The First Home Savings Account (FHSA) is a new registered account introduced by the Canadian government in 2023 to help first-time homebuyers save for a down payment. With rising home prices across Canada, saving enough for a down payment is becoming increasingly difficult for many prospective first-time buyers.
This program can be a useful tool for first-time buyers to maximize their savings. This comprehensive guide will outline everything you need to know about the FHSA, including eligibility requirements, contribution rules, investment options, withdrawal rules, and how it compares to other savings accounts.
What is the First Home Savings Account and How Does It Work?
The First Home Savings Account is a new registered account that allows first-time home buyers in Canada to save money for their down payment in a tax-advantaged way.
The FHSA works similarly to an RRSP or TFSA account. Here’s an overview of how you can contribute, invest, and withdraw funds:
- Contribution Limits: You can contribute up to $8,000 annually to your FHSA, with a lifetime limit of $40,000. Unused annual contribution room carries forward.
- Tax Deductions: Contributions are tax deductible like an RRSP. Your taxable income is reduced by the amount you contribute.
- Investment Options: You can invest your FHSA in GICs, mutual funds, stocks, bonds, etc. All investment earnings grow tax-free.
- Tax-Free Withdrawals: The withdrawal is non-taxable when you withdraw funds for an eligible first home purchase.
- Carry-Forward of Room: If you contribute less than your annual limit, the remaining amount carries forward for future years.
- Multiple Accounts: You can open multiple FHSAs, but your total contributions cannot exceed the annual and lifetime limits.
In summary, the FHSA provides the tax perks of an RRSP along with the flexible, non-restricted access of a TFSA. The main goal is to help first-time buyers boost their savings faster through tax breaks.
Who is Eligible for the FHSA?
To be eligible to open a First Home Savings Account, you must meet the following criteria:
- Age: You must be 18 years or older to open. The account must be closed by the end of the year in which you turn 71.
- Residency: You must be a resident of Canada when you open this account and when you make qualifying withdrawals.
- First-Time Home Buyer Status: You and your spouse or common-law partner must not have owned a home occupied as a principal residence by either you in the year the account was opened or in the preceding four calendar years.
- Spousal Considerations: If your spouse or common-law partner currently owns or has owned a home that was their principal residence in the last five years, you will not be eligible to open. The homeownership history of a separated or former partner will not impact your eligibility.
In summary, the FHSA can only be opened by Canadian residents over 18 who have not recently owned a home and whose spouse has not recently been a homeowner. Check with a tax expert if you have specific questions about your unique situation.
What are the Contribution Rules for the FHSA?
Here is a summary of the key contribution rules for First Home Savings Accounts:
- Annual Limit: You can contribute up to $8,000 annually to an FHSA. This amount is not indexed to inflation.
- Lifetime Limit: A lifetime contribution limit of $40,000 per person exists.
- Carry Forward of Unused Room: Any unused FHSA contribution room carries forward to future years, allowing you to contribute more than $8,000 in a given year, provided you have accrued the room. The carry-forward allowance is capped at $8,000.
- Overcontribution Penalties: If you overcontribute, you will pay a 1% tax per month on the excess amount.
- Deadline: Contributions must be made by December 31 each year; there is no 60-day grace period like with RRSPs.
- Spousal Contributions: You cannot claim deductions for contributions made to your spouse’s FHSA. The account holder gets the tax deduction.
In summary, be sure not to overcontribute and note that the annual cutoff is Dec 31, with no grace period. Keep track of your available room.
How Can You Invest Through Your FHSA?
The FHSA offers flexible investment options similar to an RRSP account. Here are the main types of eligible investments:
- Guaranteed Investment Certificates (GICs)
- Mutual funds
- Stocks and bonds
- Exchange Traded Funds (ETFs)
- Bank savings accounts and term deposits
As you approach an anticipated home purchase date, consider lower-risk investments like GICs or savings accounts to protect your savings.
