FHSA: First Home Savings Account

Need help saving for your first home? Do you enjoy tax-sheltered savings and investment accounts? Well, the federal government has introduced a new program that should be right up your alley.

Introduced on April 1, 2023, the First Home Savings Account (FHSA) helps prospective homebuyers save money towards a home. With tax-free benefits, the program is likely to appeal to Canadians trying to squirrel away savings for a downpayment.

How does an FHSA work?

The FHSA is a savings and investment vehicle that lets you save up to $8,000 a year, tax-free, to a maximum total of $40,000.

The name of the program is a clue to its intention – it’s an account to help you save towards a first home – but the money you save in an FHSA doesn’t actually have to be used for a home purchase. In truth, whether you’re saving for a home or not, this account has some really neat elements that are worth considering.

A FHSA essentially combines the best parts of an RRSP (Registered Retirement Savings Plan) and a TFSA (Tax-Free Savings Account). Like an RRSP, contributions to an FHSA are tax-deductible, meaning they come off your income and reduce your taxes. And, like a TFSA, withdrawals from the account are also tax-free. Similar to both an RRSP and a TFSA, you can invest your savings within the account, earning additional money that’s also tax-sheltered.

Your FHSA can remain open for a maximum of 15 years or until you turn 71, whichever comes sooner. At that time, if you have funds in your FHSA, you can transfer them to another tax-sheltered account like an RRSP or withdraw them.

FHSA eligibility

To open an FHSA, you need:

• to be 18 years old (although in some provinces and territories, you need to be 19 to legally enter into any contract)

• to be a resident of Canada with a Social Insurance Number (SIN)

• to be a first-time homebuyer (for an FHSA, this means you have not owned a home in the year your account is opened or at any point in the previous four years – this also includes living in a home you co-own or in a home owned by your spouse or common-law partner)

FHSA contributions

Once you open an FHSA, you can start contributing. The annual contribution limit is $8,000 and, over the life of your account, you can contribute a total of $40,000.

Contributions are tax deductible when it comes time to file your taxes (helping reduce your net income and the amount of tax you pay when you file to the CRA). This tax-deduction benefit is similar to RRSP contributions – however, unlike RRSPs, contributions to your FHSA need to be made during the calendar year (with RRSPs you are afforded 60 days of contribution leniency into the following year, through January and February).

If you don’t contribute the maximum $8,000 every year, the unused contribution space carries over (to a maximum of $8,000). So, for example, if you contributed $4,000 in 2023, you would be able to contribute $12,000 in 2024 (the $8,000 annual contribution limit, plus $4,000 unused contribution from 2023).

An FHSA account holder is the only person who can make contributions to their FHSA. Family and spouses, for example, are not able to bolster contributions.

Investing, not just saving

Don’t let the name fool you – a First Home Savings Account is not just a savings account. Your FHSA can be used as an awesome investment vehicle. Like an RRSP and a TFSA, any funds you have in your FHSA can be invested into options like stocks, bonds, GICs, ETFs, and precious metals. Any money earned through your investments in an FHSA grows tax-free, and the earned income doesn’t reduce your contribution space.

Withdrawing from an FHSA

When it comes time to withdraw your funds from an FHSA, any qualifying withdrawals are tax-free – including any investment returns you’ve earned in your account.

What’s a qualifying withdrawal?

In most cases, a qualifying withdrawal would be an account holder withdrawing the funds from their FHSA to purchase their first home in Canada. There are some rules for what qualifies as a qualifying withdrawal:

• Any home bought must become the buyer’s primary residence (the purchase of an investment property would not qualify)

• You must be a first-time home buyer (which, for the FHSA, means you can’t have lived in a home you owned during the calendar year before the withdrawal or in the previous four years – including homes owned by your partner or spouse)

• Your home purchase must be located in Canada

• You must have a written agreement that you’ll be buying your first home by October 1 in the year after your withdrawal

Any withdrawals you make from your FHSA that are not qualifying withdrawals (for example, dipping into your FHSA to cover an unexpected expense) would be taxed and need to be declared in your tax return.

After making your qualifying home purchase, if there’s money left over in your FHSA, it will need to be moved – since you’ve bought a home, you will no longer qualify to maintain an FHSA. Leftover funds can be transferred to an RRSP or RRIF (Registered Retirement Investment Fund), tax-free. Leftover funds need to be transferred out by December 31 the year following your qualified withdrawal. And the good news is the transferred funds do not affect your RRSP contribution room.

FHSA and HBP

A Home Buyers’ Plan (HBP) is a program built into RRSPs and it’s also a vehicle to help you save for a downpayment on a home. There are some similarities here with FHSAs. But there are some key differences between HBPs and FHSAs, too.

Like a FHSA, you can withdraw money from your RRSP Home Buyers’ Plan to purchase a home. The main differences are: 1) an HBP allows you to withdraw $35,000 towards a home, while a FHSA allows $40,000; and 2) with an HBP you have to repay your home withdrawal back into your RRSP. Repayments start a couple years after your withdrawal and you have 15 years to repay yourself, at a minimum of 1/15th per year.

You can actually use both. If you have an RRSP and an FHSA, you can withdraw for both for the same qualifying first home purchase. That means, if you were to max out your eligible withdrawals from both your FHSA and your RRSP, you could pull $75,000 tax-free towards your first home purchase.

Where to open an FHSA

Anywhere that’s offering RRSPs and TFSAs will also be able to offer FHSAs. While all the big Canadian banks and financial institutions have said they’ll offer FHSAs, most were not ready to open customer accounts by April 1 when FHSAs became available. However, most have said they will begin offering them during 2023. Only online brokerage Questrade was offering FHSAs on April 1, with most other banks and online investment companies looking to start offering the accounts later in the year.

Summarizing First Home Savings Account for First Home Buyers

The First Home Savings Account (FHSA) is an essential tool for Canadian first-time homebuyers. This home savings account offers multiple benefits for individuals planning to purchase their first home in Canada, making it a crucial part of your financial planning strategy.

The home savings account FHSA offers unique advantages that make it stand out from other savings options. Not only is it dedicated to helping you save for your first home, but it also comes with a host of tax benefits. Similar to a Tax-Free Savings Account (TFSA), the FHSA allows for tax-free withdrawals. This means that when you're ready to make a down payment on your first home, the funds you withdraw from this account won't be subject to taxes, thereby increasing your purchasing power.

The first home savings account is also designed to be flexible. If your plans change and you decide not to buy a home, you can still benefit from the tax advantages of the FHSA by transferring your savings to another tax-sheltered account.

Furthermore, the FHSA is not just a home savings account. It's also an investment account. This means you can invest your savings in various financial instruments like stocks, bonds, and ETFs, allowing your money to grow over time. Plus, any investment returns you earn in your FHSA are also tax-free, adding more value to your savings.

So, if you're a first-time home buyer in Canada, consider opening a first home savings account. It's a great way to save and grow your funds for your first home purchase, all while enjoying considerable tax advantages.

Don't forget to check with your financial institution or online brokerage to find out when they'll be offering FHSAs. As a first-time homebuyer, you'll find this account to be a valuable tool in your financial arsenal, helping you reach your homeownership goals sooner.