FHSA: Everything you need to know

Since 2023, a new tax-free savings account has been introduced in Canada to help Canadians access the real estate market. The First Home Savings Account (FHSA) has been available in Canada since April 1, 2023. In this practical guide, we explain everything you need to know about this new savings plan. In particular, how it works, eligibility criteria, contribution room, tax deductions, tax-free withdrawals and eligible investments.

The First Home Savings Account (FHSA) is a new savings plan that allows eligible first-time home buyers to save tax-free.

But FHSA offers much more… It allows tax-deductible contributions like RRSPs and tax-free withdrawals like TFSAs.

In addition, FHSA withdrawals are not limited to a fixed amount like the HBP ($35,000). In fact, although the FHSA account has a lifetime contribution limit of $40,000, the entire FHSA account balance (contributions and returns) can be used to purchase a first qualifying home. Which is a huge advantage.

For example, a taxpayer who invests $8,000 a year in his FHSA and earns an average annual return of 5% will have accumulated $46,415 after 5 years. If he waits 15 years (the maximum holding period) before using his FHSA, he will have accumulated $75,606… which he can withdraw tax-free for the purchase of his first qualifying home.

FHSA contribution room is $8,000 per year, for a lifetime maximum of $40,000.

Unused contribution room can be carried forward into the future (until the FHSA is closed). However, two rules apply:

1. Unused contribution room accumulates from the time you open your FHSA. Unlike the TFSA, where unused contribution room accumulates from age 18.
2. The catch-up of unused contribution rights is limited to one contribution year at a time. In other words, you can contribute a maximum of $16,000 per year to the FHSA, including $8,000 for the current year and $8,000 for a one-year catch-up.

As with an RRSP, your contributions to the First Home Savings Account (FHSA) are tax-deductible for the current year.

For example, if you contribute $8,000 to your FHSA in 2023, your taxable income for 2023 will be reduced by the same amount. With a marginal tax rate of 36%, you’ll get a tax refund of $2,880. This tax refund can be used as you see fit… including for a new FHSA contribution.

Finally, unlike an RRSP, your contributions made during the first 60 days of the year are not tax-deductible for the previous taxation year.

FHSA withdrawals are not taxable if used to purchase or build a first qualifying property.

Unlike the HBP/RRSP, FHSA contributions can be used immediately to purchase a qualifying first home.

As previously mentioned, the FHSA must be closed by December 31 of the year following your first eligible withdrawal. If you have unused contributions in your FHSA, you can transfer them directly to your RRSP or RRIF (registered retirement income fund).

If you withdraw the remaining amounts as a taxable withdrawal, they will be included as income on your income tax return for the current year. You’ll have to pay tax accordingly.

Funds held in a Registered Retirement Savings Plan(RRSP) can be transferred to your FHSA, as long as the amount is within your FHSA contribution room.

Of course, you will not be entitled to a new tax deduction. However, this transfer allows you to make a tax-free withdrawal without having to pay it back (unlike an RRSP).

Conversely, if you don’t use all or part of your FHSA, the funds can be transferred to your RRSP tax-free.

Unlike RRSPs, it is not possible to participate in your spouse’s FHSA. Your common-law partner/spouse is the only person authorized to open his or her own FHSA and claim tax deductions for FHSA contributions.

The FHSA (First Home Savings Account) and the HBP (Home Buyers’ Plan) are two registered plans designed tohelp Canadians enter the real estate market.

The FHSA allows you to save up to $40,000 tax-free. FHSA balances, including returns, can be withdrawn tax-free for the purchase of a first qualifying property.

The HBP is a program that allows you to withdraw up to $35,000 from your RRSPs to buy or build a qualifying home. However, the amount withdrawn must be repaid (to yourself) over a 15-year period beginning two years after the year in which the funds were withdrawn from your RRSPs.

That said, the FHSA and HBP can be combined for the purchase of a qualifying first home. That’s quite a sum: $40,000 (plus returns) from the FHSA and $35,000 from the HBP (RRSP), for a total of $75,000. For a couple, the figure doubles to $150,000.

The First Home Savings Account (FHSA) is available to Canadian residents only. So, if you’re not a Canadian resident, you can’t open a FHSA.

Note that if you become a non-resident of Canada after opening a FHSA account, you can continue to participate. However, you will not be able to make a withdrawal for the purchase of a first qualifying property as long as you are a non-resident. In addition, if you make a taxable withdrawal, withholding tax will be deducted at the source.

In short, the FHSA is undoubtedly Canada’s most powerful tax tool. It combines the advantages of both RRSPs and TFSAs, including tax-deductible contributions and tax-free withdrawals.

For Canadian residents wishing to enter the real estate market, the FHSA is a considerable asset and an opportunity not to be missed.

For more information, consult the Canada Revenue Agency (CRA) website or a financial professional.

Here are answers to the most frequently asked questions about the First Home Savings Account (FHSA).