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Everyone dreams about buying their first home. A First Home Savings Account (FHSA) is a new kind of savings account designed to help make those dreams a reality. FHSAs combine the tax advantages of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) into one flexible account. Contributions to an FHSA are tax-deductible, and funds used to buy a first home can be withdrawn tax-free.
As FHSAs are new, they are not currently offered by most financial institutions. However, there are many other ways to invest and grow your wealth – it’s always a good time to start investing! This article will outline the key things you may consider about FHSAs and the steps you can take today to help make your wish of owning a home come true.
What is the FHSA?
An FHSA combines the features of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). Like an RRSP, contributions made to an FHSA are tax-deductible. And like a TFSA, money from your FHSA, including any investment earnings, can be withdrawn tax-free. FHSAs have an annual contribution limit of $8,000 and a lifetime contribution limit of $40,000. When used properly, FHSAs can be an important part of a first-time homebuyer’s down payment savings strategy.
FHSAs can remain open for up to 15 years, or until you turn 71. After that, the money in an FHSA must be used to buy a new home. If buying a new home is no longer part of your plan, the funds must be transferred to an RRSP, a Registered Retirement Income Fund (RRIF) account, or withdrawn (though withdrawals will be subject to taxes).
Who is eligible for an FHSA?
To be eligible for an FHSA you must be:
- A Canadian resident
- 18-71 years old
- A first-time homebuyer
A first-time homebuyer includes anyone who has not lived in a home owned by them, their spouse or common law partner, either in the current year before the account is opened or in any of the preceding four calendar years. Owning a rental property doesn’t make you ineligible for an FHSA, so long as you’ve never lived in that property. However, living in a home held by a trust or other intermediary can make you ineligible for an FHSA. You can only use an FHSA to buy a home once in your lifetime.
Contribution limits and withdrawals for an FHSA
FHSAs have a lifetime contribution limit of $40,000. You can have more than one FHSA, but the total amount contributed cannot be more than the lifetime limit of $40,000.
Annual contributions are capped at $8,000, but unused amounts can be carried over to the next year. Any contributions exceeding the maximum are taxed at a 1% rate per month (until they are removed).
Unlike an RRSP, all contributions to an FHSA must be made by December 31st. Contributions made within the first 60 days of the calendar year cannot be claimed as part of the previous tax year.
Unlike a TFSA and RRSP, you start to earn contribution room only after opening the account.
Taxes on an FHSA
The FHSA combines the tax advantages of an RRSP and TFSA into one account. Contributions are tax-deductible while qualified withdrawals are tax-free.
You can claim the deduction in the year you made the contribution or carry the deduction over to a future tax year. So, if you open an FHSA when you are a student (in a low-income bracket), you can wait until you get a job to claim the deduction.
Unlike the Home Buyers Plan (HBP), withdrawals from an FHSA do not have to be repaid. Contributions made to an FHSA after a qualifying withdrawal will not be deducted from your net income.
FHSA Withdrawals
Funds from your FHSA can be withdrawn as a single lump sum, or as a series of smaller withdrawals. You can even make withdrawals within 30 days of moving into your new home. Just be sure you understand the difference between qualified and unqualified withdrawals outlined below.
Qualified withdrawals
For withdrawals from an FHSA to be non-taxable, they must meet the following conditions:
- You must be a first-time homebuyer when you withdraw the money.
- You must be buying or building a home in Canada.
- You must have a written agreement to either buy or build a qualifying home before October 1 of the year after you made the withdrawal.
- You must intend to make the home your primary residence within one year of building or buying it.
FHSAs must be closed before the end of the year after you make your first withdrawal. Any funds left in your FHSA at that time must be transferred to an RRSP or RRIF or withdrawn. Transfers to an RRSP or RRIF are non-taxable and any funds withdrawn will be taxed at your marginal tax rate.
Non-qualifying withdrawals
Non-qualifying withdrawals don’t count toward the lifetime or annual contribution limit of your FHSA.
- Includes any money withdrawn for reasons other than buying your first home.
- Will be included in your income and taxed at your marginal rate.
- Will be subject to withholding taxes by your financial institution, similarly to taxable RRSP withdrawals.
Ready to buy a home now?
Since FHSAs are new, most financial institutions don’t currently offer them. Luckily, there are several other ways to help get you on track for your first home.
RRSPs and the Home Buyer’s Plan
If you already have an RRSP and you are ready to buy a home, you can take advantage of the Home Buyer’s Plan (HBP). With the HBP, you can withdraw up to $35,000 from an RRSP for a down payment on your first home. If you and your partner are planning on buying a home together, you can each withdraw up to $35,000 for a total down payment of $70,000. Funds withdrawn from an RRSP for the purpose of buying a home must be repaid over the next 15 years. At least 1/15 of the borrowed amount must be re-contributed every year, starting in the second year from the year of withdrawal. If the minimum amount is not paid back in a year, the difference is considered as RRSP income and will be taxed at your marginal tax rate. Learn more about how to take advantage of the Home Buyer’s Plan.
Leveraging your TFSA
First-time homebuyers are increasingly using TFSAs to save for a down payment. TFSA withdrawals are non-taxable and can be made at any time. There are no limits on how much you can withdraw, and you’re not required to pay anything back. Moreover, any amount withdrawn will be added back to your contribution room so you can recontribute the full amount anytime starting with the next calendar year. Learn more about how to help boost your savings with a TFSA.
Take advantage of the HBP and a TFSA
Some people split their savings between an RRSP and a TFSA. If you’re able, consider using your RRSP and TFSA to save for a down payment. Funds from a TFSA can be used to supplement the $35,000 you’re eligible to withdraw under the HBP. Combining your RRSP and TFSA savings can be a great way to help save up a higher down payment.
