Understanding First Home Savings Account (FHSA)
In the 2022 Federal budget, the Canadian government proposed the introduction of the tax-free First Home Savings Account (“FHSA”). This new registered plan enables prospective first-time home buyers to contribute up to $40,000 toward saving for their first home on a tax-free basis.
Similar to a Registered Retirement Savings Plan (“RRSP”), contributions to an FHSA are tax-deductible, and withdrawals to purchase a first home – including from investment income – are non-taxable, like a Tax-Free Savings Account (“TFSA”).
This guide provides details about the First Home Savings Account and helpful planning tips for your consideration.
How to open and close an FHSA?
To open an FHSA, you must be a resident of Canada and at least 18 years of age. You must also be a first-time home buyer, meaning that you have not lived in a home that was owned, either solely or jointly, with a spouse or common-law partner at any time in the calendar year before the account is opened, or at any time in the preceding four calendar years.
An FHSA matures and must be closed (with related proceeds either used to make a qualifying purchase, transferred tax-free to an RRSP or Registered Retirement Income Fund “RRIF” or withdrawn on a taxable basis) upon the fifteenth anniversary of the individual first opening an FHSA; or by the end of the year in which the holder turns 71.
What are the qualified investments for an FHSA?
An FHSA is permitted to hold the same qualified investments that are currently allowed for TFSAs. Taxpayers are able to hold a broad range of investments, including mutual funds, publicly-traded securities, government and corporate bonds, and guaranteed investment certificates (“GICs”).
The prohibited investment rules and non-qualified investment rules applicable to other registered plans also apply to FHSAs, including the potential tax consequences described in this article. These rules are intended to disallow investments in entities with which the account holder does not deal at arms length, as well as investments in certain assets such as land, shares of private corporations and general partnership units.
What is the eligible contribution to an FHSA?
The lifetime limit on contributions is $40,000, with an annual contribution limit of $8,000. Meaning, you are subject to contributing the lesser of your annual limit and remaining lifetime limit. The annual contribution limit applies to contributions made in a particular calendar year. You are able to claim an income tax deduction for contributions made in a particular taxation year. Unlike RRSPs, contributions made within the first 60 days of a given calendar year cannot be attributed to the previous tax year. You are allowed to carry forward unused portions of your annual contribution limit up to a maximum of $8,000.
For example, an individual contributing $5,000 to a FHSA in 2023, is allowed to contribute $11,000 in 2024 (i.e., $8,000 plus the remaining $3,000 from 2023). However, amounts carried forward only start accumulating after an individual opens an FHSA for the first time.
Like RRSP deductions, contributed amounts can be carried forward indefinitely and deducted in later tax years (e.g., if you expect to be in a higher tax bracket in the future).
Note : An individual is permitted to hold more than one FHSA, however, the total amount an individual contributes to all of their FHSAs cannot exceed their annual and lifetime contribution limit of $40,000. Taxpayers are responsible for ensuring they do not exceed their annual limit. The Canada Revenue Agency (“CRA”) intends to provide basic FHSA information to support taxpayers in determining how much they can contribute in a given year.
What are the qualifying FHSA withdrawal conditions?
In order for an FHSA withdrawal to be a qualifying (i.e., non-taxable) withdrawal, certain conditions must be met:
- You must be a first-time home buyer at the time a withdrawal is made. Specifically, you cannot have lived in a home that you and your spouse or common-law partner, either solely or jointly owned with others, at any time during the part of the calendar year before the withdrawal is made or at any time in the preceding four calendar years. There is an exception to allow individuals to make qualifying withdrawals within 30 days of moving into their first home.
- You must also have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal, and intend to occupy the qualifying home as their principal place of residence within one year after buying or building it.
- A qualifying home is a housing unit located in Canada. A share in a co-operative housing corporation that entitles the taxpayer to possess and have an equity interest in a housing unit located in Canada, would also qualify. However, a share that only provides a right to tenancy in the housing unit would not qualify.
If you meet the qualifying withdrawal conditions, the entire amount of available FHSA funds may be withdrawn on a tax-free basis in a single withdrawal or a series of withdrawals.
How can I make transfers to and from an FHSA?
You may transfer funds from an FHSA to another FHSA, an RRSP or a RRIF on a tax-free basis. Funds transferred to an RRSP or RRIF are subject to the usual rules applicable to these accounts, including taxability upon withdrawal. These transfers would not reduce, or be limited by, your available RRSP contribution room. These transfers do not reinstate an individual’s FHSA lifetime contribution limit.
You are also allowed to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits and the qualified investment rules. Although such transfers are subject to FHSA contribution limits, they are not deductible from income and do not reinstate your RRSP contribution room.