FHSA Basics: What Every Canadian Should Know

Basics, Background, and Benefits

The First Home Savings Account (FHSA) was introduced in 2023 to help Canadians save for their first home in a tax-efficient manner. The FHSA combines some of the most attractive features of both an RRSP and a TFSA: the benefit of an upfront tax deduction (like an RRSP) and tax-free withdrawals (like a TFSA). This unique combination makes the FHSA one of the most effective savings tools available for prospective first-time homebuyers.

Who Can Open an FHSA?

To open an FHSA, you must be a resident of Canada, at least 19 years old (18 in some provinces), and under the age of 71. You must also qualify as a first-time home buyer, meaning you or your spouse or common-law partner have not lived in a home you owned in the current year or previous four years. If you are unsure whether you qualify, it is important to seek professional advice.

Contributions and Withdrawals

FHSA contributions are generally tax-deductible and can be used to reduce your taxable income. Contribution room starts to accumulate the year you open the account, and the annual contribution room is $8,000, with a lifetime contribution limit of $40,000. Unused contribution room can be carried forward, up to a maximum of $8,000 per year. FHSA contributions must be made by December 31 to qualify for a deduction for that tax year. As with RRSP contributions, deductions may be carried forward and claimed in a future year if desired. FHSA contribution room is entirely separate from RRSP contribution room, and participation in an FHSA does not reduce your ability to contribute to an RRSP. Overcontributions are subject to a penalty tax of 1% per month on the excess amount.

Investment growth within an FHSA is tax-free, and qualifying withdrawals used to purchase or build a first home are also tax-free. Unlike withdrawals under the RRSP Home Buyers' Plan, qualifying FHSA withdrawals do not need to be repaid. If funds are not used for a qualifying home purchase, they may generally be transferred tax-free to an RRSP or RRIF. Non-qualifying withdrawals are taxable as income at your marginal tax rate.

If you open an FHSA and become a non-resident of Canada, you cannot make a qualifying withdrawal to buy or build a home as a non-resident. If you are leaving Canada, you should seek professional advice about planning opportunities with your FHSA.

It's important to note that an FHSA cannot remain open indefinitely. The account must be closed by December 31 of the year following your first qualifying withdrawal, within 15 years from when you opened the account, or by the end of the year in which you turn 71, whichever occurs first.

What Can You Hold in an FHSA?

You can hold a wide range of investments in an FHSA account:

• Cash
• Mutual funds
• Exchange-traded funds
• Bonds
• GICs
• Stocks
• Certain other permitted investments

The investments held within your FHSA should reflect your financial goals, time horizon, and risk tolerance. This is especially important to consider for FHSAs as the time horizon for this account may be quite short. Please contact us if you would like to discuss how to make the most of your FHSA and ensure it aligns with your overall financial plan.