1. What is the First Home Savings Account (FHSA)?
The FHSA allows you to save contributions up to $40,000 for buying your first home. The contributions are tax deductible, the investment growth is tax-sheltered, and when you buy your first home, the withdrawals are tax-free. There is no need to repay the contributions.
2. Am I eligible to open an FHSA?
You can open an FHSA if you are a Canadian resident over the age of majority in your province/territory and under the age of 71, and considered a first-time home buyer. This means you and/or your spouse/common-law partner must not have owned your home in the current or previous four years.
3.How do the contributions and participation room work?
Participation room starts once you open the FHSA, with an annual contribution limit of $8,000 and a lifetime limit of $40,000. You can carry forward unused room of up to $8,000 in addition to the new year’s room, so the maximum possible in one year would be $16,000. You will be able to view FHSA participation levels on your notice of assessment. For over-contributions, there is a 1% penalty per month. Contributions are deductible in the current year or can be carried forward, but unlike the RRSP, contributions in the first 60 days cannot be applied to the previous tax year.
4. I don’t have enough money to contribute. Can I transfer from my RRSP or TFSA?
If you have available FHSA participation room, you can contact your financial institution to complete a tax-free transfer from your RRSP to the FHSA. You wouldn’t be able to claim the tax deduction again, and it would use your FHSA participation room but would not impact your RRSP deduction limit. There is no direct transfer between TFSA and FHSA, but you could withdraw TFSA funds and contribute to the FHSA, which would allow you to claim the tax deduction. Note that your TFSA contribution room would only increase from the withdrawal in the following year.
5. Can I still use other accounts to save for a home?
Yes, you can save for your home using any combination of the FHSA, the RRSP Home Buyers’ Plan, and TFSA.
6. Where can I open an FHSA?
The FHSA launched April 1, 2023 and is already available at several financial institutions, with more expected throughout the year as they continue to work with CRA and their internal processes. Please check with your financial provider to see if/when it is available. You can have more than one FHSA, but the same rules and limits apply to you across all the accounts. Depending on your provider, you can invest in a variety of different financial instruments, like cash, GICs, mutual funds, ETFs, segregated funds, stocks, bonds, etc.
7. I’m ready to take the money out to buy my home. How does it work?
There is no minimum number of days funds must be in the account before being withdrawn. If you are a first-time home buyer with a written contract to buy/build a qualifying home, you can withdraw the money tax-free, before October 1 of the year after the withdrawal, or up to 30 days after having moved in. Any funds remaining in the FHSA afterward can be transferred to an RRSP/RRIF, penalty-free and tax deferred, if you transfer the remaining funds by December 31 of the following year.
8. I didn’t buy a house, or I have leftover money after buying a house. What can I do with the money?
The FHSA can be open for 15 years, until you turn 71, or make your first qualifying withdrawal, whichever comes first. If you make a qualifying withdrawal, all FHSAs must be closed by Dec 31 of the year afterward. If you do not buy a home, or decide to complete a full or partial withdrawal for any other reason, withdrawals are taxable income for you in that year.
You also have the option to transfer your FHSA to an RRSP on a tax-deferred basis. This will not impact your unused RRSP contribution room, and you do not need to have any RRSP room available. Once the funds are transferred, they will be subject to normal RRSP rules and any income later withdrawn would be taxable.
9. What happens to the FHSA if I die?
You can appoint a beneficiary on the FHSA, and they would include this as income when received & pay taxes at their tax rate. If there are no beneficiaries appointed, the FHSA would form part of your estate and funds would be directed according to your will. The estate would include the value of the FHSA as income & pay taxes.
For spouses/common-law partners that are appointed as successor holders, and are themselves eligible for FHSA, they could inherit it as a tax-free rollover. If not eligible, they would pay taxes on the income or could elect an RRSP/RRIF transfer.
In all cases, decisions must be made within the “exempt period”, which is defined as December 31 of the year after death (or earlier if age 71, non-resident, or reached the 15 year time limit).
After this date, the tax treatment of any income earned also depends on the type of FHSA it was (depositary, trusteed, or insured, which the financial institution can tell you).
10. This sounds great. Are there any drawbacks?
With any financial decision, ensure you understand if it’s suitable for you and consult a professional advisor. As mentioned earlier in this article, there are a few items with the FHSA that could have unintended consequences if not kept in mind. These include: the differences (as compared with RRSP/TFSA) with how FHSA participation room is earned and carried forward; contributions in the first 60 days of the calendar year are not tax deductible for the previous year; the nuances with beneficiaries and tax implications at death; and the maximum 15 year timeframe. This is a new type of account in Canada, and the rules may evolve, so make sure you are consulting the CRA for the most up to date information.
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