With inflation slowly on the decline and interest rates recently announced to remain at 4.5%, Canadians are finally feeling some economic relief. However, Canadians hoping to buy their first home in 2023 still feel housing is unaffordable—and the majority of them have even given up on the idea of buying a home altogether.
In an effort to change this and assist prospective first-time homebuyers, the federal government announced the tax-free First Home Saving Account (FHSA) as part of their 2022 budget. As of April 1, 2023, Canadians can open this account and begin saving for their first home tax-free (up to a lifetime amount of $40,000) and incur additional benefits.
What Is The First Home Savings Account and How Does it Work?
The FHSA is a registered savings plan that gives potential first-time homebuyers the ability to save up to $40,000 ($8,000 per annum) towards their home purchase without accruing tax. Similar to a Registered Retirement Savings Plan (RRSP), contributions to a FHSA are tax-deductible on your income tax return for the tax year you make them in.
Additionally, account holders can withdraw funds for purchasing or building their first home tax-free. Any funds not used can be transferred on a non-taxable basis to an RRSP or a Registered Retirement Income Fund (RRIF).
In essence, the FHSA leverages characteristics of Tax-Free Savings Accounts (TFSAs) and RRSPs to provide new homeowners a running start in an economically difficult period.
What Are the FHSA Rules?
Though the FHSA carries substantial benefits, it also has stringent requirements. If you’re planning on opening an FHSA when it becomes available at most major banks (this could be late spring–or later), you’ll need to meet specific criteria:
- Be a resident Canadian.
- Be at least 18 years of age or older.
- You must not have owned real property (e.g. condo, duplex, single-family unit) solely
or jointly with a spouse or common-law partner within the last four years.
Note: your spouse or common-law partner also cannot own your current primary residence (i.e. where you currently live and reside).
In addition to eligibility requirements, FHSAs have other account rules that you should familiarizing yourself with:
- The annual contribution limit is $8,000 and the lifetime contribution limit is $40,000.
- Account holders may have more than one account, though the annual and lifetime contribution limits stay the same.
- Unlike RRSPs, any contributions made in the first 60 days of a calendar year cannot be claimed as income deductions for your prior tax return.
- FHSA holders can carry forward unused contribution amounts to the following year, up to a maximum of $8,000.
- Any contributions over the prescribed annual limit will be taxed at 1% per month until they are eliminated (either by the beginning of a new year or by removing amounts from the account).
- The account lasts until one of three instances occurs: the account reaches 15 years of age, the account holder reaches the end of their 71st year or a qualifying withdrawal is made for a first-home purchase.
Do you Have to Repay the FHSA?
Unlike other savings plans, such as the home buyer’s plan (HBP), you are not required to repay funds placed into an FHSA.
Opening and Closing Your FHSA
Determining your eligibility for an FHSA is the easy step. Choosing what type of account to open—or when to close it—requires careful deliberation.
Why Should I Consider Opening an FHSA?
FHSAs offer robust tax breaks in the form of tax-deductible contributions and tax-free withdrawals, so long as you are using them to purchase a home. If you’re a first-time homebuyer, an FHSA could give you a head start on acquiring that home.
Who is Eligible to Open an FHSA?
Resident Canadians that do not have a primary residence owned by them, their spouse or common-law partner and are at least 18 years of age are eligible to open an account. Keep in mind that potential account holders cannot be 71 years of age or over either.
How to Open an FHSA
You’ll need to contact an issuer (e.g. bank, trust company, credit union or insurance company) qualified to open the FHSA. At this time, none of the major banks are offering the FHSA, though Questrade rolled out theirs on April 1, 2023.
Types of FHSAs
There are three types of FHSAs:
- Depository accounts are with financial institutions and they hold cash, guaranteed investment certificates (GICs) or term deposits.
- Insured FHSAs are annuity contracts made with a licensed annuity provider.
- Trusteed FHSAs are trust accounts (typically with a trust company) that hold qualified investments like cash, GICs, term deposits, bonds and mutual funds.
Savvy investors can also open a self-directed FHSA through an issuer of their choice.
