The First Home Savings Account (FHSA) is a new account designed to help Canadians save for their first home, offering valuable tax advantages and flexibility.
Key Features and Benefits
- Tax Advantages: Contributions to an FHSA are tax-deductible, lowering your taxable income for the year. Additionally, all growth within the account—such as investment gains—is tax-free. Withdrawals used to buy a home are also tax-free, making it a highly efficient way to save for your first home.
- Contribution Limits: You can contribute up to $8,000 annually with a lifetime limit of $40,000. If you don’t reach the annual $8,000 limit, you can carry forward the unused portion to the next year. For example, if you only contribute $5,000 in 2024, you can contribute up to $11,000 in 2025, as long as you haven’t reached the lifetime limit.
- Investment Options: The FHSA allows you to invest in a variety of options, including mutual funds, stocks, bonds, and ETFs, similar to RRSPs and TFSAs. However, certain non-arm’s length investments, like shares in private companies, are generally not permitted.
Eligibility and Suitability
To open an FHSA, you must:
- Be a Canadian resident, aged 18 or older and under 71.
- Be a first-time homebuyer, meaning you (or your spouse) haven’t owned a home that you lived in within the last four years.
The FHSA is ideal for Canadians who are aiming to buy their first home and want to maximize their savings through tax benefits.
Withdrawal Rules
- Qualified Withdrawals:
To make a tax-free withdrawal, you must have an agreement to buy or build a qualifying home by October 1 of the year following the withdrawal. You must intend to live in the home as your principal residence within one year. - Non-Qualified Withdrawals:
If you withdraw funds without meeting the conditions above, the amount will be taxable. Additionally, any unused FHSA contribution room is lost when making non-qualifying withdrawals.
Using Both FHSA and RRSP for Your First Home
If you’re saving for a first home, you can combine the FHSA with the Home Buyers’ Plan (HBP) through your RRSP:
- The HBP allows you to withdraw up to $60,000 tax-free from your RRSP, which you repay over 15 years.
- With the FHSA’s additional $40,000 limit, you can access up to $100,000 in total for a first home purchase by using both programs.
Transfer Options
If you decide not to purchase a home, FHSA funds can be transferred to an RRSP or RRIF tax-free, without affecting your regular RRSP contribution limits. Once transferred, the funds follow the withdrawal and tax rules of an RRSP, and the FHSA contribution room is permanently lost.
Advantages and Disadvantages
Advantages:
- Tax deductions on contributions reduce your current taxable income.
- Both tax-free growth and withdrawals provide significant tax savings.
- Can be combined with the HBP for more purchasing power.
Disadvantages:
- Lifetime limit of $40,000 may not be sufficient in high-cost housing markets.
- Non-qualified withdrawals are fully taxable and cannot be re-contributed.
The FHSA offers a straightforward, tax-efficient approach for first-time homebuyers looking to build their savings. By combining it with the HBP, Canadians can access substantial funds toward a home purchase, with the flexibility to redirect funds to retirement if plans change.