The First Home Savings Account (FHSA) is a program that can help Canadians exit the rental market and gain entry into the housing market.
With the current housing crisis and rent prices, many people are taking out personal loans to make up for the shortfall. Moreover, many Canadians are in debt and don’t think that they will save enough of a deposit to buy their first home.
This tax-free savings account for first-time homebuyers was created to help Canadians save up for a down payment. It offers some of the best features of both a tax-free savings account (TFSA) and a registered retirement savings account (RRSP).
Let’s take a closer look at the FHSA to help you understand how it works and how it may help you get one step closer to buying your first home.
What Is The Tax-Free FHSA?
The FHSA is a program established by the federal government to help young Canadians under the age of 40 purchase their first home.
Eligible applicants can save up to $40,000 in this account which can be used toward the purchase of a home.
First Home Savings Account Features
What makes the FSHA so advantageous? Here are some of it’s best features.
- Tax-Free – This account is tax-free, which means any interest, capital gains, and dividends earned will not be taxed, just like in a TFSA.
- Tax Deductible – Each contribution you make to this account reduces your taxable income by the same amount, just like how an RRSP does.
What Is The FSHA Contribution Room?
There are limits to how much you can contribute to your First Home Savings Account, much like annual RRSP contribution limits. For First Home Savings Accounts, the annual contribution limit is $8,000, with a lifetime contribution limit of $40,000.
Do Your Unused Contribution Room Carry-Over?
Investors with unused FHSA contribution room can carry forward up to a maximum of $8000 to the next year.
Any funds withdrawn from your account do not have to be repaid, unlike the Home Buyers’ Plan for an RRSP. That said you’ll need to close your account within one year from the initial withdrawal.
Can You Transfer Money From An RRSP To An FHSA?
Yes, you can transfer money from your RRSP account to your FHSA. You won’t be taxed immediately on the transferred funds, as long as the transfer is made directly from one account to another. Further, this transfer is allowed only if you don’t go over any unused FHSA contribution room when the transfer is made.
How Does The Tax-Free First Home Savings Account Work?
To help you understand how the Tax-Free First Home Savings Account could help you achieve your dream of homeownership, let’s use an easy example.
Let’s say you open a Tax-Free First Home Savings Account starting in 2023 and contribute $8,000 every year to the account. After 5 years of contributions, you’ll have a total of $40,000 to use for a home purchase.
By using your Tax-Free First Home Savings Account, you can use these funds as a down payment for your first home. You can withdraw these funds from your account tax-free, potentially saving you thousands of dollars. You’ll also be able to claim the First-Time Home Buyers’ Tax Credit, giving you additional tax savings.
Since you withdrew the money in 2028 to buy your first home, you’ll need to close the account within a year.
What If You Don’t Buy A House?
The FHSA must be used within 15 years. This means you need to be ready to buy a house within 15 years of opening the account. If you don’t buy a house, the money in your FHSA can be rolled over into an RRSP or RRIF.
Who Can Access The Tax-Free First Home Savings Account?
You’ll need to meet the following criteria to be eligible for the Tax-Free First Home Savings Account:
- Be at least 18 years old and under 40
- Be a Canadian citizen or permanent resident
- Not own a home at any point in the year you open your account or during the previous 4 calendar years
Since the program is meant for primary residences, it cannot be used to buy an investment or rental property.
You’re allowed to have more than one FHSA, but your contributions cannot be any higher than your annual or total limit.
Are FHSA Withdrawals Considered Taxable Income?
The reason for withdrawing from your FHSA will affect how your withdrawal is treated when you file your income taxes.
In most cases, the amount you withdraw from your FHSA is taxable. You must include this withdrawal amount as part of your income when you file your taxes for the year you receive the withdrawn funds.
However, you will not have to include the withdrawal from your FHSA in your income and can avoid taxation if it is:
- A qualifying withdrawal. This type of withdrawal is made to put toward the purchase of your first home.
- A designated amount. This refers to an amount of your excess FHSA amount that is withdrawn from your FHSA or transferred from your FHSA to an RRSP or RRIF. A designated amount cannot be more than your excess FHSA amount.
- An amount otherwise included in your income.
Further, if the funds are transferred directly between FHSA accounts or to your RRSP or RRIF, the money would not be taxed immediately as it would not be considered a withdrawal.
