Personal Tax

FHSA Canada - Guide to the First Home Savings Account

Paul Sharpe, CPA, CA
/
June 28, 2023

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Learn how the FHSA works, who can open one, how much you can contribute and potential downsides to using one.

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FHSA Canada - Guide to the First Home Savings Account

As a first-time home buyer in Canada, saving up for a down payment on a house can be a daunting task. 

Thankfully there are some tools out there that can help you save that money for your first home purchase.

In this article we'll be talking about the newest registered investment account that's offered in Canada, the First Home Savings Account, or FHSA. 

We'll explain everything you need to know about the FHSA and how it works.  

You’ll find out who is eligible for the FHSA, the benefits of using it, how to contribute and withdraw funds and some potential pitfalls to avoid.

Or if you'd rather hear Joe explain all things FHSA, you can check out this video instead! 👇

Understanding the FHSA

The FHSA has the word “savings” in its title but it's actually a registered investment account. 

Usually, when you earn income on investments that you hold, you have to pay income tax on that investment income. 

However, there are some registered investment accounts that provide tax benefits, and the FHSA is the latest of these accounts.

It combines some of the benefits of the Tax-Free Savings Account (TFSA) and some benefits of the Registered Retirement Savings Plan (RRSP). 

The FHSA allows you to reduce your taxable income and also grow your money tax-free, as long as the money is used to buy a home.

How the FHSA Works

I like to think of the FHSA as a big bucket that you can dump your cash into.  

The cash can then be used to purchase various different types of investments, but it’s all done inside of the bucket.

For example, let’s say you took $1,000 and dumped it into your FHSA bucket.

The bucket now has $1k of cash sitting in it.

You have now contributed that money into the registered account and you get to deduct that amount from your income in the current year, reducing your income tax.

You could then use that cash to purchase investments of various types.

Let’s say that you purchased a guaranteed income certificate (or GIC) worth $1,000.

The investment is still held within the FHSA bucket but the cash has been replaced by the GIC.

As the GIC earns interest income, that money stays within the FHSA bucket and you get to earn that income tax-free.

In future, when you're ready to buy your first home and pull all the money out, you don't have to pay taxes on that money. 

However, if you take the money out and don't use it to buy a house, you would then have to pay taxes on the money that you earned.  This is because you didn’t use the funds for buying a home, which is what the account was designed for.

To wrap up this section, let’s look at a simple summary of how your first home savings account works:

How the FHSA Works

  1. You contribute cash and get to deduct that amount from your current taxable income
  2. You invest that cash and the income is earned tax free inside the FHSA
  3. If you withdraw the cash to purchase your a qualifying home, you don’t have to pay tax on the money you withdraw
  4. If you withdraw the money and don’t purchase a house, you’ll have to pay tax on the amount you withdraw.

Who Can Open an FHSA

Next up, we’ll look at who is eligible to open a first home savings account.

To open an FHSA, you must be between the ages of 18 and 71 years old, a Canadian resident, and you must also be a qualified first-time homebuyer.

The term “first-time home buyer” shouldn’t be taken literally, though.

It doesn't necessarily mean that you have never purchased a home in your lifetime. 

It means that in the past five calendar years, you did not live in a house that you or your spouse or common-law partner owns. 

So if you live with your spouse in a house that they own, you aren’t able to open an FHSA, even if you’ve never actually bought a property yourself.

But on the flip side, if you do own a house as a rental property and you've never lived in it, then you are able to open an account.

FHSA Timeframes

The First Home Savings Account is  also designed with specific timeframes for its use. 

You can have your FHSA open for up to 15 years after the year that you open the account. 

So, for example, if you're 30 years old when you open the account, you have until you're 45 to use the money in the account to buy a qualifying home. 

So the FHSA can remain open for up to 15 years OR until the end of the year that you turn 71, whichever comes first.

If you don't use the money within your FHSA to buy a home within 15 years or by the time you turn 71, you have a few options:

You can withdraw the money and pay taxes on it.

Or a potentially better option would be to transfer that money into your Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF) on a tax-deferred basis. 

This could help maintain the tax-free growth of the funds as they would still be held within a registered account.

FHSA Contribution Limits

The FHSA, like the TFSA and RRSP, has an annual contribution limit of $8,000. 

There is also a  lifetime contribution limit of $40,000. 

