The First Home Savings Account (FHSA) is a registered account designed to help Canadians save money for their first home purchase.
It combines the tax advantages of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA).
FHSA contributions are tax-deductible.
Qualifying withdrawals (the money used to purchase a home), including income and capital gains, are not subject to income tax.
First introduced in the 2022 federal budget proposal, the FHSA is available to Canadian residents as of April 2023.
An FHSA can help you offset some of the costs of home ownership and may enable you to move into your ideal home sooner rather than later.
In this article, we’ll explain how the FHSA works and who can open an account.
FHSA Contribution Amounts
Much like an RRSP or TFSA, there are limits to how much money you can deposit into an FHSA each year.
The maximum yearly contribution amount is $8,000, up to a lifetime limit of $40,000.
You can deduct FHSA contributions against your income for the tax year you contributed.
Alternatively, you can defer the deduction to a future year, much like an RRSP deposit.
As per the Canada Revenue Agency (CRA), the maximum amount you can deduct on your tax return is the lessor of:
- Your total annual FHSA limits for the current year and all prior years, less the total of all your FHSA deductions for each prior
- $40,000, less the total of all your FHSA deductions for each prior year, less any amounts that you’ve transferred from your RRSPs for the current year and past years
Based on the rules above, it’s worth noting that you cannot claim transfers that you make from your RRSP to your FHSA as a deduction on your tax return.
You can carry forward unused contribution room, but only up to a maximum of $8,000 to the following year.
In other words, you can only defer one year’s worth of contribution room at any time.
Let’s assume you choose not to deposit any money during the first five years of opening your account.
In that case, the maximum you can contribute in the sixth year is $16,000.
This carry-over feature applies only to open accounts.
For this reason, opening an FHSA account is advantageous even if you lack the funds needed to contribute initially.
If you accidentally exceed your annual contribution limit, you’ll incur a tax of 1% per month on the excess amount for each month it stays in your account.
You can eliminate your excess contribution by making a designated withdrawal or transfer.
To qualify for an FHSA, you must be at least 18 years old and a Canadian resident.
In addition, you must meet the criteria of the CRA’s definition of a first-time homebuyer.
Essentially, on the date you open your FHSA, you must not have lived in a home during the current or preceding four years that you or your partner owned.
Investments a FHSA Can Hold
You can hold a wide variety of financial assets in an FHSA, much like an RRSP or TFSA:
- Guaranteed Investment Certificates (GICs)
- Savings accounts
- Mutual funds
- Exchange-traded funds (ETFs)
- Publicly traded stocks
- Government and corporate bonds
FHSA vs TFSA
At first glance, an FHSA may seem like a new type of TFSA.
But there are some notable differences between the two savings accounts.
|Purpose||Save money for a home purchase||General savings – no restrictions on how you can use the funds in your account|
|Annual contribution limit||$8,000||$6,500|
|Maximum lifetime contribution limit||$40,000||No limit|
|Tax treatment of contributions||Contributions are tax-deductible; income and capital gains are not taxable||Contributions are not tax-deductible; income and capital gains are not taxable|
|Unused contributions||Maximum of one year of unused contribution ($8,000) can be carried to a subsequent year||Unused contributions accumulate continuously and can be carried forward indefinitely|
|Withdrawals||Withdrawals applied to a home purchase are not taxable; withdrawals for other purposes are taxable||Withdrawals are not taxable – there are no restrictions on how you can use the funds|
|Account closure deadline||Account can remain open for a maximum of 15 years from the date you open the account||Account can remain open for your whole life|
As you can see, a TFSA is a general-purpose savings account that provides tremendous flexibility and offers solid tax breaks.
An FHSA allows you to claim your contributions on your tax return, but it has far more restrictions than a TFSA.
However, this isn’t necessarily a bad thing, as it’s intended solely to ease the cost of homeownership for first-time buyers.
FHSA vs Home Buyers Plan
The Home Buyers Plan (HBP) is another federal government program designed to make homeownership more accessible to first-time homebuyers.
The HBP allows you to withdraw funds (up to a maximum of $35,000) from your RRSP account and apply them toward a home purchase.
The idea is that you can increase the size of your down payment, which, in turn, means you’ll need a smaller mortgage to finance your home purchase.
