Last Updated: May 8th 2023
The government of Canada introduced legislation that went live April 1st of this year. The new financial account is designed to provide some relief for would-be first time home buyers. The First Home Savings Account has unique features to help qualified Canadians save for their first home.
Why is this change being made?
The FHSA essentially takes the best of both worlds from a Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). Like a RSP, there is a tax deduction you can use to lower your taxable income for your contributions. Qualifying withdrawals to purchase your first home would be non-taxable similar to a TFSA and the funds do not need to be paid back, which is a major difference from the RSP Home Buyers’ Plan.
Who Qualifies?
A qualifying individual is considered a first-time home buyer if they (and/or their spouse or common law partner) have not owned a home in the same calendar year of opening the FHSA account or in the previous four years prior to the FHSA account opening. Additionally, the person must meet these conditions:
- At least 18 years old
- A Canadian resident
- A first-time home buyer
- Must be to purchase a primary residence and not investment property.
Contributions
There is a lifetime contribution limit of $40,000, and an annual contribution limit of $8,000 in any year, including 2023. As is the case with RSPs and TFSAs, you can hold multiple FHSAs but the cumulative total cannot be exceeded. If you do over contribute, generally you have to pay a tax of 1% per month on the amount exceeded in that month. You will continue to pay the monthly 1% tax until the excess FHSA amount is eliminated.
Your excess FHSA amount will be reduced or eliminated by your new FHSA participation room (on January 1 of the following year), or by taking out the overcontribution from your FHSAs. Another page from the TFSA and RSP playbook is carry forward room. You can carry forward any unused FHSA contribution room from the prior years up to a maximum of $8,000 (subject to your lifetime contribution limit of $40,000). This means that if you contribute less than $8,000 in a particular year, you may contribute the unused amount in a subsequent year in addition to the $8,000 annual contribution limit for as long as you have the account.
For example, if you contribute $7,000 to your FHSA this year, you would be allowed to contribute $9,000 next year ($8,000 plus the remaining $1,000 from the previous year). Unlike RRSPs, contributions made within the first 60 days of a calendar year cannot be attributed to the previous tax year. FHSA contributions can be claimed as a deduction against all sources of taxable income.
Withdrawals
Qualifying withdrawals to buy a home are not taxable as long as you are a first-time home buyer when you make the withdrawal. There is an exception to allow individuals to make qualifying withdrawals within 30 days of moving into a qualifying home. A contract must be in place to buy or build a qualifying home before October 1 of the year following the year of withdrawal. For example, if you withdraw in 2025, you must buy or build your house by October 1st 2026.
You must intend to occupy the home as a principal place of residence within one year after buying or building it. For a property to qualify it must be a housing unit located in Canada. Any funds left over after making a qualifying withdrawal can be redirected to your RRSP or a Registered Retirement Income Fund (RRIF), without a penalty and is considered tax deferred, as long as you transfer the remaining funds by December 31 of the following year you withdrew, since the plan stops being an FHSA at that time.
Transfers do not reduce or limit your available RRSP room. If you withdraw FHSA savings as a non-qualifying withdrawal, you must include the amount as income for the year of the withdrawal and tax will be withheld similar to a RRSP. Unlike a TFSA, withdrawals and transfers cannot be added into FHSA contribution limits the following year.
What can you invest in?
The same things you can and cannot invest in with a TFSA or RSP applies to your FHSA. Cash, Guaranteed Investment Certificates (GICs), stocks, options, bonds, ETFs are all approved. Art and other collectibles, commodities, NFTs, crypto, are all a no go. Please note this is not an exhaustive list so consult with a financial professional before making an investment in your FHSA.
Last Points
You are allowed to use both your First Home Savings Account as well as make a withdrawal from your RRSP under the Home Buyer’s Plan to purchase a qualifying home. Keep in mind that with a HBP withdrawal, you’ll have to repay any funds you withdraw from your RRSP. There is no repayment requirement for withdrawals from an FHSA.
The FHSA must be closed by December 31 of the year you turn age 71, by December 31 of the 15th anniversary of first opening the account if the funds have not been used to purchase a qualifying home, or by December 31 of the year follow
ing the year of the qualifying withdrawal
A FHSA is a great account to tax efficiently save for one of the most exciting purchases you’ll ever make. If you want to learn other ways to maximize tax strategy, check out our Taxes page for more information.