The lifetime contribution limit was chosen as it represents about five to six percent of the average home price in Canada which is also roughly the minimum down payment for a home under a million dollars. 

On a yearly basis starting in 2023, you can fund the account with up to $8,000.

Any unused portions of that limit will carry forward up to a maximum of eight thousand dollars to use in the following year.

We'll give a few examples to clarify how these contribution limits work.

Example 1

In the first example, you contribute the maximum amount of $8k in 2023.  Then you continue contributing the annual maximum of $8k each year for the next four years.

By 2027, you’ve hit your maximum of $40,000 in total contributions.

That’s the basic example of how you would maximize your contributions as quickly as possible.

FHSA Maximum Contributions

Example 2

Now let’s get into how the carry-forward contribution room works.

Let’s say that in 2023 you only contribute $2,000, leaving $6,000 worth of carry-forward room.

Then in 2024 you get a bunch more cash and decide you would like to contribute as much as possible.

You’re able to contribute the full $8,000 for 2024 PLUS the prior year’s carry forward contribution room of $6,000.

So in 2024 you get to contribute a total of $14,000.

Then we’ll say you weren’t able to contribute any money in 2025 or 2026.

Now the year is 2027 and you want to contribute as much as possible again.

You missed contributing $8,000 in both 2025 and 2026.

But in 2027 you’re only able to contribute $16,000.

That’s $8,000 from 2027’s contribution room plus the 8,000 that was carried forward from the year before.

That’s because $8,000 is your maximum carry-forward contribution. 

FHSA Contribution Carryforward

FHSA Overcontributions

Now that we know about the contribution limits, you might be wondering what happens if you contribute more than eight thousand dollars in a year or over forty thousand dollars in total? 

Well, if you go over your limit, you'll have to pay a one percent penalty on your over-contribution for each month that the excess amount remains in your account. 

So, it's very important to keep track of how much you're putting into this account.

Next question!

What Types of Investments Can You Hold in Your FHSA?

What kinds of investments can you hold within your FHSA account?

The answer is that you can hold the same types of investments as in your TFSA or RRSP. 

That is:

  • Stocks
  • Bonds
  • Mutual Funds
  • Exchange-traded Funds (ETFs), or
  • Guaranteed Investment Certificates (GICs)

If you’re curious about where you can open an FHSA, don’t worry we'll cover that too.

Where You Can Open an FHSA

You can open a first home savings account at most financial institutions in Canada. 

This includes most credit unions, online brokerages and any of the big banks. 

You might do a little shopping around to see if anyone is offering a promotion to open your account with them.  

Or you might go ahead and stick with your current financial institution because of their great customer service.

You Can Use the FHSA and the HBP Together

The FHSA was designed so that the $40,000 plan limit could cover the down payment at 5% down payment for the average home in Canada.  

However, that doesn’t completely help people in markets like Toronto, Vancouver or even here in Victoria.

Thankfully, you can combine the use of your FHSA with the RRSP Home Buyers’ Plan during the purchase of a qualifying home.

The Home Buyers' Plan (or HBP) is a program offered by the Canadian government that allows first-time home buyers to withdraw up to $35,000 from their RRSP tax-free to use towards the purchase of a home. 

The withdrawal amount is considered a loan, and must be repaid to your RRSP over a period of 15 years.  

You will need to start repaying the borrowed funds to your RRSP after two years. You’ll find the required payment amounts on your annual notice of assessment.

The Potential Downsides of the FHSA

So, while the FHSA might seem like a great idea, it's also important to consider the potential downsides. 

For example, let’s consider the rapid growth of housing prices in Canada. If housing prices continue to grow faster than your investment return, you might not be gaining much ground in your quest to buy a home.

Also, you're locking up your money for a specific purpose. 

If your plans change and you decide not to buy a house, or if you're unable to buy a house within the 15 year time limit or by the age of 71, you won't be able to take advantage of the tax-free benefits of the FHSA.

That being said, the FHSA is still another potentially useful tool for Canadians looking to save up for their first home.

Just make sure you understand all the ins and outs of the FHSA before deciding if it's the right move for you.

Conclusion

There you have it, our rundown of the First Home Savings Account.

A unique savings vehicle that combines some of the benefits from a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP).

It’s another, albeit small, step taken to help hopeful Canadian homebuyers with their currently expensive and challenging situation.

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Article by
Paul Sharpe, CPA, CA
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Originally published
June 28, 2023
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