Growth-oriented investments like stocks and equity mutual funds could generate higher returns when your purchase date is further out.
A target date fund or robo-advisor may be an easy, hands-off approach. The asset mix automatically gets more conservative as your target date nears.
All investment returns and earnings generated within an FHSA are tax-free. Capital gains, interest, dividends, and other income do not need to be reported or taxed while in the account.
Proper investment planning can help grow your FHSA balance faster.
What are the Withdrawal Rules for the FHSA?
To make a tax-free withdrawal from your FHSA, you must meet these eligibility criteria:
- You must be a first-time home buyer.
- You must have a written purchase agreement for a qualifying home.
- The withdrawal must be made to purchase or construct a qualifying home.
- The home must become your principal residence within 12 months of purchase.
You can also transfer funds from your FHSA to an RRSP or RRIF without tax consequences, provided you have an available RRSP room.
Overall, be sure to only make withdrawals for an eligible first home purchase to get the full tax-free benefit.
How Long Do You Have to Buy a Home with the FHSA?
The FHSA has a maximum duration of 15 years from when you first opened an FHSA.
You must close your account by December 31 of the year you turn 71 or if you have held the account for 15 years, whichever comes first.
When closing your FHSA, here are your options if you still have a balance:
- Transfer the funds to an RRSP or RRIF
- Withdraw the funds and pay regular income tax rates
- Complete an eligible first home purchase by the FHSA maturity date
If the maturity date is approaching and you are not ready to buy, you may wish to transfer the balance to an RRSP to avoid taxes.
FHSA vs RRSP – How Do They Compare?
While both accounts provide tax breaks on contributions, there are some key differences between the FHSA and RRSP:
| FHSA | RRSP |
|---|---|
| Annual contribution limit is $8,000 | Annual limit is 18% of earned income up to a maximum amount |
| Lifetime limit of $40,000 | No lifetime limit |
| It can be used for any purpose | HBP withdrawals must be repaid |
| Withdrawals restricted to first home purchase | The annual limit is 18% of earned income up to a maximum amount |
| Must be closed at age 71 | Can be converted to RRIF with no closure requirement |
The FHSA works best for focused first-home savings, while an RRSP is better for more flexible long-term savings. Using both accounts together can maximize your tax savings.
FHSA vs Home Buyers’ Plan – How Do They Differ?
The FHSA differs from the Home Buyers’ Plan (HBP), which allows first-time buyers to withdraw up to $35,000 tax-free from an RRSP for a home purchase.
| FHSA | Home Buyers’ Plan |
|---|---|
| No HBP-type repayment required | Must repay over 15 years |
| Can withdraw any amount | Limited to $35,000 withdrawal |
| If used together, no repayment is needed | Counts against RRSP room |
| Can combine with HBP | If used together, no FHSA repayment needed |
The FHSA provides tax-free savings that don’t need to be repaid. This gives more flexibility compared to borrowing from your RRSP through the HBP.
Using both plans together can optimize your down payment savings.
FHSA vs TFSA – What Are the Key Differences?
While both accounts provide tax-free growth, here are some key ways the FHSA and TFSA differ:
| FHSA | TFSA |
|---|---|
| Only first-home withdrawals are tax-free | No tax deduction for contributions |
| No age limit to maintain an account | All withdrawals tax-free |
| Must be closed at age 71 | No age limit to maintain account |
| Lifetime contribution limit of $40,000 | No lifetime limit |
| Withdrawal restrictions | Can withdraw for any purpose |
An FHSA is ideal to maximize tax deductions on your first home savings. A TFSA is better for more flexible savings that can be used for multiple goals.
Where Can You Open an FHSA?
Most major Canadian financial institutions currently offer First Home Saving Accounts, including:
Most major Canadian financial institutions currently offer First Home Saving Accounts, including:
- BMO: BMO offers a competitive 3% interest rate on FHSA savings accounts. You can also invest your FHSA in GICs and mutual funds. New customers get a $100 bonus when signing up.
