Tax-Free First Home Savings Account (FHSA) Explained

The Tax-Free First Home Savings Account (FHSA) will make it easier for Canadians to buy their first home in an era where the average cost of a home keeps inching closer to $1 million.

As proposed in the 2022 Federal Budget, first-time homebuyers will be able to save up to $40,000 tax-free for a downpayment on a home.

Read on to learn about how the FHSA will work based on what we know so far.

What is the First Home Savings Account (FHSA)?

The Tax Free First Home Savings Account combines two of the best features of other popular registered accounts in Canada – the TFSA and RRSP.

Like the TFSA, your contributions, as well as investment gains, will remain tax-free. And like the RRSP, your contributions are tax-deductible and lower your taxable income.

In all, if you are a first-time homebuyer, you will be able to contribute up to $40,000 in an FHSA and put the funds towards the purchase of a home.

The maximum annual contribution limit is $8,000 and Canadians will be able to open an account starting in 2023.

How Does The First Home Savings Account Work?

To be eligible to open an FHSA, you must be a resident of Canada and at least 18 years of age.

Also, you must not have owned a home in the year you open an FHSA account or in the preceding four calendar years.

When the tax-free First Home Savings Account was first proposed by the Liberals in 2021, there was a maximum age threshold of 40 years, however, this age limit has been removed.

FHSA Limits

If you do not make the full $8,000 contribution limit in one year, you are unable to carry forward your unused contribution room to future years (unlike the RRSP and TFSA).

After contributing the full $40,000, you can make no further contributions.

And, after withdrawing funds from your FHSA, you must close the account within a year of this withdrawal.

Like the TFSA and RRSP, you can open multiple FHSAs at various financial institutions, subject to the annual and lifetime maximum contributions.

Lastly, an FHSA can be open for up to 15 years, after which the funds must be withdrawn.

FHSA Canada Transfers

If you no longer need the money in your FHSA to buy a home, you can transfer the funds to an RRSP or a Registered Retirement Income Fund (RRIF) if you have contribution room in either of these accounts.

If your RRSP or RRIF is already fully-funded and you don’t have a qualifying non-taxable withdrawal for a home purchase, FHSA withdrawals are included in your taxable income for the year.

Tax-Free First Home Savings Account FHSA

Is the FHSA Taxable?

No, the FHSA is not taxable.

The government’s goal is to make it easier for Canadians to save money they can use to buy a home.

Your contributions grow tax-free and you also get a tax deduction.

In some cases, FHSA withdrawals become taxable, such as when you withdraw funds for purposes other than a home purchase.

First Home Savings Account Investments

You can hold cash in your FHSA i.e. use it as a savings account, or invest in a variety of investment assets including:

If you are looking at buying a home within a 1-3 year time frame, a high-interest savings account or GIC is a safer bet.

First Home Savings Account vs. Home Buyers Plan

The Home Buyers’ Plan (HBP) allows Canadians to borrow up to $35,000 from their RRSP to buy a home. This withdrawal is also tax-free, but it has to be paid back within 15 years or you will face penalties.

A couple can withdraw up to $70,000 through the HBP when buying their first home (i.e. $35,000 x 2).

The FHSA is not paid back and a couple can save/contribute up to $80,000 (i.e. $40,000 x 2).

Based on currently available information, you can use either the FHSA or HBP when buying a home, not both.

Here are some of the other measures that have been proposed in order to make housing more affordable in Canada.

Related: How To Buy a Home in Canada.

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Author

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Enoch Omololu

Enoch Omololu is a personal finance expert and a veterinarian. He has a master’s degree in Finance and Investment Management from the University of Aberdeen Business School (Scotland) and has completed several courses and certificates in finance, including the Canadian Securities Course. He also has an MSc. in Agricultural Economics from the University of Manitoba and a Doctor of Veterinary Medicine degree from the University of Ibadan. Enoch has a passion for helping others win with their personal finances and has been writing about money matters for over a decade. He has been featured or quoted in The Globe and Mail, Winnipeg Free Press, Wealthsimple, Financial Post, Toronto Star, CTV News, Canadian Securities Exchange, Credit Canada, National Post, CIBC, and many other personal finance publications.

His top investment tools include Wealthsimple and Questrade. He earns cash back on purchases using KOHO, monitors his credit score for free using Borrowell, and earns interest on savings through EQ Bank.

2 thoughts on “Tax-Free First Home Savings Account (FHSA) Explained”

  1. Great clear explanation on this new account – thanks Enoch!

    Steve

    • @Steve: Thanks for stopping by!

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