Things to think about if you’re still saving up
You may not be ready to lay down roots, but it’s good to be prepared when that time does come. If this sounds like you, consider an RRSP or TFSA to jump start your savings. Both accounts provide different benefits that may be better suited to your needs. Which account you use may be less important than when you start using them. In most cases, the earlier you start to save, the better off you’ll be.
Build your saving with an RRSP
An RRSP is an excellent way to start saving for a down payment. RRSP contributions are tax-deductible and re-investing any tax refund you receive can be a great way to help grow your savings. Funds held within an RRSP can be invested in stocks, bonds, mutual funds and other investment products, depending on your appetite for risk. The HBP allows you to withdraw up to $35,000 for the purpose of buying your first home, but those funds must be paid back over the next 15 years. Any funds not paid back will be taxed as income at your marginal tax rate. Learn more about ways to help save with an RRSP.
Build your saving with a TFSA
TFSAs are all about flexibility. While contributions to your TFSA are not tax-deductible, withdrawals can be made at any time, for any reason, tax-free. Funds withdrawn from a TFSA don’t need to be repaid, and TFSAs can hold a wide range of investment products. You won’t pay taxes on any investment gains you earn, and you can dip into your savings whenever you need them. Learn more about saving with a TFSA.
Transfer your savings to an FHSA down the road
Funds held within an RRSP or TFSA can be used to fund an FHSA, subject to applicable contribution limits.
For example, money held in an RRSP could eventually be transferred to an FHSA without any tax consequences as long as it’s a direct transfer and then withdrawn tax-free. All you would need is to fill out Form RC720, transfer from your RRSP to your FHSA and give it to your financial institution. Unlike the HBP, funds transferred from an RRSP to an FHSA won’t need to be paid back later. Any money not used to buy your first home can always be transferred back to your RRSP later.
A TFSA can also be used to fund, or supplement, an FHSA. However, you'll have to withdraw the money from your TFSA, then contribute it to your FHSA. Withdrawals from a TFSA are tax-free and do not need to be repaid. All contributions to an FHSA would be tax-deductible, allowing you to avoid paying additional taxes. This means any RRSP or TFSA you open today, could be used to help fund an FHSA once they become available.
Difference between the FHSA and the Home Buyers Plan (HBP)
Both an FHSA and the HBP can be used to buy a first home. However, there are some distinct differences between the two.
|
FHSA |
RRSP HBP |
Withdrawals |
No withdrawal limit. You can withdraw everything including any income earned. However, there is a lifetime contribution limit of $40,000. |
Withdrawal limit of $35,000 under HBP. |
Repayment of withdrawn funds |
Qualified withdrawals are tax-free and do not need to be repaid. |
Withdrawals must be repaid over 15 years or they will be taxed as income. |
Holding period for funds |
No minimum holding period before withdrawal. |
Minimum holding period of 90 days before withdrawal. |
How to invest in an FHSA?
While FHSAs aren’t currently offered at many financial institutions, they should be available soon. Most financial institutions are preparing to offer FHSAs some time in late Spring or early Summer of 2023.
But that doesn’t mean you can’t start saving now. Consider investing in a cash account, TFSA, or RRSP. Any money invested now can continue to grow and can always be used for an FHSA later.
FAQs related to FHSA
What happens to an FHSA after 15 years or after purchasing a home?
You are required to close all of your FHSAs on or before December 31 of the year following the year of your first qualifying withdrawal.
The FHSA can remain open for up to 15 years or until the end of the year you turn 71. At that time, any funds in the FHSA not used to buy a qualifying home must be transferred to an RRSP or RRIF or withdrawn. Money that’s withdrawn from an FHSA will be subject to withholding taxes, which can be claimed on your income tax and benefit return as a credit toward any tax owing for the year of the withdrawal. The Canada Revenue Agency (CRA) will send you a reminder when your FHSA needs to be closed.
What can be invested in an FHSA?
Like RRSPs and TFSAs, investments such as stocks, bonds, Exchange-Traded Funds (ETFs), mutual funds and Guaranteed Investment Certificates (GICs) can be held in an FHSA.
Can I combine the HBP and FHSA to help me buy my first home?
Yes. You can combine the HBP and FHSA to buy your first home.
Can my spouse and I both open an FHSA to buy the same home?
Yes. Both you and your spouse or partner can open individual FHSAs and use the money in them to buy a qualifying home.
Can I transfer funds from a TFSA to an FHSA?
You cannot transfer funds directly from a TFSA to your FHSA as there is no direct transfer option available for TFSA. However, you can withdraw funds from your TFSA and contribute to FHSA tax-free, and get the tax deduction, provided you have contribution room available in your FHSA.
Once available, FHSAs can become an important part of a first-time homebuyers' savings strategy. FHSAs combine the benefits of an RRSP and TFSA into a single, flexible account. Using an FHSA in combination with other savings accounts can help first-time homebuyers optimize their savings and reach their financial goals earlier. While FHSAs are fairly new and not yet available with all financial institutions, those looking to save for a new home don’t need to wait. There are lots of tools available to help you save for your first home. The most important thing is to not wait for FHSAs to become available, but to instead consider starting investing now. Doing so may help you get your hands on the keys to your first home sooner than you think.
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Looking to invest on your own for your first house?
You can open a TD personal investing FHSA account here. You can also continue to save for a home through an RSP, TFSA or a cash account. We offer two services for self-directed investors. Choose your option!