Early RRSP withdrawals are subject to a withholding tax, and you need to report them as part of your taxable income.
However, enrolling in the HBP program will absolve you from these tax penalties, provided you use the funds directly toward your home.
The eligibility requirements for the HBP are pretty similar to those of the FSHA.
You must be a Canadian resident and meet the four-year rule the CRA applies to first-time homebuyers.
However, that’s where the similarities end.
Under the HBP program, you’re “borrowing” money from your RRSP to help you finance the purchase of a property.
As such, the rules dictate that you repay the funds you withdraw back into your RRSP over 15 years.
Conversely, with an FHSA, you build up your balance over time by making regular deposits.
You can use money from your RRSP to top up your FHSA, but the CRA considers this transaction to be a transfer rather than a loan like under the HBP.
Therefore, once you withdraw money from your FHSA to put toward your home purchase, you are not obligated to return the funds to your RRSP in the future.
Another significant distinction between the two programs is that FHSA contributions are tax-deductible, while funds you withdraw under the HBP are not.
In fact, you receive no preferential tax treatment by using the HBP.
You can use the FHSA and HBP simultaneously to purchase your first home; enrolling in one program doesn’t disqualify you from the other.
Withdrawing from a FHSA
You can make two types of withdrawals from an FHSA: qualifying and non-qualifying.
A qualifying withdrawal is when you apply the funds strictly toward your property purchase.
Here are the requirements for a qualifying withdrawal:
- You’re a Canadian resident on the date of your withdrawal
- You’re a first-time homebuyer on the date of your withdrawal
- You have a written agreement to buy or build a qualifying home before October 1 of the year following your withdrawal date
- You have not gained possession of your home more than 30 days before your withdrawal date
- You intend to occupy the home as your principal residence within one year after purchase or completion of its construction
To make a qualifying withdrawal, you must complete form RC725 and submit it to your FHSA issuer.
As with a TFSA, qualifying FHSA withdrawals are tax-free, including the original contributions plus any accrued income and capital gains.
If your withdrawal doesn’t meet the above conditions, the CRA will deem it to be non-qualifying.
You must add the total withdrawal amount to your taxable income for the current tax year.
Your FHSA issuer will also charge you a withholding tax similar to the one applied to early RRSP withdrawals.
Alternatively, you can transfer a non-qualifying FHSA withdrawal to an RRSP or RRIF on a tax-free basis.
Unlike a TFSA or RRSP, you cannot maintain an FHSA indefinitely.
You must withdraw your funds the sooner of:
- Fifteen years after opening your account
- the end of the year in which you turn 71
- the end of the year in which you make a qualifying withdrawal
After your maximum participation period expires, you must close your account.
Frequently Asked Questions
- What is the FHSA limit in Canada?
The annual FHSA contribution limit in Canada is $8,000, with lifetime contributions capped at $40,000. Transfers from RRSPs count as regular contributions and will reduce the annual and lifetime limits along with regular deposits.
- Can you use FHSA and RRSP together?
Yes, you can transfer money from your RRSP to your FHSA. The transaction won’t trigger any tax consequences as long as it’s a direct transfer and doesn’t exceed your annual FHSA contribution room.
However, you cannot claim this transfer as a deduction on your tax return. Furthermore, that contribution room won’t be available for your RRSP the following year.
Should you decide not to use the funds in your FHSA to purchase a home, you can later transfer the funds back to your RRSP tax-free.
- Which banks offer FHSA in Canada?
Currently, the following banks and financial institutions offer FHSAs:
- Royal Bank of Canada (RBC)
- National Bank of Canada
- Fidelity Investments
Many of Canada’s biggest banks, including TD, BMO, CIBC, and Scotiabank, have announced they plan to offer FHSAs by the end of 2023.
- Can I open a FHSA for my child?
No. You can only open an FHSA for yourself. And only you, as the FHSA holder, can contribute to your FHSA and claim the deposit as a deduction on your tax return.
However, you can gift your child money, which they can deposit in their own FHSA.
Income attribution rules generally don’t apply to monetary gifts parents give their children to contribute to their FHSA. As a result, you won’t have to pay any tax on income or capital gains realized in your child’s FHSA account.