FHSA: What Is It and How Does It Work?
Proposed in the 2022 Budget and set to launch on April 1, 2023, the First Home Savings Account (FHSA) can help first-time house buyers purchase their dream home tax-free.
Here is everything you need to know about this new savings account, from where you’ll be able to open one to maximum contributions and deductions. Plus we will take a look at how it compares to other tax-free accounts, such as TFSA and RRSP, to help you decide which is right for you.
What is a First Home Savings Account (FHSA)?
An FHSA is a registered account designed to help Canadians save up for their first home. It was announced in Bill C-32 (Fall Economic Statement Implementation Act, 2022) and is set to come into force on April 1, 2023. With an FHSA, account holders will be able to contribute up to $8,000 a year, while lifetime contributions are capped at $40,000.
This can go a long way towards making a down payment on your home and getting approved for a montage more easily.
How Does an FHSA Work?
An FHSA combines features of other registered savings accounts—like a Registered Retirement Savings Plan (RRSP) the contributions you make are tax-deductible, while any income earned from the account will not be taxed, just like with a Tax-Free Savings Account (TFSA).
Similar to the Home Buyer’s Plan (HBP), an FHSA can be used by first-time home buyers; however, you won’t have to pay back the amount and there are no withdrawal limits imposed.
Like other registered accounts, an FHSA will be able to hold savings or investments—typically the same ones held in an RRSP or TFSA, such as mutual funds, different types of ETFs, bonds, stocks, options and Guaranteed Investment Certificates (GIC).
With an FHSA, account holders can make tax-deductible contributions of up to $8,000 a year, or up to $40,000 over the lifetime of the plan.
If you don’t contribute the full $8,000 in a single year, your contribution room carries forward to the next year up to a maximum of $8,000.
So if you open an account this year and contribute $4,000, you can contribute $12,000 in 2024 (the $8,000 for 2024 and the remaining $4,000 from 2023).
This means that you can deposit up to $16,000 in a given tax year.
What happens if I overcontribute to my FHSA?
Like with TFSA and RRSP overcontributions, If you go over the annual limit, you will need to pay 1% tax on the overcontributed amount every month until the excess amount is withdrawn or until contribution room is freed up.
Say you contribute 10,000 in November 2023—this exceeds your annual limit by 2,000, so you would pay an over-contribution tax charge of $40 (1% times 2,000 for two months) on your 2023 tax return. The $2,000 will not be considered an overcontribution after January 2024 as the contribution limit resets to $8,000 each calendar year.
What’s more, you will be able to deduct the extra $2,000 from your net income for 2024 as long as you have unused contribution room and have not made a withdrawal between November and the start of the year.
What is a qualifying withdrawal?
To withdraw your savings from an FHSA you will have the meet the following criteria:
- Be a first-time home buyer
- Be a resident of Canada from the time you withdraw the money to the purchase of the home
- Buy a home located in Canada (including shares to own a unit of co-op housing)
- Have a written contract confirming that you are buying or building a home in Canada before October 1 of the year after the year you withdraw the funds
- Occupy the home as your place of residence for one year after building or purchasing it
- The home cannot be purchased more than 30 days before the funds are withdrawn
Once you withdraw the money, you need to close the account. You can transfer the remaining funds (if any) to an RRSP or RRIF before the year ends. You will not be eligible to open another FHSA.
What happens if you don’t use the FHSA to purchase a first home?
An FHSA will stay open for 15 years or until you turn 71 (whichever comes first).
If you don’t make a qualifying withdrawal during that time, you will be able to transfer the funds into an RRSP or Registered Retirement Income Fund (RRIF) on a tax-free basis. This will not affect your contribution room, but when you eventually withdraw the money from these accounts, they will be taxed.
You may also withdraw the savings from an FHSA without making a qualifying home purchase, although the money will form part of your taxable income. In this case, you will not have to close the account unless it’s been 15 years since you opened it or you are turning 71 in that calendar year.
Who can open an FHSA?
To be eligible for this new savings account, you need to be
- A resident of Canada
- At least 18 years old (or 19 if you live in a province where the age of majority is 19)
- Under 71 years of age
- A first-time home buyer —this means you haven’t lived in a home that you, your spouse or your common-law partner owned the year the account was opened or in the four calendar years preceding the opening of the account
Where can you get an FHSA?
Any financial institution that issues TFSAs or RRSPs can also offer an FHSA. This includes banks, credit unions, life insurance companies and Canadian trust companies.
