The First Home Savings Account (FHSA) is scheduled to come into effect in April 2023. The FHSA is a new registered investment plan that was announced in the federal government’s 2022 budget with the intent to help more Canadians enter the housing market. It can be a tax-efficient way to save toward the purchase of a home and if you don’t end up buying or building a qualifying home, you can direct the funds toward your retirement.
The FHSA will allow eligible individuals to save up to $40,000 and combines the tax advantages of two existing registered plans – the registered retirement savings plan (RRSP) and the tax-free savings account (TFSA).
Opening the FHSA
To open a FHSA, you must be a resident of Canada, at least 18 years of age and not turning the age of 72 or older in the year of opening the account. In addition, you must be a first-time home buyer, which means you must not have owned a home in which you lived in as your principal residence at any time during the part of the calendar year before you opened the account or at any time in the preceding four calendar years.
Contributions
You will be able to contribute up to a lifetime limit of $40,000 to your FHSA, with an annual contribution limit of $8,000. The full annual limit of $8,000 would be available starting in 2023, no matter when you open the account during the year. Unused room can be carried over to the next year. For example, if you open an FHSA in 2023 and contribute $6,000, you would be able to contribute up to $10,000 in 2024 (i.e., $8,000 for 2024, plus the remaining $2,000 left from 2023).
Carry-forward amounts start accumulating only after you open an FHSA. As such, if you’re a first-time home buyer and 18 years of age, you could consider opening a FHSA immediately, even if you don’t have the funds to contribute right away. As an example, if you open an account in 2023 but only have the funds to contribute to the FHSA in 2024, you’d be able to contribute up to $16,000 ($8,000 annual contribution room from 2024, plus $8,000 carried forward contribution room from 2023) in 2024.
You can open multiple FHSAs, but the annual and lifetime contribution limits apply to the combined accounts. It is important to keep track of the contributions made to an FHSA to ensure you are not contributing over the limit. There is a 1 per cent tax applied to over-contributions for each month the excess amount stays in your FHSA.
Tax Benefits
The FHSA combines the tax advantages of an RRSP and a TFSA. Like an RRSP, contributions to an FHSA are tax-deductible. So, if you contribute $8,000 you can deduct the same amount from your taxable earnings. You can use the deduction in the year you contribute or carry it forward to a later year, which may be useful if you expect to be in a higher tax bracket in the future.
If you are making a qualifying withdrawal, you won’t pay tax on that withdrawal. Like a TFSA, you can withdraw the principal and growth tax free. If you are making a non-qualifying withdrawal, then you would pay income tax on the principal and potential growth, just like an RRSP withdrawal.
FHSA vs. Homebuyer’s Plan
With the government’s existing Homebuyers’ Plan (HBP), first-time homebuyers can withdraw (tax-free and without penalty) up to $35,000 from their RRSP to buy a house. This is considered a “loan” and must be paid back into the RRSP within 15 years.
First-time homebuyers can choose to use both the HBP and the FHSA together. This means that by maximizing both programs, you could put $75,000 (plus any investment growth in the FHSA) toward a down payment.
You have a maximum of 15 years to save within an FHSA. You will need to close your FHSA by December 31st of the 15th year anniversary of first opening the account or in the year you turn 71.
Comparing the FHSA and HBP:
- HBP withdrawals must be paid back into your RRSP. FHSA withdrawals do not.
- The FHSA lifetime contribution limit ($40,000) is higher than the maximum HBP withdrawal limit ($35,000).
- After you pay the HBP back into your RRSP, withdrawals are ultimately taxed. Qualifying FHSA withdrawals are tax-free.
Withdrawing Funds
The FHSA is designed for people buying a first home. For this reason, withdrawals will only be tax-free if they meet certain conditions. You must have a written agreement to buy or build a home before October 1 of the year after you make the withdrawal. The home must be in Canada and must be your first. You can make one lump-sum withdrawal or multiple, as needed, but the account must be closed by the end of the year after your first withdrawal.
If your withdrawal does not meet the above requirements, it will be included in your taxable income for that year and tax will be withheld. You do not get the contribution room back after making a non-qualifying withdrawal.
Closing the FHSA
If you decide not to buy a house, then you can transfer the money you’ve saved (and any investment income earned) directly to an RRSP or a RRIF. There is no penalty and no tax at the time of transfer. However, keep in mind that once in the RRSP or RRIF, the money will then be taxable when you withdraw based on the rules of those account types.
When you transfer money from an FHSA to an RRSP, it doesn’t change your RRSP contribution limits. It becomes $40,000 (plus any income) of additional contribution room. On the flip side, you won’t get the FHSA contribution room back – once used, it’s gone.
Transferring Funds from RRSP to FHSA
Tax-free transfers from an RRSP to an FHSA will be allowed, subject to FHSA annual and lifetime contribution limits and the qualified investment rules. However, transfers from an RRSP to an FHSA will not be tax deductible and won’t reinstate your RRSP contribution room.
Evaluating your Options
If you are thinking of buying a home in the near future, it’s important to be aware of the options available to help you save for this major purchase. The more you know about each option, the better-informed choice you’ll be able to make in the right savings vehicle for you. We have listed a few great articles below that provide more detailed information on the FHSA, Home Buyers’ Plan and the comparison between the FHSA, TFSA, and RRSP.
- Saving for the purchase of your home – Comparing the FHSA, TFSA, and RRSP
- Tax-Free First Home Savings Account
- Home Buyers’ Plan
If you have any questions or would like to discuss the FHSA, please do not hesitate to contact us.
“How will you replace your current income in retirement?”™ - Jim Seyers