First Home Savings Account

What is the first home savings account? Introduced in the federal budget in 2022 and available to all Canadians from April 1, 2023, the first home savings account is designed to aid Canadians in financing the purchase of their first home. With this home savings account, individuals can set aside $8,000 per year, up to a maximum of $40,000, to buy or build a new home. Just like contributions to your RRSP, any money you contribute to your FHSA is tax deductible. Moreover, similar to a TFSA, any growth within the account, including capital gains, dividends, and interest, is completely tax-free, making it an excellent option for tax savings in your financial planning. You do not need to pay back any funds you withdraw from your FHSA, in contrast to the Home Buyers Plan, although the account must be closed within the year of your home purchase. If you do not use the FHSA within 15 years of opening it, you will have to either transfer the funds to your RRSP or RRIF on a tax-free basis or withdraw them at your marginal tax rate. Withdrawals made for purchasing a home come without tax repercussions, while those not utilized for this purpose are taxable income. Account eligibility is straightforward: the FHSA is available to residents of Canada between the ages of 18 and 72, provided you and your spouse have not owned a home in the current calendar year or the previous four years. When withdrawing from the FHSA, the taxpayer must have a written agreement to buy or build a qualifying home as their principal residence before October 1 of the year after the withdrawal. Contributions to the FHSA are tax deductible in the year they are made, or they can be carried forward to future years, ensuring flexibility in your financial planning. There is a lifetime contribution limit of $40,000 and an annual limit of $8,000, with contribution room carrying forward. Investment options within the FHSA are similar to those in RRSPs and TFSAs, allowing a variety of choices, including stocks, bonds, ETFs, cash, mutual funds, and GICs. Unlike the Home Buyers Plan, the first home savings account does not require repayment upon withdrawal, facilitating homeownership without additional burdens. If you decide that home ownership is not for you, you can transfer your savings into an RRSP or RRIF tax-free. However, any withdrawals made from the FHSA that are not used for a home purchase will be considered taxable income. It’s essential to note that you must close your FHSA after 15 years or upon turning 71, whichever comes first. The first home savings account represents a novel savings plan. If you are uncertain about its suitability for your financial planning, reflect on your long-term savings goals. If you aim to purchase a home, consider how much you need to save and whether the FHSA, RRSP Home Buyers Plan, or TFSA aligns best with your objectives. Consulting with a financial advisor can help you navigate these options effectively. Want to see how it works? Try one of our savings calculators here.