New First Time Home Buyers Tax-Free Savings Account (FHSA)

If you’re on the market for your first home, there’s an exciting new tax-free savings account available to Canadians as of April 1, 2023. The Tax-Free First Home Savings Account (FHSA) allows prospective first-time home buyers to save up to $40,000 completely tax-free. The purpose is to help potential new buyers save for a down payment.  

Similar to a Registered Retirement Savings Plan (RRSP), contributions are tax-deductible. Like a Tax-Free Savings Account (TFSA), withdrawals used to purchase your first home are non-taxable, including any investment income you earn. 

How Can I Qualify for the FHSA?

To qualify for the Tax-Free First Home Savings Account, you must be: 

• A resident of Canada

• At least 18 years of age (or the age of majority in your province) 

• Under the age of 71

• A first-time home buyer

First-time home buyer

You can consider yourself a first-time home buyer providing you, your spouse, or common-law partner, have not owned a home where you lived at any time during the year before you open the FHSA or at any time in the preceding four calendar years.  

How to Open a Tax-Free First Home Saving Account?

The FHSA is available as of April 1, 2023. You can open an FHSA at any financial institution that offers RRSPs and TFSAs, including banks and credit unions, as well as trust or life insurance companies. 

You can only hold an FHSA for a period of 15 years. The period begins as soon as you open your first FHSA and ends on December 31 of the year in which the earliest of the following events occur: 

• You reach the 15th anniversary of the date you opened your FHSA

• You turn 71 years old

Can I open an FHSA if I already own a home?

You can not open an FHSA if you own a home and have lived in it at any time during the year before the account was opened or the four calendar years before that. If your spouse owns a home and you lived in it in the past year or four preceding years, you won’t qualify as a first-time home buyer. You are considered an owner if you have more than 10% ownership in your current home. Ownership of less than 10% doesn’t count as owning a home. 

If you own a rental property but you haven’t lived in it within the past year or at any point in the four preceding years, you can still qualify for the FHSA.

When Can You Start Contributing to an FHSA?

Starting April 1, 2023, you can open an FHSA and start contributing. The maximum lifetime contribution limit is $40,000, and you can contribute up to $8,000 per year. The annual contribution limit is not tied to your income level. If you want to open an FHSA in 2023, you can contribute up to $8,000 even though the program starts on April 1, 2023. 

Once you open an FHSA, unused contributions can be carried forward and used in a later year, up to the lifetime limit of $40,000. For instance, if you open an FHSA in 2023 and only contribute $2,000, you can contribute up to $14,000 in 2024 ($8,000 for 2024 and the remaining $6,000 you didn’t contribute in 2023). 

Unlike an RRSP, the carry-forward amount does not automatically start when you turn 18. You have to open an FHSA for the carry-forward to kick in. Additionally, you can not attribute contributions made within the first 60 days of the following calendar year to the previous tax year, like you do with an RRSP.

It is possible to hold more than one FHSA; however, you still can’t exceed the annual limit of $8,000 or the lifetime limit of $40,000. 

If you over-contribute to your FHSA then, similar to a TFSA, you can expect to pay a tax of 1% per month on the over-contribution amount. It’s possible that when your annual contribution limit is reset the next year, over-contributions from the previous year might cease to be an over-contribution. Then you can deduct this amount for the current year. If you make a withdrawal before the over-contribution stops being an over-contribution, you won’t receive an income tax deduction for this amount. 

What Happens to the Funds if I Don’t Purchase a Home?

If you don’t end up using the money in your FHSA to purchase a home, you have a few different options: 

Transfer to a registered account 

You can transfer your savings on a tax-free basis into an RRSP or a Registered Retirement Income Fund (RRIF). These transfers will not reduce your available RRSP contribution room. 

It’s also possible to transfer funds from one FHSA to another FHSA. In this case, contributions are not tax-deductible. 

Make a withdrawal 

If you don’t want to transfer the money to a registered account, you also have the option to withdraw your money, although this withdrawal would be taxed. 

How Can I Withdraw Money from the First Time Home Buyers Tax-Free Saving Account?

You can withdraw money from your FHSA for any purpose, but the withdrawal is only tax-free if it qualifies. For a withdrawal to be qualifying, certain conditions have to be met:

• Must be a first-time buyer at the time the withdrawal is made

• Must have written agreement to buy or build a qualifying home before October 1 following the year of withdrawal,

• Must intend to occupy the qualifying house as your principal place of residence within one year after purchasing or building it. 

As long as you meet these conditions, you can withdraw the entire amount all at once, or in a series of withdrawals.

 Non-qualifying withdrawals are added to your income and will be taxed accordingly.  

What Type of Investments Can You Hold Within an FHSA?

You can hold the same type of investments in an FHSA as in a TFSA. This includes:

• Mutual funds

• Stocks 

• Bonds

• Exchange-traded funds (ETFs)

• Guaranteed investment certificates (GICs)

Does The FHSA Affect Your Credit Score?

