The FHSA – or First Home Savings Account – is a Canadian registered investment account introduced by the Canadian government in 2023 to help Canadians with saving for their first home.
What Is The FHSA?
Similar to the TFSA and RRSP, even though the FHSA has ‘savings’ in the title, and you can use it to save, it’s actually a registered investment account. Typically when you invest your money, you have to pay taxes on the money you gain – but, there are several ‘registered’ investment accounts that exist that give you tax benefits.
One example is the TFSA, which is a tax free account. When you invest in this account, your money grows tax free – so, when you take money out of it, you don’t have to pay taxes on that money.
Another example is the RRSP, which is a tax deferred account. When you invest in this account, you do pay taxes on the money you earn in the future, but you’re able to lower how much you pay in taxes each year you add money into that account.
So, the TFSA means less tax in the future, and the RRSP means less tax now. Because these are such great perks, there’s a limit on how much you can contribute to both of these accounts.
The FHSA is the newest account with tax benefits, and it essentially combines the perks from both the TFSA and RRSP. The money you contribute into this account can be used to reduce your taxable income (just like the RRSP), and you’re also growing your money tax free (just like a TFSA) – but, the catch is that when you take money out of the account, you have to use it to buy a home to take advantage of this perk.
Benefits Of The FHSA
When you put money into your FHSA, it brings down your taxable income – aka, the money you make from your job. For example, if you add in $5,000 this year, and you have a salary of $55,000, your taxable income would be brought down from $55,000 to $50,000 – so, you’d pay less money in taxes this year.
Now, let’s jump forward to the future – let’s say that it’s five years from now, you’re looking to buy your first home, you have $30,000 your FHSA, and pull all of that money out to use for your down payment. When you take out the $30,000, you don’t have to pay taxes on that money. So, if your salary was still $55,000, you’d still have a taxable income of $55,000 – not $85,000.
The important thing to note is that the above benefits only apply if you use the money within your FHSA to buy a home. If you want to take that money out, but you don’t use it to buy a house, then you would have to pay taxes on the money that you earned. So, the benefits here are the ability to bring down your taxable income the year you contribute money, and the ability to take the money you earn in the account out tax free to buy your first home.
Who Can Open An FHSA?
You have to be a Canadian resident, you have to be between the ages of 18 and 71, and you have to be a first time home buyer. Based on the criteria for this account, the term first time home buyer means that you haven’t owned a home over the past four years. So, even though it’s called the First Home Savings Account, it’s really for your first home, or your first home in four years – and specifically that you can’t have lived in a home that you own in the year you open your FHSA, or four years prior to that.
How, going back to the age range of 18-71 years old – you can only actually keep your FHSA open for up to 15 years after the year you open an account. For example, if you open up an account at age 30, you would have until you’re 45 to use the money in your account to buy a qualifying home. So, basically your FHSA can remain open for up to 15 years, or until the end of the year that you turn 71 – whichever comes first.
If you don’t use the money in your FHSA to buy a home within that 15 year time period, or by the time you’re 71, then you have a few different options.
You wouldn’t be able to take the money out tax-free, but you could still withdraw the money and pay taxes on it. The better option is to transfer the money into either an RRSP or RRIF – which is a Registered Retirement Income Fund – on a tax deferred basis. This means that it would continue to reduce your taxable income, because you’d be adding money into an RRSP account, and that’s the benefit for that account.
The good news is that you wouldn’t lose the money in your FHSA if you don’t use it to buy a house, but you definitely take advantage of the most benefits if you do use the money to buy a house.
The FHSA Contribution Limit
Similar to the TFSA and RRSP, the FHSA has a contribution limit, meaning that there’s a maximum amount of money that you can add into this account, to kind of limit the benefit you get to a specific threshold.
For this account, the lifetime contribution limit is $40,000. That means that the maximum amount of money you can transfer into this investment account is $40,000 – now, your money can grow on top of this, but that’s the maximum you can put in there yourself.
On top of the lifetime contribution limit of $40,000, there’s also limits on how much you can contribute per year. On a yearly basis, you can fund your account with up to $8,000 – and any unused portions of that limit will carry forward up to a maximum of $8,000 to use the following year.
Example 1 –
- You open up an FHSA in 2024, and contribute the full $8,000 limit
- Then, you do that again in 2025, 2026, 2027, and 2028
- At the end of the fifth year, you would have contributed the maximum $8,000/year, and reached to maximum $40,000 contribution limit
- At that time, you could either withdraw the money to buy your first home, or you could let the money sit there and grow for up to another 10 years before buying a home and take advantage of the growth your money could see over that time period
Example 2 –
- You open up an FHSA in 2024, and only contribute $3,000
- Then, in 2025, you contribute $13,000 (the new $8,000 yearly limit plus the extra $5,000 you didn’t use last year)
- Then, in 2026, you don’t contribute any money at all
- Then, in 2027, you contribute $16,000 (the new $8,000 yearly limit plus the entire $8,000 you didn’t use the year before)
- Okay, now pretend that in 2027, you actually didn’t contribute any money at all for the second year in a row; in this case, in 2028 you could still only contribute a maximum amount of $16,000 – not $24,000 – even though you missed two years
Withdrawing From Your FHSA
Once you open an FHSA – and fund the account with money – what happens when you’re ready to take money out of the account to buy your first home?
Keep in mind that this has to be for either your first home, or your first home in 4+ years. It also has to be a primary residence – aka you need to be planning on living in this home, and can’t use the money from your FHSA to buy an investment property – and it has to be a home you will be moving into within one year of the purchase date.
When you go to withdraw the money for a qualifying purchase, there are a few steps that you’ll have to take.
- You’ll have to fill out a form called ‘Form RC275 – Request to Make a Qualifying Withdrawal from your FHSA’ and give it to the bank or financial institution you have your FHSA at.
- You’ll also have to prove that you have a written agreement to buy or build a home within 1 year from the withdrawal date, and you also can’t have acquired the home more than 30 days before taking the money out.
Once you’ve used your FHSA, you have to close the account down on or before December 31st of the year following you taking out the money. You also can’t open another FHSA again in the future once you’ve already successfully used one to buy a home.
Using your FHSA to invest and grow your money
Just like the other tax-advantaged investment accounts available in Canada, you’ll likely want to invest within your FHSA. But, unlike the other tax-advantaged investment accounts available in Canada, you won’t be investing for the long-term, as the maximum number of years you can keep this account open is 15 years.
Because of this, you’ll likely want to reduce your risk, as you don’t want to be in a position where you go to buy your first home and your money has gone down, not up. But, you also do want to take advantage of investing and growing your money. So, what are your options?
You might want to consider investing in passive index funds or ETFs that are well diversified, or GIC’s that have a locked in return.
FHSA vs RRSP First Time Home Buyers Plan
Note that you can use both the FHSA and the RRSP First Time Home Buyers Plan in conjunction to buy your first home – you don’t have to use just one or the other.
The RRSP First Time Home Buyers Plan let’s you take money out of your RRSP tax-free specifically for the purpose of buying your first home. You can take up to $35,000 from your RRSP, and you have to re-contribute the money you took out within 15 years of taking it out – because the real purpose is retirement, not buying a home.
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