The First Time Home Savings Account
Introduced in the 2022 Federal Budget, the First Time Home Savings Account (FHSA) is a registered plan that combines the best features of the TFSA and RRSP in helping Canadians save for their first home purchase. We hope to be able to offer the FHSA by December 2023.
We will attempt to unpack some of the details here as well as provide our thoughts on how to maximize your down payment potential.
Eligibility
To open an FHSA, you must be 18 years of age, a resident of Canada, and a qualified first-time home buyer (you or your spouse or common-law partner did not own or occupy a home as a principal residence in the current year or previous four calendar years).
Contributions
Individuals can contribute up to $8,000 per year, beginning in 2023 to a lifetime contribution limit of $40,000. Unused portions may be carried forward subject to the above rules. For example, if you contribute $5,000 to an FHSA in 2023, you could contribute $11,000 to an FHSA in 2024 ($8,000 + the remaining $3,000 from 2023). Important to note is that the contribution limits and carry forward amounts do not start accumulating until an individual opens an FHSA for the first time. Hence, it is even more important to open a FHSA in 2023 to take advantage of compounding growth if you are eligible!
Income Tax Considerations
Contributions to the FHSA are tax deductible within the calendar year. This contrasts with the RRSP where contributions are tax deductible within the first 60 days of the calendar year. Like RRSPs, contributions made to the FHSA can be carried forward and deducted in future years.
Transfers to/from FHSA
Individuals can transfer funds from an FHSA to another FHSA, to an RRSP, or to a RRIF on a tax-free basis. Funds transferred to an RRSP or RRIF are taxable on withdrawal from these respective accounts. A transfer to these accounts does not reduce the available RRSP contribution room and cannot be claimed as a deduction on your income tax return.
Individuals can also transfer funds from an RRSP to an FHSA tax free, subject to the annual and lifetime contribution limits. Funds transferred to an FHSA from an RRSP are not deductible and do not reinstate an individual’s RRSP contribution room. The subsequent withdrawal if used to purchase a qualifying home is tax free.
Withdrawals
There are two types of withdrawals from an FHSA:
- Qualifying withdrawal: As a first-time home buyer and resident of Canada, you must have a written agreement to buy or build a home you intend to occupy as your principal residence before October 1 of the year following the year of the withdrawal. The withdrawal can’t be later than 30 days after acquiring a home. These withdrawals are tax free.
- Taxable withdrawal: If a withdrawal isn’t a qualifying withdrawal, it’s generally fully taxable income in the year it’s made. This excludes certain withdrawals such as removing an over-contribution.
What’s The Best Option to Save for a Home?
If you have a shorter time horizon (less than five years) consider using both the FHSA and RRSP. Contribute to the FHSA in each calendar year, including when you plan to buy a home, and delay your RRSP contribution until at least 90 days before you intend to withdraw your funds. This can allow you to maximize your tax-deductible contributions and your withdrawal for a home purchase while minimizing any repayment required under the HBP (Home Buyers Plan).
If you have a longer time horizon (five or more years) before an expected home purchase, consider the FHSA. Be sure to contribute the maximum $8,000 annually and hit the lifetime maximum contribution limit of $40,000. The contributions are tax deductible —and the longer time horizon allows your contributions to benefit from compounded growth, withdrawals for a home purchase are tax free, and there’s no repayment required.
The tax savings from an FHSA or RRSP contribution can be used to contribute to the other plan or even to a TFSA to really supercharge the savings rate.
If you think you may need to use your savings for something other than a first-time home purchase, consider the TFSA. Your TFSA contribution limit begins to accrue as soon as you’re 18 years old and carries forward. If you use a TFSA to fund future FHSA or RRSP contributions, those contributions will be tax deductible and the withdrawals will be added to your TFSA contribution limit the following year.
Don’t forget that there is also the Home Buyer’s Amount – a non-refundable tax credit that allows you to claim up to $5,000 ($10,000 with a spouse) on your income tax return, worth up to $1,500 in tax savings to offset a portion of your home ownership costs for a qualifying home. This amount is filed on Line 31270 of your income tax return.
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