Like an RRSP or TFSA, opening an FHSA will not affect your credit score. While you may incur taxes for making non-qualifying withdrawals, this information is not reported to the credit bureaus and shouldn’t affect your score.

What Happens to my FHSA is Case of:

Divorce

If you get a divorce or split from your common-law partner, it is possible to transfer the FHSA to another person’s FHSA, RRSP or RRIF, tax free. The contribution room of the person receiving the transfer will not be affected. However, the person transferring the money will not gain back the contribution room. 

Death

Similar to a TFSA, you can designate your spouse or common-law partner as the successor of your FHSA. In the event of your death, your spouse or partner can take over as the new account holder providing they meet the eligibility criteria to open an FHSA. If your spouse or partner is not eligible, the amount can be transferred to an RRSP or RRIF or withdrawn on a taxable basis. 

Emigration

If you go to live in another country, you can still contribute to your FHSA; however, you can not make a qualifying withdrawal as a non-resident. You are considered a non-resident if:

• You routinely live in another country and are not considered a resident of Canada

• You don’t have significant residential ties to Canada

• You live outside of Canada throughout the tax year

• You stay in Canada for less than 183 days during the tax year

At the time you withdraw funds from your FHSA, you must be considered a resident of Canada. You also must be considered a resident up to the time you purchase or build a qualifying home.

What is the Difference Between Home Buyer’s Plan, TFSA and FHSA, and which is best for me?

Home Buyers Plan (HBP)

The Home Buyers Plan (HBP) allows you to withdraw up to $35,000 from your RRSPs to purchase or build a qualifying home for yourself or a relative with a disability. You then have up to 15 years to repay the money to your RRSPs, and you have to start repaying the second year after you first withdraw funds. 

For instance, if you withdraw money in 2023, you will have to start repaying in 2024. You are not taxed on any of the money withdrawn up to the $35,000 limit. Certain RRSPs, including group RRSPs, and locked-in RRSPs do not allow you to withdraw funds for the HBP. 

To qualify for the HBP you must: 

• Be a first-time home buyer (did not occupy a home owned by you, your spouse, or common-law partner in the last four years). 

• Have a written agreement to purchase or build a qualifying home for you or a relative with disabilities

• Be a resident of Canada when you withdraw the funds and up to the time you purchase or build your home 

• Intend to live within our home as your principal residence within one year after buying or building. 

You can not use the FHSA and the Home Buyers’ Plan together to purchase the same qualifying home. The main difference between an HBP and FHSA is that you have to pay back the HBP within 15 years. If you fail to repay the money, it is included as RRSP income, and you will incur taxes. With an FHSA, there is no obligation to pay the money back. 

Tax-Free Saving Account (TFSA)

A TFSA is a registered savings account that allows you to contribute after-tax dollars and earn income tax-free, even when it is withdrawn. Anyone over 18 years old with a valid Social Insurance Number (SIN) can open a TFSA. 

The annual contribution limit in 2023 is $6,500, and contribution room starts once you turn 18. As of 2009, any unused TFSA contribution room from previous years rolls over. You can find your total TFSA contribution room on your notice of assessment. 

While the FHSA and HBP are not options for current homeowners, the TFSA does offer a tax-free way to save and grow your money for another potential down payment or to put towards renovations of the current home. A benefit of a TFSA is that it’s extremely flexible. You can use it to save for virtually anything, not just a downpayment on a home. You can also withdraw your money whenever you want. 

You can use a TFSA in combination with an FHSA to save for a downpayment. If you can max out the $8,000 annual limit, you can continue to contribute to a downpayment fund using a TFSA. It is also possible to transfer assets from your TFSA into your FHSA (as long as it doesn’t exceed your contribution limit) and receive a tax deduction for the amount. 

First Time Home Savings Account (FHSA)

When comparing the FHSA to the HBP, there are some major pros. First, the FHSA has a higher contribution limit of $40,000 versus the HBP at $35,000. Second, you don’t need to repay the money you withdraw from your FHSA. You must repay the money you withdraw from our HBP within 15 years. 

However, using an FHSA to fund your down payment will require some pre-planning since you can only contribute $8,000 per year. If you start investing as soon as possible, it will still take you several years of saving before you can accumulate enough for a downpayment. Hopefully, the market will be on your side and bump up the amount in your account. 

On the other hand, if you’ve been contributing to your registered retirement savings plan (RRSP) for years, you might already have enough saved to take out the maximum HBP amount of $35,000 in the short term. 

The Bottom Line

The tax-free first home savings account offers an exciting new benefit to prospective first-time home buyers. The FHSA marries some of the best qualities of an RRSP and TFSA. Like an RRSP, contributions are tax-deductible. Like a TFSA, withdrawals used to purchase your first home are non-taxable. Plus, you aren’t taxed on any income that you earn while your money is in the FHSA.

If you decide to contribute to an FHSA and then don’t end up purchasing a house, you can transfer the money tax-free to an RRSP or RRIF. While the $40,000 lifetime maximum, and any potential earnings, might not cover an entire downpayment in Canada, it’s still a great start.