First Home Savings Account

What is the first home savings account?

Introduced in the federal budget in 2022 and available to all Canadians April1, 2023. The first home savings account is set out to help Canadians with financing the purchase of their first home. Those using the account can set aside $8,000 per year to a maximum of $40,000 into the account to buy or build a home. 

Just like in your RRSP any contributions you make are tax deductible, and like your TFSA any growth inside (capital gains, dividends, and interest) is tax free. This account in basically the best of an RRSP and TFSA combined.

You don’t need to pay back any funds you withdraw from your account like the home buyers plan, although you will have to close the account withing the year of purchase of your home.

If you don’t use the FHSA within 15 years of opening, you will have to close the account and either transfer the funds to your RRSP or RRIF on a tax-free basis or withdraw at your marginal tax rate. Individuals that make a withdrawal can transfer any remaining savings into their RRSP or RRIF on a tax-free basis as long as that transfer happens before December 31stof the year following the withdrawal.

Account eligibility

The FHSA has launched on April 1, 2023, and you can open an FHSA as long as.

· You are between the ages of 18 and 72.

· You are a resident of Canada.

· In the current calendar year or the previous four years, you and your spouse or common law partner have not lived in a home that either of you have owned.

Since this is designed for the purchase of your first home there are some rules for the withdrawal to qualify, the taxpayer must have a written agreement to buy or build a qualifying home as their principal residence before October 1st of the year following the year of withdrawal.

Income Tax Treatment

Contributions to the FHSA would be tax deductible in the year they are contributed, or they can be carried forward to be used in future years, and any withdrawal made to purchase a qualified home would be completely tax free.

Withdrawals that are not used to purchase your first home are included as taxable income, and if you don’t use the FHSA to purchase a home within 15 years of opening the account, you will have to either transfer the funds to your RRSP, or RRIF, or withdraw the funds at your marginal tax rate.

Contribution

There is a lifetime contribution limit of $40,000 and an annual contribution limit of $8,000, contribution room does carry forward for the life of the plan, although you can only contribute up to $8,000 of excess carry forward amount in any given year. 

Contribution limit only applies to contributions made in the calendar year. Unlike RRSP the first 60 days of contribution cannot be attributed to the previous year.

Investment options

The FSA holder would be the only taxpayer permitted to claim any deductions for contributions made to their respective FHSA, so there is not spousal FHSA available. 

Similar to the RRSP And TFSA, you would be allowed to hold a variety of investments in your FSA, including but not limited to 

· Stocks

· Bonds

· ETF’s

· Cash

· Mutual Funds

· GIC’s

Difference between Home Buyers Plan

Unlike the Home Buyers Plan, you do not need to pay back the first home savings account once you have withdrawn it. This account is meant as a down payment for your first home.

With the HBP you can withdraw up to $35,000 from your RRSP, and those funds would have to be repaid eventually over a 15-year period. Under the FHSA you can contribute up to $40,000 with no need to repay.

What happens if you don’t buy a home?

 If You decide home ownership is not for you, you can transfer the savings into an RRSP or RRIF tax free. Otherwise, any withdrawals you make from the FHSA is considered taxable income.

There are limits to how long you can keep the FHSA open. You must close your account after you have had it for 15 years, or when you turn 71, whichever comes first.

The first home savings account is a new kind of savings plan. If your unsure whether its right for you, consider your long-term savings goals. If you’d like to purchase a home consider how much you would need to save and whether the FHSA, RRSP Home Buyers Plan, or TFSA would be better for your needs. You can always speak with a financial advisor to help guide you with setting up your plan.

Want to see how it works. Try one of our savings calculators here.