Personal Finance

Understanding the First Home Savings Account (FHSA)

The First Home Savings Account (FHSA), introduced by the federal government in 2022 and rolled out by financial institutions from 2023, is designed to help pave the way for homeownership by introducing additional tax savings for those who are saving for their very first home. Much like the Registered Retirement Savings Plan (RRSP), the FHSA allows for deductions on your income tax and benefit return for the year of contribution or subsequent years.  The FHSA is registered to an individual's CRA account, so spouses can each open an account and have access to their own personal contribution room.

Savings can be invested in the FHSA, either in a managed or self-directed account, and any gains or interest will remain tax-free as long as you can make a qualifying withdrawal (if you do not qualify when withdrawing, you will need to pay tax on those gains). Generally, the types of investments that qualify are the same as those permitted in a RRSP and TFSA, including shares in publicly traded companies, government and corporate bonds, GIC’s, ETFs and mutual funds. If the funds are for your down payment and you need to limit risk exposure, in some accounts you can leave it as cash and just earn regular interest (FHSA products vary between providers).

Who can open a FHSA Account?

The FHSA is not for existing homeowners, and you need to meet all of the following conditions to qualify to open a FHSA:

  • You are between 18* and 71 years old as of the December 31 on the year you open the FHSA.
  • You are a resident of Canada for tax purposes (if you are unsure, see our blog post on determining your Canadian residency status).
  • You did not live in a qualifying home** (or what would be a qualifying home if located in Canada) as your principal place of residence that you owned or jointly owned in this calendar year (or owned by a spouse or common-law partner), in the current calendar year or the previous 4 calendar years.

*In certain provinces and territories, the legal age at which an individual can enter into a contract (which includes opening an FHSA) is 19 years old. This includes British Columbia, New Brunswick, Newfoundland, Northwest Territories, Nova Scotia, Nunavut, and Yukon.

**Qualifying homes include Single-family homes, Semi-detached homes, Townhouses, Mobile homes, Condominium units, Apartments in duplexes, triplexes, fourplexes, or apartment buildings, A share in a co-operative housing corporation that entitles you to own and gives you an equity interest in a housing unit. It does not include a share that only provides you with a right to tenancy in the housing unit

Contribution Limits and Carry-forwards

Your contribution room begins to accumulate the year the account is opened. If there is no account opened, you do not accumulate contribution room.

The contribution limit for the FHSA increases by $8,000 for each calendar year your first account is open, and the lifetime FHSA deduction limit is capped at $40,000. Contributions, including transfers from RRSPs, contribute to determining the deductible amount over your lifetime.

The carry-forward room is capped at $8,000, so if you don’t contribute for 2 years, you do not get $16,000 carry-forward.

Over-contributions are taxed 1% per month so it’s important to keep track of your deposits and contribution room.

How It Works with Tax Deductions

Contributions made to FHSAs may be deductible for the year of contribution or subsequent years. Calculating the maximum deductible amount involves filing your income tax and benefit return for the year you initiated your FHSA. Any unused contributions are carried forward, with the cumulative amount reflected on subsequent notices of assessment or reassessment

Your FHSA provider (financial institution the account is held with) should provide you with a T4FHSA Information Slip by February 28th (or 29th) of each year, summarizing your deductible contributions for the previous year. Upload this slip to your Metrics folder (#FilesYouWantMetricsToSee) when it's time to do your taxes.

Making a Qualifying Withdrawal

So you’ve signed a purchase agreement for your first home and need the funds for your down payment (or perhaps you need it for closing costs or some new furniture). To avoid owing tax on your contribution when you withdraw your money, you must make a “Qualifying Withdrawal” by meeting the following criteria from CRA:

  • You must be a first-time home buyer for the purposes of making a withdrawal;
    • This means you did not live in a qualifying home (or what would be a qualifying home if located in Canada) as your principal place of residence that you owned or jointly owned at any time in the current calendar year before the withdrawal (except the 30 days immediately before the withdrawal) or the previous 4 calendar years
    • A "first-time home buyer" for the purpose of making a qualifying withdrawal is different from a "first-time home buyer" for the purpose of opening an FHSA.
  • You must have a written agreement to buy or build a qualifying home with the acquisition or construction completion date of the qualifying home before October 1 of the year following the date of the withdrawal.
  • You must not have acquired the qualifying home more than 30 days before making the withdrawal (so you have 30 days after closing to withdraw all of your funds).
  • You must be a resident of Canada from the time that you make your first qualifying withdrawal from one of your FHSAs until the earlier of the acquisition of the qualifying home, or the date of your death.
  • You must occupy or intend to occupy the qualifying home as your principal place of residence within one year after buying or building it.
  • You must fill out Form RC725 "Request to Make a Qualifying Withdrawal from your FHSA" and give it to your FHSA issuer. Some FHSA issuers such as Wealthsimple will generate this on your behalf during the withdrawal process, after confirming with you that you meet the criteria.

Other important points about the FHSA

  • You can use the FHSA and the Home Buyers Plan (HBP) at the same time.
  • Just like the HBP, there is no need to provide proof of expenses for the funds. WHAT you use the money for is not important, so long as you respect the criterias around buying a home.
  • It’s only for a principal residence you plan to occupy, not for revenue generating properties or secondary residence.
  • The contributions done in the first 60 days of the year are not deductible for the previous year like RRSP contributions are.
  • If you over-contribute from an RRSP transfer to your FHSA, you can transfer those funds back to your RRSP tax-free to avoid the tax. However this would be inefficient as you cannot claim the deduction on an over-contribution, and this transfer would not count as an RRSP contribution.
  • Just like RRSPs, you don’t have to deduct the contribution the year you make it. You can wait for a year with higher income.
  • If you don’t make a qualifying home purchase within 15 years of opening the account, the funds are transferred to your RRSP without impacting contribution room

In summary, the FHSA is an account that should not be ignored if you are saving for your first home, as it can unlock significant tax refunds for the years you contribute, as long as you are using the account as it is intended to be used and expect to make a qualifying withdrawal in the future.

For more information, you can review up-to-date CRA guidelines or get in touch with your tax advisor.

Disclaimer: This commentary is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, nor does it constitute solicitation to buy or sell any securities referred to. Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.

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