Benefits of an FHSA
There are a few aspects of an FHSA that can make this a great option for first-time home buyers.
- You can grow your funds tax-free: Any interest you earn from your investments in the FHSA will not be taxed so your money can grow faster than with a non-registered account.
- You can carry forward unused contribution room into the next year up to $8,000 for as long as you have the account.
- Your contributions are tax deductible so you can lower your taxable income and by extension the amount of tax you pay.
- An FHSA is flexible—you can transfer the funds to another registered account without paying tax if you don’t use up all the funds for a qualifying purchase.
- You can withdraw the money for your first home tax-free. Plus you won’t have to pay back the funds.
- You can automate payments from your chequing account and easily monitor your progress to ensure that you are on track toward your savings goal.
- You can combine an FHSA and the HBP to buy your house. Note that the money you withdraw through the HBP will need to be repaid.
- You could combine your FHSA with your spouse’s account for a down payment. Bear in mind that unlike an RRSP, which allows spousal contributions, you cannot contribute to your husband or wife’s FHSA.
How Does an FHSA Compare to Other Registered Accounts?
Here is a brief look at the main difference between an FHSA, TFSA and RRSP.
|Used for any purpose||No||Yes||Yes|
|Withdrawals taxed as income||No (if used to buy a qualifying home)||No||Yes (withdrawals are taxed unless used as part of HBP)|
|Accounts can hold savings or investments||Yes||Yes||Yes|
|Unused annual contributions carry forward to the next year||Yes||Yes||Yes|
|Total contribution amount limit||$40,000||Cumulative||18% of earned income|
|Can the plan be opened jointly?||No||No||You can contribute to a spousal RRSP|
How is the FHSA different from the Home Buyers’ Plan (HBP)?
While both can be used to purchase your first home in Canada, with the Home Buyers’ Plan you can withdraw up to $35,000 from your RRSP. The money must be repaid to the account within 15 years of the withdrawal.
With an FHSA you can contribute up to $40,000 and you will NOT have to pay the money back.
Will an FHSA affect my eligibility for the Home Buyers’ Plan (HBP)?
No, you can have an FHSa and an HBP, i.e. withdraw money from your RRSP and FHSA to buy a qualifying home.
Considering that the average price of houses in Canada is $612,000, try and use both options to purchase your home (assuming you are eligible for both).
Bottom Line: Should I Wait for the FHSA to Save for a Home?
It’s up to you, but remember that even though the FHSA comes with a handful of benefits for first-time home buyers, it will not be available until spring 2023 and has a lifespan of 15 years.
It’s much better to combine an FHSA with another registered account or the Home Buyers’ Plan. You should also consider other options that might help you save for a down payment, such as debt consolidation to cut down on monthly debt payments, term deposits, or other high-return safe investments.
In general no. If you withdraw the money to make a qualified home purchase, you will not pay any tax. However, if the money is withdrawn for any other purpose from the FHSA or is transferred to an RRSP or RRIF and then withdrawn, it will be considered part of your taxable income.
Yes, you may hold an FHSA as well as a TFSA or RRSP at the same time. An FHSA is not an extension of a TFSA, so you will have a separate contribution room for each of the accounts.
Yes, you can if you have available contribution room in your FHSA. This is not the best idea though as the amount transferred can’t be claimed as a deduction on your tax return. The transfer will not reinstate your RRSP contribution room either, so it’s much better to contribute to an FHSA first and then into an RRSP assuming you have enough cash flow.
Talk to a financial advisor about your options before you decide to transfer funds from one account to another.
No, parents cannot use an FHSA to save for their child’s home. They can, however, gift the money to their adult children who can then contribute the funds to their FSHA. If you want to start saving for your child or let them try their hand at trading, there are other investment and savings options available for teenagers.
No, you can make contributions to your own FHSA only, i.e. the FHSA will not be a joint account. You will not be allowed to make contributions to your husband or wife’s FHSA either, but you can combine your savings from your individual accounts and use it to buy your first home. The withdrawals for both you and your spouse will be tax-free as long as you are both first-time home buyers.
You can designate your spouse as the successor account holder. If they meet the criteria, they can become a full-fledged FHSA holder and use the account without it affecting their own contribution limit. If not, the funds can be transferred to an RRSP or RRIF or withdrawn as taxable income.
Individuals can hold more than one FHSA, but the contribution room will stay the same whether you have one or multiple accounts. The accounts will also stay open for a maximum of 15 years starting from the date you opened your first account.