Looking to become a new homeowner in Mississauga, Toronto, or the GTA? The Tax-Free First Home Savings Account (FHSA) is here to help! Combining elements of both an RRSP and TFSA account, the FHSA is an ideal savings vehicle for your first home.

We’ve compiled all the information you need on this new program, including eligibility, opening an account, and how it works when contributing or withdrawing funds.

Starting April 1, 2023, Canadians will have access to this new tax-efficient savings plan. It allows you to save up to $40,000 on a non-taxable basis. You can contribute an annual maximum of $8,000 and benefit from tax deductions like those offered by Registered Retirement Saving Plans (RRSPs). And withdrawals are similarly comparable with Tax-Free Savings Accounts (TFSAs): no taxes on withdrawals. Any income/gains within the account are not taxable, which applies to both RRSPs and TFSAs. Unlike an RRSP though, any unused contribution amounts within the first 60 days of a new year can’t be attributed back to the previous tax year.

Eligibility

To open an FHSA, you are required to be a Canadian resident, 18 years of age or older, and meet the definition of a First-Time Buyer for this program, which is –

“A first-time homebuyer is defined as someone (you or your spouse/common-law partner) who has not owned a home in which they lived at any time during the year before the account is opened or at any time in the preceding four calendar years.”

You can have more than one account but need to stay within your annual and maximum contribution amounts. Your maximum participation period starts when you open your first FHSA. Once you use your FHSA to buy your home, you cannot open another account later.

Eligible institutions that can offer this account include Banks, trust companies, life insurance companies, and credit unions.

Contributions

By contributing to an FHSA, you benefit from tax deductions like those available through RRSPs. You include the contribution amount when you file your tax return, and you can choose which year you’d like your deduction applied in, providing you with flexibility since you want to use your deductions when you are in the highest tax bracket possible.

Unused amounts can be carried forward to the following year up to a maximum of $8,000. Say in 2023 you contribute $5,000. In 2024 you’ll be eligible to contribute $11,000 – the $3,000 you carried forward and the $8,000 limit for 2024. You’ll need to make sure that you don’t exceed your annual and total contribution limits.

Five years will be the shortest amount of time to fully fund your FHSA to your maximum of $40,000.

Note: your contribution room doesn’t start accumulating until you open an account, which is different from RRSPs and TFSAs. And like a TFSA account, if you over contribute you will be subject to a penalty of 1% of the excess each month until withdrawn.

Withdrawals

Any withdrawal from an FHSA must meet certain criteria to be non-taxable –

  • you must be a Canadian resident and a first-time home buyer at the time of withdrawal.
  • you must have an agreement in writing to buy or build a qualifying residence before October 1 of the year following the year of withdrawal and intend on occupying that new property as your primary place of residence within one year after buying or building it.
  • you can also make a withdrawal up to 30 days after you purchase the home.

If these requirements are not met, taxes will apply on your withdrawal in the same tax year as the withdrawal was made. In other words, you can always withdraw the funds as taxable cash.

Note: You can make both an FHSA withdrawal and an RRSP Home Buyers’ Plan withdrawal for the same qualifying home purchase. When the FHSA was first announced, it was stated that you couldn’t use both but that has changed. The Home Buyers’ Plan (HBP) allows you to withdraw $35,000 per person ($70,000 per couple) to help with the purchase of your new home. Under the HBP, you need to repay the funds to the RRSP over 15 years while you don’t have to repay with the FHSA.

Eligible Investments

Within an FHSA, the types of investments you can invest in are the same as those eligible for a TFSA, including – GICs, mutual funds, exchange-traded funds (ETFs), bonds, and stocks.

Closing an account

After December 31 of the year when either 15 years have passed since originally opening the account or the end of the year that you turn 71 years old, your savings will no longer qualify as an FHSA and should be transferred tax-free into an RRSP or Registered Retirement Income Fund (RRIF). This also applies to the year after your qualified home purchase.

If you make a qualifying withdrawal before these time periods, any unwithdrawn funds can still be moved without taxation to an RRSP or RRIF up until the end of the next calendar year, at which point the account is then closed. Any transfers to an RRSP do not limit your RRSP contribution room. Also, note that withdrawals and transfers do not replenish your available FHSA contribution room, as is the case with TFSAs.

Strategically using the FHSA

Here are interesting strategies to consider:

  1. You can receive free $40,000 RRSP contribution room. Those that don’t have earned income do not build RRSP contribution room. If you use this account and don’t buy a home, you can transfer your $40,000 to your RRSP.
  1. Always contribute to your FHSA first, then to your RRSP. If you already have an RRSP, consider transferring from your RRSP to your FHSA up to the annual and lifetime limits. The great news with this strategy is that withdrawals to buy a home will be tax-free, which means you are making a tax-free RRSP withdrawal! The downside is that you don’t get a tax deduction.
  1. If you want to gift money to your adult kids, you could open and fund an FHSA for them. They can then use the deduction when it makes the most sense for them i.e. when they are in a higher tax bracket.
  1. You can fund a spouse’s FHSA, and any withdrawals will not be attributed back to you for tax purposes.
  1. If you use both the HBP and the FHSA between you and your spouse, you could have $150,000 for your downpayment i.e., $70.000 HBP and $80,000 FHSA.
  1. If you bought a rental property but never a primary residence, you may qualify as a first-time home buyer.

What’s next?

If you are in the saving up stage of buying your first home, congratulations! The FHSA could be a tremendous help. It still pays to get in touch early to discuss your plans. We are experienced at giving the type of early advice that can make an enormous difference in how successful you are in purchasing your dream home in Mississauga, Toronto, and the GTA. We love working with first-time buyers, just check out our over 500 5-star google reviews!