When to Close an FHSA
To avoid any unintended tax consequences, the CRA recommends closing your FHSA before your maximum participation period ends. This occurs on December 31 of the year when one of the following events occurs:
- Your FHSA reaches its 15th anniversary.
- You reach the age of 71.
- You made a withdrawal to purchase a home the year prior.
Withdrawals From Your FHSAs
Arguably, the FHSA shines when it comes to tax-free withdrawals. Although, there are several ways to remove funds from the account.
Types of Withdrawals
Making Qualifying Withdrawals From Your FHSAs
So long as you meet the following conditions, you can withdraw assets from your FHSA tax-free:
- Have a written agreement in place to acquire or build a home by October 1 of the following year.
- Fill out Form R725, Request to Make a Qualifying Withdrawal from your FHSA, and present it to your account issuer.
- Acquire the home no more than 30 days prior to the withdrawal.
- Occupy or intend to occupy the property as your principal residence within one year.
Keep in mind that you can make a series of withdrawals or one large removal.
Making Taxable Withdrawals From Your FHSAs
Any withdrawals that are not considered qualifying or designated are deemed taxable. They will be reported on your tax and benefit return as income. On the plus side, this amount will be subject to tax withholding, which can be claimed as a credit on your tax return for that same year.
Making Designated Withdrawals From Your FHSAs
If you contribute over $8,000 in a year, resulting in excess FHSA amounts, you can remove the excess amounts as designated withdrawals. These transactions will not be considered a form of income.
Can I Invest in the FHSA?
FHSAs can hold investment vehicles similar to that of RRSPs, including:
- Government and corporate bonds
- Mutual funds
- Public securities
What Happens if You Don’t Use Your FHSA To Buy a House?
You have a couple of options if you choose not to purchase a home with the funds. One that allows your funds to remain untaxed until withdrawal is to transfer them to an RRSP or RRIF. This transfer is only tax-deferred if you have no excess amounts in the FHSA.
On the other hand, you can remove the funds as you like—on a taxable basis.
What Are Other Canadian Home Buyer Incentives?
Canadians have two other incentives for purchasing their first home: The Home Buyer’s Plan (HBP) and the First-Time Home Buyer Incentive.
Home Buyer’s Plan. The HBP allows first-time home buyers to withdraw up to $35,000 from their RRSPs tax-free. However, the funds need to be repaid to your RRSP within 15 years’ time.
First-Time Home Buyer Incentive. This shared-equity mortgage with the Government of Canada allows eligible home buyers to reduce their down payment by 5% to 10%—depending on whether the home is a new build or a resale. This incentive must be paid back, within 25 years or when the home is sold.
Can I Use the FHSA and the Home Buyers Plan at the Same Time?
Thankfully, yes. So long as you meet the withdrawal requirements for the Home Buyer’s Plan (HBP) and the FHSA, you can use the funds from each.
Can I use the FHSA and the First-Time Home Buyer Incentive at the Same Time?
Definitely. The Federal Government—which offers the incentive—indicates that “traditional funds” such as RRSPs and savings accounts, are the types of funds usable with its program. Leveraging the HBP, FHSA and first-time incentive is a three-pronged approach that squeezes out the greatest amount of value for new homebuyers.
Frequently Asked Questions (FAQs)
Is the FHSA available in Canada?
As of April 1, 2023, the FHSA is technically available to Canadians. Note, however, that many banks and other financial institutions have not given concrete dates as to when they will actually offer it.
Who is eligible for FHSA in Canada?
Anyone who is 18 years of age or older (subject to provincial legislation), a resident Canadian and has not purchased their first home within the last four years. Keep in mind that if you have a spouse or common-law partner, they cannot own your principal residence (where you currently live) for you to be eligible.
When can I open an FHSA account?
Technically the Canada Revenue Agency (CRA) announced FHSAs open to the public as of April 1, 2023, but few institutions are currently offering the savings plan . One institution that has been offering the account since April 1 is Questrade.
What is the difference between a TFSA and an FHSA?
There are two major differentiators. For one, the TFSA does not allow for tax-deductible contributions. Second, and more importantly, funds retained in a TFSA can be used for any purpose tax-free. Funds from an FHSA can only be used towards a home to be tax-exempt.