All About the First Home Savings Account (FHSA)

The First-Time Home Buyer Savings Account, or FHSA, is a new registered savings account that is offered by Canadian financial institutions based on the government program to help first-time home buyers save money towards purchasing a home. The FHSA program allows Canadians to contribute up to $40,000 which will be tax-deductible similar to an RRSP. The income and gains inside an FHSA, as well as withdrawals, will be tax-free, similar to a TFSA.

Who is Eligible to Open a First Home Savings Account?

To open an FHSA, you will first need to confirm your eligibility to the financial institution where you open the account. To open an FHSA, you must:

• be an individual resident of Canada with a social insurance number,
• be at least 18 years of age, and not turning 72 within the year, and
• not live in a home that you or your spouse (or common-law partner) own, at any time in the current year or the preceding four years.

How Much Can I Contribute to an FHSA and Deduct from My Taxes?

Contribution room only accumulates once you’ve opened an account. You can contribute up to $8,000 in any one year, and up to $40,000 over your lifetime. If you don’t contribute the maximum in a year, that contribution room carries forward, up to a maximum of $8,000 of carry-forward room. There is no 60-day window to contribute for the prior year, as there is with RRSPs.

The full amount of your contribution to the First Home Savings Account is deductible from your taxable income. The amount of tax savings will depend on your marginal tax bracket. If you expect your income to be in a higher tax bracket in a future year, you can carry forward undeducted contributions and deduct them in a later year.

Unlike RRSPs, there is no spousal FHSA. The person who makes the deposit is the person who will get the tax deduction. However, you can give money to your spouse or child for them to make an FHSA contribution, without worrying about attribution rules. As with any other source of downpayment, you should not expect to be repaid any money that you gift for an FHSA contribution.

What Investments Can an FHSA Hold?

A First Home Savings Account can hold all the same types of investments as a TFSA. This means taxpayers can invest in things like mutual funds, publicly traded stocks, exchange-traded funds (ETFs), government and corporate bonds, and guaranteed investment certificates (GICs). However, there are rules that prohibit certain types of investments, such as private corporations or partnerships, or investing in certain assets like land.

How do I Use a First Home Savings Account to Buy a Home?

To make a tax-free withdrawal from an FHSA, the following requirements must be met:

1. The person withdrawing the money must be buying their first home. That means they cannot have owned a home they lived in during the year of the withdrawal or the four years before that.
2. The person must have a written agreement to buy or build a qualifying home before October 1 of the year after the withdrawal. They also need to plan on living in the home as their main residence within one year after buying or building it.
3. The home must be in Canada. A share in a co-operative housing corporation that lets the person have an equity interest in a housing unit in Canada also qualifies. If all the requirements are met, the person can take out all the money in their FHSA account without paying any taxes, either all at once or in multiple withdrawals. The account must be closed (fully withdrawn) one year after the first withdrawal.

Can I Withdraw from Both an FHSA and an RRSP Using the Home Buyers Plan?

The government originally said no, but changed the legislation to allow both a First Home Savings Account withdrawal and a HBP withdrawal from an RRSP. That means a married couple could each use up to $40,000 (plus interest or growth) from an FHSA and up to $35,000 from their RRSP (which they need to pay back over 15 years) or up to a total of $150,000 from registered plans for a first-time home purchase.

If you haven’t fully contributed to your FHSA by the time you buy your first home, you could transfer money from your RRSP rather than (or in addition to) making a HBP withdrawal. That way, you could make a tax-free withdrawal and avoid having to pay yourself back.

What Happens to the First Home Savings Account if I Don’t Buy a Home?

The FHSA account must be closed either one year after a qualifying withdrawal, or on December 31st of the year 15 years after it was opened or you turn 71. Any funds not used for a home purchase can be transferred to an RRSP or RRIF. A transfer to an RRSP or RRIF doesn’t require or use up RRSP contribution room. However, they then become taxable upon withdrawal. Alternatively, you can withdraw funds directly from the FHSA (non-qualifying withdrawal), however taxes will be withheld at the same rate as an RRSP withdrawal, and will increase your taxable income. You won’t recover FHSA contribution room after a non-qualifying withdrawal.

Strategies Using a First Home Savings Account

If you’ve already owned a home in the past, you could qualify as a first-time home buyer again if you rent for four consecutive years. If you’re currently renting, you could benefit from postponing your home purchase until you qualify for an FHSA.

If you don’t have enough money to contribute fully to your FHSA, you could transfer money from your RRSP without paying taxes. You could also take money from your TFSA, but that has no tax advantage. You could also borrow money to contribute, but you cannot deduct any interest cost.

If you are eligible to open a First Home Savings Account, it could benefit you, even if you don’t plan to purchase a home. It will allow you to get tax deductions for contributing up to $40,000, it will grow tax-free, and if you don’t buy a home within 15 years or before age 71, you can transfer the full amount to your RRSP or RRIF without any additional RRSP contribution room.

Other Government Programs for First-Time Home Buyers

The Home Buyers’ Plan (HBP) is a program that allows home buyers to borrow up to $35,000 from their RRSPs towards the purchase of your first home under certain conditions. Tax deductions on interest earned apply only to those who pay tax on their income.

The First Time Home Buyer Incentive (FTHBI) provides eligible buyers with 5% or 10% off the price of the home they’re buying, which can mean big savings for buyers. To qualify for this program, you must have purchased or plan on purchasing a resale or new build home that is less than $500,000.

The Home Buyer’s Tax Credit (HBTC) is a non-refundable tax credit that provides buyers with $10,000 for the purchase of an existing home, which would provide up to $1,500 in tax relief to eligible home buyers. The HBTC is a small rebate that can help recover some of the costs associated with first-time home buying.

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