FHSA Essentials: Key Benefits and Smart Uses for First-Time Homebuyers

What is it?

Introduced on April 1st, 2023, the First Home Savings Account (FHSA) was created for eligible Canadians who are first-time home buyers to save for a qualifying home without paying tax on the growth of your investments within the account.

In this article, we’ll take a look at Canada’s most recent registered savings plan and see how it could benefit you in saving for your first home and reaching your other financial goals.

How Does it Compare to the Other Registered Savings Plans?

The FHSA can be seen as a blend of the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP). Combining key features from each savings plan. The FHSA is tax deductible like the RRSP, meaning that you can claim an income tax deduction for the contributions you made to the account during the year. Also, like the TFSA, it has no withdrawal limit, and your withdrawals are not subject to taxation. Although for an FHSA, the withdrawals need to be deemed a qualifying withdrawal in order to not face tax consequences.

Much like the TFSA, there is a maximum amount that you can contribute to your FHSA each year. In 2024 you can contribute up to $8000 to your FHSA, which is slightly higher than the $7000 maximum contribution to your TFSA for the same year. The RRSP account also has a maximum annual contribution limit, which is up to 18% of your previous year’s income or up to the fixed contribution limit of $31,560. There is also a lifetime maximum contribution limit for the FHSA that can’t be exceeded, which is $40,000 (which is equivalent to 5 years of maximum contributions to this account).

You can also carry forward any unused contribution room from previous years with all of these accounts. For example, if you contributed only $4,000 to your FHSA in Year 1, you could carry over the remaining $4,000 to Year 2, increasing your annual contribution limit to $12,000 for Year 2. It’s important to know that there is a carry forward limit of $8000. Say for example that you went two years without contributing anything to your FHSA and then in Year 3, you try to contribute an amount of $16,000. Because of the cap on annual amounts carries into the next year, you can actually only contribute $8000 in Year 3 for a total contribution limit of $16,000 in Year 3 and not $24,000. For additional examples of how these contribution limits work for the FHSA, click here to see the CRA’s website on contributing to your FHSA.

Your FHSA can be composed of the exact same types of investments as a TFSA, RRSP, or any other investment account. Cash, mutual funds, securities listed on a designated stock exchange, GICs, bonds, and certain shares of small business corporations are all permitted to be held in these savings accounts.

Do I Qualify for this Account?

To qualify for this new savings account, you must be between the ages of 18 and 71, a Canadian resident, and additionally you and/or your spouse/common law partner can not have owned a home in the calendar year or at any time in the preceding four calendar years. To read more on the eligibility criteria for the FHSA, click here to visit the CRA’s page on this topic.

Is this Account Right for me?

If you are a first-time home buyer and are thinking about saving up for your first home, then this account can provide the kick start you need to achieve your home buying goals. Even if you are unsure if you will be purchasing a house, the FHSA is a useful tool to grow your savings on a tax-free basis. If after opening the account you decide that you are no longer in the market for a house but have still contributed to an FHSA, don’t worry! You can reallocate your FHSA savings to an RRSP or an RRIF in your name without incurring any tax consequences. Even if you don’t end up using the funds accumulated in your FHSA to purchase a home, it will still allow you to contribute $40,000 (total FHSA contribution limit) that can grow each year without incurring any taxes owing, which can later be contributed into your RRSP to continue growing on a tax-free basis. Be sure to check with your accountant before moving money between investment accounts to ensure there are no unintended tax consequences.

If you find yourself consistently maxing out your annual RRSP and TFSA contributions, then the FHSA is another way to help grow your savings without increasing your annual tax bill.

What about the Home Buyers Plan?

The Home Buyers Plan (HBP) is the option to withdraw up to $60,000 from your RRSP ($120,000 for a couple) to help finance the purchase of a home.

The HBP and FHSA are meant to work together in harmony. Contributing to a FHSA will not affect your eligibility for the HBP, and the two accounts can actually be used together to purchase a qualifying home. It is important to know that the funds used through the HBP must be repaid to your RRSP account within 15 years (no matter if you used it with the FHSA or not), in comparison to the withdrawal from the FHSA where there are no repayment requirements.

For more details about using both the FHSA and the HBP,  this article from Scotiabank explains how the two accounts can be used together to achieve your home savings goals.

Conclusion

The new FHSA can be a powerful tax-free savings tool, even if you don’t end up using it to purchase a home. It combines the benefits of both a TFSA and an RRSP, in that the funds you contribute can grow on a tax-free basis, and any contributions made are tax deductible. If, after opening the account, you do not use the accumulated funds to purchase your first home, they can be easily transferred to an RRSP account, continuing to grow without increasing your tax bill.

Before opening up a FHSA, you should always consult with your tax or wealth management advisor and make sure you have all the information you require to make a well-informed decision.

Further Readings:

• FHSA - Here is the CRA home page for the FHSA where every detail of this account can be found. TD also has a great article on the FHSA which goes into a lot more detail on the subject, read it here.

• RRSP Home Buyers Plan – Read more about the HBP from an article from RBC and the CRA.