The Tax-Free First Home Savings Account (FHSA) may be the light at the end of the tunnel for Canadians who have been wanting to save to finally become a homeowner and to end their rental life.
In the 2022 Budget, the Government of Canada introduced various programs to make housing more affordable for young people and first-time home buyers in Canada. Along with increasing new home production and doubling the first-time homebuyer's credit, FHSA was also introduced. This new registered plan is intended to help Canadians save towards their first home by allowing account holders to contribute up to $40,000 over the lifetime of the plan.
If you’re wondering how this account works and how this new account stacks up with Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP), in this post I will not just provide you the difference and similarities of FHSA with TFSA and RRSP, I also attempted to provide you with a more detailed guide of FHSA.
What is the Tax-Free First Home Savings Account (FHSA)? The FHSA is a new account that was introduced in the 2022 federal budget. In the current proposed plan, starting mid of 2023 eligible Canadians will be able to open and contribute to an FHSA up to $8,000 each year. It basically provides first-time home buyers the combination of the beneficial aspects of TFSA and RRSP.
Who are eligible to open an FHSA? To be eligible to open an FHSA, an individual must:
be a Canadian resident;
be at least 18 years of age and not over 71;
be a first-time home buyer, which means the individual hasn’t lived in a home owned (whether jointly with another person or otherwise) by either the individual or their current spouse or common-law partner at any time in the past four calendar years or in the current year up to when the FHSA is opened.
Since this incentive is for first time homeowners, the expectations is that FHSA is meant to acquire primary home and not for an investment property.
Who are the eligible issuers of FHSA? Any financial institution that is able to issue RRSPs and TFSAs would be able to issue FHSAs. This includes Canadian trust companies, life insurance companies, banks and credit unions.
What are the contributions, deductions rules and parameters of an FHSA? If eligible, an individual’s lifetime limit on contributions would be $40,000, with an annual contribution limit of $8,000. No matter when the FHSA is available in 2023, Canadians would be allowed to contribute the full $8,000 annual limit in that year.
The fund in the account must be used within 15 years from the time the FHSA was opened or before the account holder turns 71 (whichever comes first), otherwise the account will need to be closed.
The annual contribution limit would apply to contributions made within a particular calendar year. Individuals would be able to claim an income tax deduction for contributions made in a particular taxation year. Unused portions of the annual contribution limit up to a maximum of $8,000 will be allowed to carry forward.
Funds within an individual’s RRSP can be transferred to an FHSA on a tax-free basis. However, the lifetime contribution limit of $40,000 and the yearly contribution limit of $8,000 would still apply. Additionally, you will not get the contribution tax break since it has been claimed when the contribution to the RRSP was made.
An individual would be permitted to hold more than one FHSA, but the total amount that an individual contributes to all of their FHSAs could not exceed their annual and lifetime contribution limits.
What kind of investments can I hold in my FHSA? An FHSA would be permitted to hold the same qualified investments that are currently allowed to be held in a TFSA, including ETFs, stocks, bonds, cash, GICs, mutual funds.
Friendly advice from Cup of Tyh: The flexibility to invest in various products is a great feature of FHSA, however, if you are planning to buy a house within the next 5 years, it is best that you consult your financial advisor on how you should invest your money. Though there is a potential that you could grow your money by maybe 15%-20% in five years, remember that there is also an equal chance that your investment could also drop by the same amount. Purchasing stocks, ETFs or mutual funds may not be the best idea if you are looking into a short-term investment, avoid putting your savings in a riskier fund and consider putting them in a safer investment such as bond or a high-interest savings account (HISA). If you need advice in finding out which options will work best for your financial plan, feel free to contact me.
How does FHSA compare to an RRSP or TFSA? Similar to both RRSP and TFSA, this new account allows tax-free growth while the funds is being held in the account.
Just like TFSA, withdrawal from FHSA is also non-taxable but unlike the TFSA, you do not have the flexibility for how you are going to use your money from your FHSA. Your savings from your FHSA must be used in buying your first home. Any withdrawals not related from buying a home that is not considered a qualifying withdrawal will be taxed.
FHSA allows eligible individual to withdraw up to $40,000 while you can withdraw up to $35,000 from your RRSP under the Home Buyers Plan and you have to pay the money back within 15 years while FHSA do not require the account holder to replace the funds withdrawn from the account.
Here’s a breakdown on how FHSA, TFSA and RRSP works:
What are considered to be qualifying withdrawals from FHSA? The entire amount of available FHSA funds may be withdrawn on a tax-free basis in a single withdrawal or a series of withdrawals provided the FHSA withdrawal meets the qualifying withdrawal conditions. To be considered a qualifying withdrawal (non-taxable), the following conditions must be met.
You must be a first-time home buyer at the time a withdrawal is made, which means the individual hasn’t lived in a home owned (whether jointly with another person or otherwise) by either the individual or their current spouse or common-law partner at any time in the past four calendar years or in the current year up to when the FHSA is opened.
You must also have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal
You must intend to occupy the qualifying home as their principal place of residence within one year after buying or building it.
How is the FHSA different from the Home Buyers Plan (HBP)? The current HBP allows eligible Canadians to withdraw up to $35,000 from their RRSP. You have up to 15 years to repay to your RRSP the amounts you withdrew from your RRSP under the HBP. Unlike HBP, you do not need to pay back the money you withdrew from your FHSA.
The HBP will continue to be available for eligible first-time homebuyers, however, an individual will not be allowed to make both an FHSA withdrawal and an HBP withdrawal in respect of the same qualifying home purchase.
What happens if you don’t use your FHSA? Funds within the FHSA can be transferred to his/her RRSP at any time before the year the account holder turns 71. You do not need to have unused RRSP contribution room to make the transfer. However, if the account holder is over the age of 71, the funds can be transferred to his Registered Retirement Income Fund (RRIF). The amounts transferred do not count as a new RRSP contribution, so there is no additional tax break., if there is no available contribution room in your RRSP, as FHSA transfers wouldn’t count against it.
Source: Design of the Tax-Free First Home Savings Account - Canada.ca, accessed January 10, 2023
