FHSA – First Home Savings Account
If you need to open an FHSA or consult an expert regarding the most efficient way of saving for your first home, sign up for an appointment with one of our Financial Services Officers!
What is an FHSA
A first home savings account (FHSA) is a registered plan allowing you, as a prospective first-time home buyer, to save for your first home tax-free (up to certain limits). You can open an FHSA starting April 1, 2023. Contributions to an FHSA are deductible from taxable income, like an RRSP, while income and gains are tax-free, like a TFSA.
The FHSA is a unique savings vehicle that is designed to help you save towards a down payment on your first home, unlike a TFSA which is used to save for a variety of unplanned expenses and big-ticket items, or an RRSP that is used to save for your retirement. The savings in your FHSA can only be used towards your first home purchase.
An FHSA allows you to invest money in the account without being taxed on the income and growth of the assets held in the FHSA. This tax-free compounding growth results in faster savings compared to investing in a non-registered account.
An FHSA is available to an individual who meets all the following requirements:
- Is a resident of Canada at the time of purchase;
- Is between the ages of 18 to 71;
- Has a valid SIN, and
- Is a first-time home buyer.
A first-time home buyer means that you have not owned a home in which you lived at any time during the year the account was opened, or at any time in the preceding four calendar years. As holder and owner of the FHSA, you can have as many accounts as you wish, as long as you do not exceed the annual and lifetime limits as provided by the Canada Revenue Agency (CRA).
How it works
The FHSA contribution limit is the maximum amount that can be contributed to an FHSA.
Starting April 1, 2023, qualifying individuals can contribute $8,000 per year to their FHSA. Unused contributions, up to $8,000, can be carried forward to future tax years subject to a maximum lifetime limit of $40,000. Carry forward room starts to accumulate once the FHSA is opened.
Any amounts in the FHSA that are not used to purchase a qualifying home can be transferred to your RRSP or RRIF on a tax-free basis. Otherwise, the amounts can be withdrawn on a taxable basis.
How to set up
You can open an FHSA through an FHSA issuer such as a bank, credit union, or a trust or insurance company. Your issuer will advise you on the types of FHSAs and the qualified investments they can contain.
To open an FHSA, you must do the following:
- Contact your issuer.
- Provide the issuer with the information they need to register your FHSA, including:
- your social insurance number
- your date of birth
- any supporting documents your issuer may need to certify that you are a qualifying individual.
An FHSA can only be open for 15 years and must be closed by the end of the year when the holder reaches age 71. Additionally, the FHSA must be closed within one year of making a qualifying withdrawal to purchase your first home. You cannot open another FHSA after either one of these events occurs.
Tracy wants to save for her first home, so she speaks with her advisor and decides to open an FHSA in 2023. Tracy contributes $2,000. Since she did not use the full $8,000 annual limit, she is able to carry forward $6,000 to a future tax year. In 2024 Tracy’s allowable contribution limit is $14,000: her annual $8,000 limit plus $6,000 carry forward amount. Tracy can contribute any amount up to her annual limit and carry forward the amount without triggering an over-contribution penalty.
Alternatively, if Tracy did not open the FHSA in 2023, she would not have generated any carry-forward amount, and her 2024 contribution limit would be set at $8,000.
Types of FHSAs
There are three types of FHSAs that can be offered:
- a depositary FHSA – an account (with a financial institution) that holds money, term deposits, or guaranteed investment certificates (GICs);
- a trusteed FHSA – a trust (with a trust company as trustee) that holds qualified investments such as money, term deposits, GICs, government and corporate bonds, mutual funds, and securities listed on a designated stock exchange;
- an insured FHSA – an annuity contract (with a licensed annuity provider);
- self-directed FHSA – You can set up a self-directed FHSA if you prefer to build and manage your investment portfolio by buying and selling different types of qualified investments. For more information, contact an FHSA issuer.
The maximum FHSA contribution dollar limit for 2023 and subsequent years is $8,000 subject to a lifetime contribution limit of $40,000. The annual limit is not income tested and is not based on the holder’s earned income like an RRSP.
You can carry forward up to $8,000 in unused contributions, subject to the lifetime limit. Carry forward room begins once the FHSA is opened. As with the RRSP, FHSA contributions are tax-deductible.
Contributions to an FHSA may only be made by the holder of the account. However, individuals may gift their spouse or common-law partner with money to make a direct contribution to their FHSA without triggering income attribution rules.
A qualifying withdrawal is non-taxable to you as the holder. Certain conditions must be met for you to receive the withdrawal tax-free. The conditions are similar to the home-buyers withdrawal from an RRSP and must be made in the prescribed form, provided by the CRA, and include you meeting all the following terms:
- First-time home buyer
- Resident of Canada
- The withdrawal is made within 30 days of moving into the home
- Has written agreement to buy or build a qualifying home before October 1st of the year following the withdrawal
- The qualifying home is in Canada.
When these conditions are met, you may withdraw funds at any time unless restricted by investment terms (e.g., a 3-year fixed deposit). A qualifying withdrawal does not generate taxable income and does not affect any income-tested benefits or credits of the holder.
Any unused amounts transferred to an RRSP or RRIF will be subject to the rules of those accounts.
Qualifying FHSA withdrawals do not impact eligibility for income-tested benefits and credits (e.g., OAS, GIS, Age Credit, HST/GST, EI, Canada Child Benefit, or the Canada Worker’s Benefit (CWB), formerly known as the Working Income Tax Benefit).
Closing an FHSA
Your maximum participation period begins when you open your first FHSA and ends on December 31 of the year in which the earliest of the following events occur:
- the 15th anniversary of opening your first FHSA, or
- you turn 71 years of age, or
- the year following your first qualifying withdrawal from your FHSA.
In order to avoid unintended tax consequences, you should close all of your FHSAs before your maximum participation period ends.
Over-contribution to FHSA
As holder, you are responsible for ensuring your maximum contribution room limit is not exceeded. An over-contribution will result in a penalty tax on the over-contributed amount at a rate of 1% per month for each month the over-contribution remains in the FHSA. A withdrawal to correct over contributions does not increase unused contribution room.
If you contribute to your FHSAs more than your FHSA participation room for the year, you will have an excess FHSA amount, in which case you have to pay a tax equal to 1% of the highest excess FHSA amount in the month, for each month that the excess remains in the account.
When you have an excess FHSA amount, you will continue to pay the monthly 1% tax until the excess FHSA amount is eliminated.
If you have an excess FHSA amount, one of the ways that you can reduce or eliminate your excess FHSA amount is to make a designated withdrawal. The amount of the designated withdrawal is not required to be included as income on your income tax and benefit return in the year. For more information, go to What happens if you contribute or transfer too much to your FHSAs.
Maximizing home downpayment
You can maximize your down payment by using the FHSA together with your RRSPs Home Buyers Plan (HBP) for the same qualifying home. This provides up to $75,000 to use towards your first home purchase. If two individuals are eligible for both the FHSA and HBP, that provides up to $150,000. The HBP program is currently set at a maximum withdrawal of $35,000, subject to the terms and conditions of the RRSP.
There is much more information available about FHSAs and best practices, and of course, there is no universal solution that would suit everyone. We encourage you to consult the CRA resources directly for more details and specific cases. You are always welcome to reach out to your Financial Services Officer at BCU Financial by booking an appointment.