The Tax-Free First Home Savings Account (FHSA)

The Tax-Free First Home Savings Account (FHSA) is a great savings tool for Canadians who are saving for their first home. The FHSA combines the best features of both RRSPs and TFSAs and provides tax-deductible contributions and tax-free withdrawals for qualifying first home purchases. By November 2024, nearly 1 million Canadians will have opened an FHSA, and this underscores its continued growth in popularity.

The FHSA is a particularly useful reference for younger Canadians who wish to enter the housing market for the first time – this housing market is dealing with high property prices and stricter conditions on mortgages. The FHSA provides dual tax benefits, offering short-term relief and long-term financial effectiveness for first-time homebuyers looking to purchase their first home.

What is the FHSA?

The FHSA is a registered savings plan introduced by the Canadian government in 2023 that allows first-time homebuyers to save $40,000 in a registered account tax-free. Contributions made to the FHSA are considered tax-deductible, and qualified money withdrawals (including any investment income) are not subject to taxes when used to purchase a first home.

The FHSA was created in response to rising housing unaffordability across Canadian cities and demands for retirement and targeted savings tools. The FHSA was intended to provide more freedom when saving, aiming to help them achieve their dream of owning a home.

Who Can Apply?

In order to establish an FHSA, you will need to meet the following criteria:

• Age: You must be at least 18 years of age (or 19 in provinces where that is the legal age) and not yet 71 years of age on December 31 of the year in which the account is opened.
• Residency: You must be a resident of Canada.
• First-Time Homebuyer: You must not have lived in a home that you owned in the current calendar year or any of the last 4 calendar years.
• Social Insurance Number (SIN): You will be required to have a valid SIN at the time of establishing the account. This ensures that any contributions and withdrawals from the account will be recorded properly to the CRA as well as tracked under your personal CRA tax record.
• Account Needs to be Established by Individual: FHSA accounts cannot be shared or opened for anyone else (i.e., a spouse or child). Each person eligible will need to establish their own account since tax benefits are available only to individual accounts.

If you’re unsure whether you meet the tax criteria for opening or contributing, check out our guide on tax deductions and credits to know about to learn more about eligibility markers and other tax-saving tools.

FHSA Contribution Limits & Tax Benefits: Maximizing your ability to save

Understanding how much you can contribute and the tax advantages the FHSA provides is critical to utilize the FHSA for maximum savings. These combined rules determine how fast your savings can grow and how much you can keep in your pocket during the tax period.

Contribution Rules

• Annual Limit: You can contribute up to $8,000 per year, starting the year you open the account. This allows for steady annual growth without breaking your budget.
• Lifetime Limit: The total you can contribute over the life of the account is $40,000. This government-imposed cap ensures that the FHSA does not lose its objective and momentum on helping purchase a first home.
• Carry-Forward: The unused contribution room carries forward to the next year, and you can do this for a maximum of 16,000 in one year. So, if you don’t take full advantage of your room by contributing the full $8,000 in a year, that amount will carry over to the next year.
• Overcontribution Penalty: Amounts above your limit will be subject to an additional tax of 1% per month on the excess contributions until they are withdrawn. Keeping track of your contribution room can save you from excess penalties.

Tax Benefits

• Tax-Deductible Contributions: Your contributions to the FHSA can be claimed as a deduction on your income tax return. This reduces your taxable income and gives you an immediate tax pause, just like an RRSP.
• Tax-Free Growth: If your investments earn any interest, dividends, or capital gains while inside the FHSA, they are not taxed. With tax-free growth of your savings, it gives your money a head start on compounding.
• Tax-Free Withdrawals: Withdrawals from an FHSA that pertain to a qualifying purchase for a first home are tax-free.

Curious how tax-free investment tools compare? Our article on comparing TFSA and savings accounts breaks it down so you can decide where to prioritize contributions.

FHSA Withdrawals: Know When They Are Tax-Free and When They Are Not

It’s essential to understand the rules for withdrawals, when you are entitled, to ensure that you are maximizing the benefits of the FHSA and avoiding tax mishaps.

Qualifying Withdrawals (Tax-Free)

Withdrawals from your FHSA are tax-free when you use those funds to buy a qualifying first home. You will be considered to have made a qualifying withdrawal if you satisfy the following conditions:

• First-Time Homebuyer: You must meet the CRA’s definition of first-time home buyer, at the time of the withdrawal.
• Written Agreement: You must enter into a written agreement to buy or build a qualifying home before October 1 of the year after you withdraw funds.
• Occupancy Requirement: You must occupy the home as your principal residence within one year of buying or building the home.

Non-Qualifying Withdrawals (Taxable)

Withdrawals that do not satisfy the CRA’s qualifying conditions for a home purchase will be ineligible, and therefore taxable:

• Taxable Income: The entire amount withdrawn, plus any investment growth, will be added to your taxable income.
• No Repayment Required: You are not required to repay non-qualifying withdrawals from your FHSA, unlike the versions available for the Home Buyers’ Plan (HBP).

Combining FHSA with Other Programs

The FHSA can be used in conjunction with other programs. This includes:

• The Home Buyers’ Plan (HBP): You can withdraw up to $60,000 from your RRSP to purchase your first home, and this is to be paid back over 15 years (HBP)
• FHSA: The FHSA allows you an opportunity to withdraw up to $40,000, tax-free, with no payback obligation.

Combined, both programs can offer up to $100,000 towards the purchase of your first home. To further optimize your tax position when combining these strategies, explore how to claim home office deductions in Canada if you’re also working remotely during your homebuying journey.

Common Questions and Misconceptions

Can I transfer my RRSP funds into my FHSA?

Yes, you can transfer funds from your RRSP to your FHSA account, and these transfers won’t give you a tax deduction.

What will happen if I don’t use my FHSA funds to purchase my home?

You can transfer the funds to your RRSP or RRIF and will not lose your contribution room, or take the funds out, but you’ll have to pay tax on it like regular income.

Is there a maximum time limit for using my FHSA?

Yes, you must use your FHSA funds within 15 years of opening the FHSA, or by the end of the year you turn 71, whichever comes first.

Conclusion

The FHSA is a distinct opportunity for Canadians to save for their first home purchase with valuable tax advantages. With an understanding of your eligibility, contribution limits, and withdrawal rules, you can take full advantage and maximize the use of this investment tool. Consult a qualified financial advisor to understand how the FHSA fits into your broader financial planning. For more information, visit the Canada.ca FHSA page.