The Perspective Blog
First Home Saving Account (FHSA)
Canada’s newest type of tax free investment account called the Tax-Free First Home Savings Account (or “FHSA”) was officially launched on April 1st. The goal is to help first-time home buyers save up faster for a down payment to purchase their first home amid soaring national home prices.
The account acts like an RRSP where contributions are tax deductible (contributions to a TFSA are not deductible). All investment income including interest, dividends and any capital gains are tax-free, similar to an RRSP and TFSA, and the full account value can be withdrawn tax-free (under certain conditions) to purchase a home. For this reason, the FHSA is an attractive place for certain individuals to allocate their savings potentially as a priority over maximizing their TFSA and RRSP contributions depending on their personal situation and goals.
Included below is an overview of the key features of the FHSA:
- Must be 18 years or older and younger than 71, and a resident of Canada
- Haven’t lived in a home owned by yourself or your spouse within the preceding 4 calendar years
- $8K contribution room accrues per year, which begins accumulating once an account is opened
o Up to $8K of unused contribution room can be carried forward to use in a later year
- Maximum lifetime contribution of $40K
- You can transfer a balance from your existing RRSP to your FHSA however it’s not usually ideal because:
o This contribution applies against your available FHSA contribution room
o The contribution is not tax deductible again (as a new contribution would be)
o The transfer does not re-instate your RRSP contribution room previously utilized
- Contributions are tax-deductible to the account holder, like an RRSP. There is no option for a spousal contribution
o Contribution room and deductibility are based on calendar years
- Investment gains, dividends, and interest earned within the account are not subject to tax, like a RRSP or TFSA
o It is unclear currently if this will apply to dividends earned from foreign investments (CRA will release more clarity at some point)
- Contributions can be deducted in a later tax year than when they were made
o This is a useful strategy for contributors who expect their income to rise in future years, as they can utilize the deduction in a year when they are subject to a higher marginal tax bracket.
- When a primary residence within Canada is purchased, a withdrawal of the entire account value (contributions plus accumulated growth)can be made tax free
o The account holder must intend to occupy the home within one year of purchasing it (it can’t be used as a rental property)
o If there are funds that weren’t used to fund the purchase, they can instead be transferred to an RRSP account
- The account can be open for a maximum of 15 years
o If no home is bought within 15 years, the account value can be transferred to an RRSP. This transfer does not reduce RRSP contribution room or require you to have available RRSP contribution room
- If the funds are withdrawn in any way other than for the above reasons, the amount of the withdrawal is included in the holder’s taxable income for the year, like an RRSP withdrawal
- The FHSA can be combined with the $35K allowable withdrawal through the RRSP homebuyers’ plan
- If purchasing a home jointly, both parties can utilize their full FHSAs and RRSP home buyers plans
Using the FHSA to invest savings on the journey toward home ownership can give first-time home buyers a much-needed leg up to enter the housing market. Tax-free contributions to the FHSA and RRSP through the homebuyer’s plan allow $75K of tax-free funds per person ($150K per household) to be used as a down payment on a home. This is enough to fully fund a 20% down payment on a $750K home (the average price of a home in Canada is $720,000 in 2023).