How To Make A FHSA Withdrawl
Your FHSA is a registered account, which means there are certain rules you must follow when you withdraw money from the account. Withdrawals from an FHSA depend on the purpose of the withdrawal:
Qualifying Withdrawals
You must complete Form RC725, Request to Make a Qualifying Withdrawal from your FHSA and submit it to your financial institution that has been authorized to open an FHSA on your behalf. Your financial institution will make sure the withdrawal is considered a qualified withdrawal.
Taxable Withdrawals
If the purpose of your FHSA withdrawal is for something other than the purchase of your first home, it will be considered a non-qualifying withdrawal, which means the amount will be subject to income tax withholding.
To process a non-qualifying withdrawal from your FHSA, you will need to reach out to your financial institution and provide the following information:
- Your FHSA account number
- The bank account you want the withdrawn funds to be deposited into
Your financial institution will then process your withdrawal.
Where Can You Open A FHSA?
Several financial institutions are available in Canada, including the following:
TD Bank
TD started offering its FHSA to clients in August 2023. You can access a full suite of TD’s FHSA investment opportunities by visiting a physical TD branch.
CIBC
CIBC will begin offering its FHSA in November 2023. You can receive up to 5.60% for 4 months when you open your first CIBC eAdvantage Savings Account, with some exceptions.
RBC
RBC offers its FHSA through RBC Direct Investing and RBC InvestEase platforms. You can also open an FHSA account through RBC online banking, on the RBC mobile app, or in person at an RBC branch. No minimum balance is required to open an FHSA account.
Scotiabank
For a limited time, Scotiabank is offering an interest rate of 5.00% on new FHSA deposits with its Savings Accelerator Account.
EQ Bank
EQ Bank currently has two FHSA offerings:
FHSA Savings Account: Earn up to 3.00% tax-free
FHSA GIC: Earn a better return that’s guaranteed, with rates ranging from 3.25% to 5.75%
Wealthsimple
Wealthsimple offers an FHSA for DIY and robo-investors. Portfolio management fees range from 0.4% to 0.5% annually, helping investors to keep their management fees low.
Questrade
Questrade began offering an FHSA back in April 2023. You can invest in an FHSA through a self-directed account or Questwealth Portfolios. No minimum deposit is required to open a Questrade or Questwealth FHSA, though you must have at least $250 invested with Questrade or $1,000 invested with Questwealth Portfolios to open the account.
Types of Investments You Can Make With the Tax-Free First Home Savings Account
Similar to a TFSA and an RRSP, you can make qualified investments within your Tax-Free First Home Savings Account, including:
Difference Between the Home Buyer’s Plan (HBP) and the First Home Savings Account (FHSA)
You may have heard of the First-Time Home Buyer’s Plan, but how does it differ from the First Home Savings Account?
- For starters, the HBP allows you to withdraw up to a maximum of $60,000, compared to a ifetime limit of $40,000 with the FHSA.
- Secondly, the funds you withdraw from the HBP will eventually need to be paid back, unlike the FHSA.
The good news is that you can use both the HBP and the FHSA when purchasing your first home.
Reasons The Government Introduced FHSA
Why did the Canadian government introduce the Tax-Free First Home Savings Account?
Housing Affordability
Home prices are skyrocketing, and wage increases are not keeping up. As such, a growing number of Canadians are finding it very difficult to get into the housing market. The average home price in Canada in March 2023 was $686,371. According to Statista, in 2021 and 2022, the average home prices in Canada were $688,096 and $703,875 respectively. For context, the average price in 2018 was $488,862.
The jumps in selling prices were largely due to speculation and super-low mortgage interest rates, which are now higher.
To target this housing affordability issue, the government decided to dedicate a big chunk of its budget to helping Canadians who need a little financial assistance to become homeowners.
Housing Supply
Right now, there are not enough homes available for sale to meet the demand of buyers.
Canada has the lowest supply of housing inventory relative to the national population among G7 countries, according to a recent report from the Bank of Nova Scotia. In Ontario alone, an additional 1.2 million homes would be required to meet demand.
Check out these 7 other tax breaks for homeowners.
Final Thoughts
If you’re struggling to find a way to come up with the funds needed to put a down payment on your first home, the tax-free FHSA may be a great tool to consider. Every dollar you can save toward your property means less mortgage debt. Let the FHSA help you.
