First Home Savings Account (FHSA)
Your Key to Homeownership
The Tax-Free First Home Savings Account (FHSA) is a registered savings account designed to help first-time homebuyers in Canada save for their dream home.
Available since April 2023, it combines the best features of two popular savings plans: the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP). This combination allows you to contribute up to a certain limit each year, with the added benefit of tax-free growth on your savings.
Similar to a TFSA, the FHSA offers tax-free growth on the investments within the account. This means that any interest, dividends, or capital gains earned on your contributions will not be taxed, helping your savings grow faster over time. Additionally, like an RRSP, contributions made to an FHSA are tax-deductible, reducing your taxable income for the year in which the contribution is made.
The FHSA is a powerful tool for Canadians looking to buy their first home, offering significant tax advantages and helping you save more efficiently.
Why First Home Saving Account is Beneficial?
FHSA Eligibility
To open a Tax-Free First Home Savings Account (FHSA), you must:
- Be a resident of Canada.
- Be at least 18 years old and not turning 72 or older in the year.
- Be a first-time home buyer, meaning neither you nor your spouse/common-law partner owned and lived in a qualifying home as your principal residence during the current calendar year or the previous four years.
This eligibility ensures that the FHSA is reserved for those truly embarking on their journey to homeownership.
Contributions & Deductions
The Tax-Free First Home Savings Account (FHSA) offers structured contribution limits to help first-time homebuyers save efficiently:
- Lifetime Contribution Limit: $40,000.
- Annual Contribution Limit: $8,000, including 2023.
Key Details:
Carry-Forward Contributions:
- Unused annual contribution amounts can be carried forward to future years, up to the lifetime limit.
- Example: If you contribute $5,000 in 2023, you can contribute $11,000 in 2024 ($8,000 + $3,000 carry-forward).
- Carry-forward amounts only start accumulating after the account is opened.
Multiple Accounts:
- You can hold more than one FHSA, but your total contributions across all accounts cannot exceed the annual or lifetime limits.
Annual Contribution Timing:
- Contributions are attributed to the calendar year in which they are made.
- Unlike RRSPs, contributions made in the first 60 days of the year cannot be applied to the previous tax year.
Tax Deductions:
- Contributions can be deducted against all sources of taxable income, reducing your tax liability based on your marginal tax rate.
- You can defer claiming the deduction, carrying it forward indefinitely for future use.
Overcontribution Penalties:
- A 1% tax applies monthly on the highest amount exceeding your limit for any month or part of a month.
Income & Gains
One of the most significant benefits of the Tax-Free First Home Savings Account (FHSA) is its tax-efficient structure:
- Tax-Free Growth: Any income earned and capital gains realized within the FHSA are not included in your annual taxable income. Similarly, capital losses are not deductible.
- Compounding Benefits: Income and capital gains grow on a tax-free basis, enabling your savings to compound more effectively over time.
This tax treatment makes the FHSA a powerful tool for building savings towards your first home, helping maximize growth without tax erosion.
Qualifying Investments
Eligible Investments:
The FHSA allows a wide range of investment options similar to those available under RRSPs and TFSAs, including:
- Mutual funds
- Exchange-traded funds (ETFs)
- Publicly traded securities
- Government and corporate bonds
- Guaranteed investment certificates (GICs)
Prohibited Investments:
There are restrictions on certain types of investments, including:
- Non-arm’s length investments
- Land
- Shares of private corporations
- General partnership units
These rules ensure that your FHSA investments are aligned with the goal of saving for a first home and maintaining tax advantages.
Closing the FHSA
FHSA Closure:
The FHSA must be closed by:
- December 31 of the year you turn 71.
- December 31 of the 15th anniversary of first opening the account, if the funds have not been used to purchase a qualifying home.
- December 31 of the year following the year of the qualifying withdrawal.
Transferring or Withdrawing Funds:
- Unused funds in the FHSA can be transferred to an RRSP or RRIF on a tax-free basis before the account is closed.
- Alternatively, you can withdraw the funds, but the withdrawal will be taxable.
- If a withdrawal was made for the purchase of a qualifying home, any unused funds can be transferred to an RRSP or RRIF on a tax-free basis until December 31 of the year following the qualifying withdrawal.