home Savings Account (FHSA) is a tax-advantaged account officially introduced by the Canadian government in 2023. This account combines some of the tax advantages of RRSP and TFSA to provide tax incentives for first-time homebuyers.

FHSA Account Opening Criteria

To open an FHSA account, you need to meet the following criteria:

• Be a Canadian resident aged between 18 and 71.
• Neither you nor your spouse have owned a principal residence in the current year and the previous four calendar years when opening the FHSA account.

Contribution Limits

• The annual contribution limit is $8,000, with a lifetime contribution limit of $40,000.
• Exceeding these limits will result in a 1% monthly penalty payable to the Canada Revenue Agency (CRA).

   Strategy:

• If you contribute at the maximum annual limit each year, you can reach the contribution limit in as little as 5 years.
• If you have unused contribution room in a year, you can carry it forward to the next year, but the carry-forward amount cannot exceed $8,000. In other words, if you didn’t contribute this year, you can contribute up to $16,000 in the following year. However, the total contribution limit can never exceed $16,000 in a year.
• Contribution limits and carry-forward room only become effective after opening an FHSA account. If you don’t open an account, you won’t have access to these limits. Therefore, if you qualify and plan to buy a home, it’s advisable to open an account as early as possible. Even if you don’t have extra funds to contribute before year-end, having the account open allows you to utilize carry-forward room when you have more funds in the next year.

Tax Benefits and Withdrawal Methods for FHSA

• When you contribute to your FHSA account each year, eligible contributions made to the FHSA account are tax-deductible, similar to the RRSP deduction.
• If you use the FHSA to purchase an eligible property and meet certain conditions, the withdrawal is tax-free.
• The investment growth within the account is also tax-free if it meets the conditions mentioned above.
• When withdrawing funds from the FHSA account, you need to complete the RC725 form.

If FHSA Funds Aren’t Used for a Qualifying First Home

• If you open an FHSA account and decide not to use it for homeownership, you must close it or transfer it to an RRSP or RRIF account by the end of the 15th year from the account’s opening or by the end of the year in which you turn 71, whichever comes first.
• If you choose to close the FHSA account, all amounts at the time of closure will be considered income for that year, and applicable taxes will be owed.
• If you opt to transfer FHSA account funds to an RRSP or RRIF account, the good news is that this transfer won’t affect your RRSP or RRIF contribution room. In other words, even if you have no RRSP or RRIF contribution room, you can still accept FHSA transfer.

Maximizing Tax Advantages for First Home Purchase Using Multiple Tax Tools

• Combine FHSA and RRSP Home Buyers’ Plan (HBP)

  • FHSA and RRSP HBP can be used together. Since the maximum amount available for HBP is $35,000, this means that, even if your FHSA has no investment returns, you can use up to $75,000 for purchasing qualifying properties ($40,000 from the FHSA and $35,000 from RRSP HBP). If you combine this limit with your spouse, the maximum will be $150,000. If your FHSA generates returns, all the funds in the FHSA account can be used for purchasing eligible properties, but the maximum amount available for RRSP HBP remains at $35,000.
  • It’s important to note that if you use RRSP HBP, you need to repay it to your RRSP within 15 years. In contrast, withdrawals from FHSA do not require repayment.

• Transferring RRSP to FHSA

  • If your RRSP balance is sufficient, you can consider transferring RRSP funds to your FHSA. However, before making the transfer, ensure that you have enough FHSA contribution room to accommodate the transfer ($8,000 annually and $40,000 lifetime). Otherwise, the excess amount will be subject to penalties. Additionally, once funds are transferred from the RRSP, your RRSP contribution room will not be restored.

All in all, the FHSA provides a beneficial tax opportunity for first-time homebuyers, making it easier for them to purchase a home. However, like any tax plan, understanding the rules and eligibility criteria of the FHSA is crucial. Before using the FHSA for a home purchase, it is strongly recommended to consult a tax professional to ensure you make informed decisions and comply with the plan’s regulations.

If you want to learn more about the program, please visit the official website of the Government of Canada: First Home Savings Account (FHSA).

Last Updated: October 24, 2023

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