Since its introduction, the First Home Savings Account (FHSA) has become a popular choice for first-time homebuyers. It combines the best features and benefits of the TFSA, RRSP, and HBP.
Are you a first-time homebuyer in Canada? If so, the FHSA is an excellent savings vehicle to consider. Here’s everything you need to know.
What is the FHSA?
The First Home Savings Account (FHSA) is a registered investment account designed to help first-time homebuyers save for the down payment on a qualifying home. It allows individuals to save tax-free, combining the advantages of the TFSA, RRSP, and HBP to make homeownership more accessible.
What are the eligibility requirements for opening an FHSA?
To be eligible to open an FHSA, you must meet the following criterias:
- You are a Canadian resident.
- You are 18 years of age or older.
- You or your spouse/common-law partner have not owned your principal residence in the past four years.
FHSA accounts must be opened between the ages of 18 and 71, and they must be closed by December 31 of the year you reach the age limit.
While these eligibility criteria apply to a broad segment of the population, the FHSA will be especially beneficial for individuals with high enough incomes to benefit from tax deductions.
How much can I contribute to an FHSA?
You can contribute up to $8,000 per year to your FHSA, with a lifetime maximum contribution of $40,000.
If you don't reach the annual contribution limit, the unused portion can be carries forward to future years. For example, if you contribute $6,000 of the $8,000 limit in the first year, you can contribute $10,000 the following year (the unused $2,000 is added to the next year’s limit).
Additionally, like an RRSP, your FHSA contributions are tax-deductible, reducing your taxable income. Withdrawals made for eligible home purchases, along with any investment income earned in the account, are also tax-free.
What are its features?
The FHSA comes with several important features to consider:
- Maximum term of 15 years: the FHSA has a lifespan of 15 years. You must use the funds to purchase a home within this period. If no purchase is made by the end of the term, the account must be closed.
- Transfer options: if you don’t use the funds for a home purchase, you can transfer the accumulated money to an RRSP or RRIF without losing your ability to contribute. However, if you withdraw the funds for purposes other than purchasing a home, you will need to pay income tax on the withdrawal.
- No carry forward for early contributions: unlike RRSPs, contributions made an FHSA in the first 60 days of the calendar, year cannot be carried forward to the previous tax year.
- No minimum holding period: unlike the Home Buyers’ Plan (HBP), there is no minimum holding period for contributions to be deductible and withdrawn. This means you can contribute and withdraw the funds as needed, as long as they are used for an eligible home purchase.
- No repayment required: there is no repayment requirement, unlike the HBP, so once you withdraw the funds for your home purchase, you don’t need to pay them back. Additionally, there is no limit on the amount you can withdraw for the purchase.
What are the benefits of an FHSA?
The FHSA has gained significant attention due to its many advantages. With this account, you can:
- Save up to $40,000 for the purchase of a first home.
- Make tax-free contributions for up to 15 years.
- Carry over unused contributions from previous years, offering added flexibility.
- Reduce your tax burden by benefiting from tax-deductible contributions.
What about the disadvantages of a FHSA? We might almost say there aren't any!
FHSA or HBP: which should you choose?
The good news is that both programs can be combined, so you don't have to choose one over the other! You can take advantage of both the FHSA and the HBP to maximize your savings for a home purchase.
However, if you don't have enough savings to contribute to both accounts, it’s a good idea to consult with your financial advisor to determine which program best suits your needs.
Is this tax savings account available in Canada?
Yes. The FHSA was officially introduced on April 1, 2023. However, most financial institutions began offering it a bit later due to the complexity of setting it up.
Which financial institutions offer the FHSA?
To open an FHSA, you must go through an authorized financial institution that is approved by the Canada Revenue Agency (CRA) to offer this type of account.
The FHSA is available though many of the same institutions that offer TFSAs, including banks, life insurance companies, and trust companies. Some of the institutions that offer the FHSA include:
- Royal Bank of Canada (RBC)
- National Bank
- Desjardins
Be sure to contact your financial institution directly to confirm if they offer the FHSA and to learn more about their specific account options.
FHSA frequently asked questions
What's the difference between a TFSA and an FHSA account?
Both are registered savings accounts, but the FHSA is specifically designed for first-time homebuyers to save for a home purchase, while the TFSA can be used for a variety of savings goals.
Can I combine the HBP and the FHSA for my first home purchase?
Yes, you can use the Home Buyers’ Plan (HBP) and the FHSA together to help you achieve homeownership.
Is there a penalty if I exceed the contribution limit?
Yes, if you exceed the contribution limit, there is a 1% tax on excess contributions. To avoid this penalty, simply withdraw the excess amount.
Can I withdraw more than $40,000 from my FHSA?
Yes, while the contribution limit is $40,000, your account can earn investment income, which can be withdrawn in addition to the original contributions.
Can I contribute to my spouse's FHSA?
No, only the account holder can claim deductions for their own contributions. However, you may be able to gift or loan money to your spouse to contribute to their FHSA.
Can I combine funds from my FHSA with my spouse's FHSA to purchase a first home?
Yes, you can combine the funds from your FHSA and your spouse’s FHSA to purchase a first home.
Will my annual contribution limit be reinstated after a withdrawal?
No, unlike the TFSA, your contribution limit will not be restored the following year after a withdrawal from your FHSA.
Looking to buy your first home in Quebec?
XpertSource.com can help you find a real estate expert. When you tell us about your project, we put you in touch with qualified resources for free. Simply fill out our form (it only takes a few minutes) and we will connect you with professionals.