- CIBC: CIBC allows you to hold cash, GICs, mutual funds, and publicly traded securities like stocks and bonds in your FHSA. You can open it through CIBC Investor’s Edge or Imperial Investor Service.
- RBC: RBC offers FHSA accounts through RBC Direct Investing for self-directed investing or RBC InvestEase robo-advisor. Invest in stocks, bonds, GICs, and mutual funds without account fees.
- TD: TD provides a $100 bonus for new FHSAs. You can invest in term deposits, mutual funds, and securities. Manage it yourself or through TD GoalAssist automated investing.
- Scotiabank: Scotiabank offered a $150 sign-up bonus for FHSAs opened by March 1, 2023. Invest your funds in GICs, mutual funds, and stocks.
- National Bank: National Bank offers bare-bones FHSAs with no minimum balance. Use it for self-directed investing or robo-advisor.
- Tangerine: Tangerine provides easy online access to FHSAs. Use it as a high-interest savings account, earning competitive rates.
- Equitable Bank: EQ Bank offers a regulated 2.5% interest rate on FHSA savings. You can also purchase FHSA GICs with higher rates of up to 3.4%.
- Wealthsimple: Wealthsimple offers a robo-advisor FHSA or self-directed FHSA account. The robo-advisor automates investing and rebalancing for you.
- Questrade: Questrade provides access to self-directed FHSA investing through its online brokerage platform. Invest in stocks, ETFs, mutual funds, and more.
Many credit unions and online banks also offer FHSAs, like EQ Bank and Motusbank. Shop around to compare FHSA interest rates, account features, investment choices, fees, and opening bonuses. Do your research to find the FHSA provider that best suits your needs and preferences as an investor.
Is the FHSA the Right Account for You?
The FHSA is best suited for first-time home buyers who:
- Will purchase a home within the next 5-15 years
- Want to maximize tax deductions on down payment savings
- Have TFSA and RRSP rooms already being fully utilized
- Are in a high tax bracket and will benefit from deductions
- Are unable to save for a down payment using other accounts
The FHSA is less advantageous if:
- You may not purchase a home before needing to close the account
- You have sufficient RRSP and TFSA room for savings
- Do you anticipate needing to withdraw the funds for other purposes
Assess your unique situation, savings goals, and down payment timeline to determine if the FHSA is the right account for you. Consult a financial planner for guidance tailored to your needs.
Summary
The First Home Savings Account provides a new tax-advantaged way for first-time home buyers in Canada to maximize their down payment savings. While contribution room is limited to $40,000 lifetime, the FHSA allows your savings to grow faster through tax deductions on deposits and tax-free growth on investments.
Consider how well an FHSA fits within your financial plan and savings timeline. The account works best with other long-term savings vehicles like TFSAs and RRSPs. Proper planning allows the FHSA to move you closer to your first home purchase. Discuss with a mortgage professional or financial advisor to determine the optimal savings approach for your situation.
FAQs
When can I make withdrawals from my FHSA?
If you meet eligibility criteria, you can make tax-free withdrawals when buying your first home. Non-qualifying withdrawals are taxed.
What home purchases qualify for FHSA withdrawals?
The home must be located in Canada and meant as your principal residence, and the purchase agreement must have been dated within the last 30 days.
Can I transfer funds between my FHSA and RRSP?
Yes, you can make direct transfers between your FHSA and RRSP accounts without tax penalties.
What happens if I contribute too much to my FHSA
Excess contributions above your limit are subject to a 1% monthly tax. You can withdraw the overages.
How do I report FHSA transactions on my taxes?
Your FHSA issuer will provide a T4FHSA slip to report contributions, withdrawals, transfers, income, and taxes.
Can I have more than one FHSA account?
Yes, you can open multiple FHSAs with different institutions, but your total contributions cannot exceed the annual limit.
What happens to my FHSA if I don't buy a house?
Your FHSA can remain open indefinitely. The balance can be transferred into an RRSP if you have room.