In April 2022, the Federal government introduced the first “Home Savings Account”. The Tax-Free First Home Savings Account (FHSA) is one of the biggest tax changes in years. It combines the benefits of a TFSA with an RRSP and can be a key tool for first-time home buyers.
FHSAs are expected to launch in mid-2023. Keep in mind, the rules are still being finalized and this is just a summary.
How It Works
An FHSA is similar to a TFSA and RRSP, in that it’s a tax-advantaged way to save and invest. Like an RRSP, the amounts you contribute are deductible. That means it reduces the tax you have to pay and you could get a tax refund. The amounts within your FHSA grow tax-free and qualifying withdrawals are tax-free, like a TFSA. This provides a “triple tax advantage” that no other home savings investment has.
Withdrawals are tax-free if the funds are used to purchase a first home. That means you can’t have owned a home in which you’ve lived in the past five years. If you don’t end up using the funds to purchase a qualifying home, you can withdraw the amount and pay tax on it, or you can transfer it tax-free to your RRSP.
You can contribute up to $8,000 per year, up to a $40,000 lifetime amount. You can invest in your FHSA the same way you do in your TFSA. Things like stocks, bonds, ETFs, mutual funds and GICs all qualify.
To be eligible to open an FHSA, you must be over 18, be a Canadian resident, and not have owned a home in which you’ve lived in the past five years.
Should You Invest in an FHSA?
The FHSA is a great option to save for your first home and it should be the new default option for most people. You should open an FHSA as soon as possible, as you’ll only start accumulating contribution room once you’ve opened an account.
The FHSA is superior in many ways to the Home Buyers’ Plan (HBP), which allows you to withdraw up to $35,000 tax-free from your RRSP. The FHSA features the same tax deduction for your contribution but has a higher contribution limit, no withdrawal limit (which means you can withdraw the $40,000 you contributed, plus any investment income), and qualifying withdrawals are completely tax-free. Unlike the HBP, there’s no need to “repay” any withdrawals; remember that with the HBP, you need to repay your withdrawals based on a prescribed schedule or you’ll be taxed in subsequent years. There is minimal downside to the FHSA, as you can transfer any unused amounts tax-free to your RRSP.
One disadvantage of the FHSA compared to the HBP is when it comes to quickly buying a home. With the FHSA, you need to stagger your contributions over a number of years, since there’s an $8,000 annual limit (or $16,000 including carry forward contribution room). That means you need to plan several years in advance. On the other hand, there’s no annual limit to contributing to your RRSP. So, if you find yourself suddenly buying a home this year, contributing to your RRSP and withdrawing the funds – at least 90 days later – through the HBP might be superior to the FHSA.
Some of the more complex rules…
Carry Forward contributions – The contribution limit is capped at $8,000 per year. You can carry forward unused contribution room up to an additional $8,000; however, you only start accruing contribution room once you open your FHSA.
Example: Marissa opens an FHSA in 2023 and contributes $5,000. In 2024, she can contribute up to $11,000 ($8,000 plus $3,000 carried forward from 2023).
Deduction timing – Unlike RRSPs, contributions made in the first 60 days of the year can’t be deducted on the previous year’s tax return.
Carry Forward deductions – Similar to an RRSP, you can deduct your FHSA contribution in the year you contribute, or you can carry it forward to a future tax year. This is particularly helpful if your income is low in the year of contribution, and you expect it to be higher in future years.
Contributions made after a qualifying withdrawal are no longer deductible.
Withdrawal requirements – To make a tax-free qualifying withdrawal, you must have a written agreement to buy or build a qualifying home before October 1 of the following year, and you must intend to occupy the home as your principal residence within one year of buying/building it.
Withdrawal timing – You can make a qualifying withdrawal anytime from when you have a written agreement to buy/build, up to 30 days after moving into the home.
Withdrawal amounts – You can make one withdrawal or a series of withdrawals.
Unused funds – Once you make a qualifying withdrawal, you can transfer any unwithdrawn amounts to an RRSP tax-free by the end of the following year.
Non-qualifying withdrawals – If you make a non-qualifying withdrawal, you’ll be taxed on the withdrawn amount. Your FHSA contribution room won’t be reinstated.
Transfer to an RRSP – You can transfer funds in your FHSA to your RRSP tax-free. These transfers won’t use up your RRSP contribution room but won’t reinstate your FHSA contribution room.
Transfer from an RRSP – Funds can be transferred from your RRSP to your FHSA tax-free. This counts against your FHSA limit and doesn’t reinstate your RRSP room.
Multiple FHSAs – You can have multiple FHSAs, including at different institutions, but the same contribution limit applies to all FHSAs you own.
Expiry – Your FHSA expires 15 years after opening it. If you don’t make a qualifying withdrawal, you’ll need to withdraw the funds (and be taxed on it) or transfer the funds tax-free to an RRSP.
Home Buyers’ Plan – You can’t make an HBP and an FHSA withdrawal for the same property.
Spousal contributions – Unlike a Spousal RRSP, you can’t contribute to your spouse’s FHSA. However, you can provide them with funds for them to contribute to their own FHSA without the usual spousal attribution rules applying.
The FHSA will be a great tool for Canadians to utilize who are considering the purchase of their first home. Although it’s projected to not be available until 2023, we believe it will be a great investment vehicle to be utilized for those who have first-time home ownership goals in the coming years.
As always, it’s important to evaluate your individual circumstances and wait for the final details on the FHSA to determine if it’s right for you.