First Home Savings Account: How the FHSA Helps You Save Tax-Free in Canada
The First Home Savings Account (FHSA) is the best new financial tool/account to be introduced since the introduction of the Tax-Free Savings Account (TFSA) back in 2009.
The FHSA is designed for a specific purpose: for Canadians to be able to save and invest to buy their first home in Canada. When saving for a first home, there are three registered accounts to consider: The RRSP (using the First Time Home Buyers Plan), the Tax-Free Savings Account, and the First Home Savings Account (FHSA). Although the FHSA is new, I think it will quickly become the best way to save for a first home.
What are the contribution rules for opening an FHSA?
To open an FHSA, you must meet the following criteria:
- Be a Canadian resident
- Be at least 18 years of age
- Not more than 71 years of age on December 31
- Be a first-time home buyer
The Canada Revenue Agency considers you a first-time homebuyer if you or your spouse/common-law partner did not live in a qualifying home as your principal residence during the current year before the FHSA was opened or at any time in the previous four calendar years.
How do FHSA Contributions Work?
The annual contribution limit is $8,000 annually, up to a lifetime contribution limit of $40,000. For example, you can contribute $8,000 per year for five years. You can carry forward unused contributions but for only one year at a time.
For example, let’s say you did not contribute to a FHSA in 2023 or 2024. Your $8,000 per year limit carries forward to 2025. Your limit in 2025 would be $24,000, but the maximum you can contribute is $16,000 in 2025. Contributions that you make to an FHSA do not affect your RRSP contribution room.
FHSA vs. RRSP
FHSAs and RRSPs serve different purposes. The FHSA is designed specifically for down payment savings, while RRSPs are primarily intended for retirement savings. However, the two accounts are similar in how they are treated for tax purposes.
Like an RRSP, FHSA contributions are tax deductible. You can also carry forward deductions in the future (does not have to be in the current year), just like an RRSP.
If an FHSA withdrawal is made for any reason other than purchasing a qualifying home, you must pay tax on the amount withdrawn, like an RRSP. If the withdrawal is for purchasing your first home, there are no tax implications. And unlike the Home Buyer’s Plan, you don’t have to return the money to your FHSA.
Can you transfer money from your RRSP to an FHSA?
You can transfer money from your RRSP to an FHSA. However, it must be a direct transfer, and you cannot exceed the contribution limits of the FHSA account.
For example, if you have $8000 of contribution room and transfer a full $8000 from your RRSP to your FHSA, you cannot contribute any more funds that year. If you move $4000 from your RRSP, you could still contribute an additional $4000 for the year.
Note that you cannot transfer from a Registered Retirement Income Fund to an FHSA.
Here’s an example of where transferring from your RRSP may come in handy:
Jason has accumulated $90,000 in his RRSP and was planning to use the Home Buyers Plan, where he could borrow $35,000 from his RRSP to purchase his first home. Now with the FHSA, Jason could transfer $8000 from the RRSP to the FHSA and withdraw the $8000 tax-free when he purchases his new home AND borrow $35,000 from the RRSP under the Home Buyers Plan.
If Jason is not planning to buy a home right away, he could either contribute $8000 to the FHSA per year and get a tax deduction like an RRSP. If he did not have money for new contributions, he could transfer $8000 per year from the RRSP to the FHSA. OR he could do a combination of the two.
How can I invest the money in my FHSA?
Like the TFSA, the name First Home Savings Account is misleading because the funds don’t have to be held in a savings account. You can take advantage of the same investments that are available in an RRSP or TFSA, such as GICs, mutual funds and ETFs, and stocks and bonds.
All of the money in an FHSA grows tax-free. If you don’t use the money for a first home, you can transfer it to your RRSP, and the money will continue to grow tax-deferred.
How do FHSA withdrawal rules work?
As mentioned, withdrawals from an FHSA for a first home are tax-free, with no repayment required. Otherwise, withdrawals are taxable, like an RRSP.
You can transfer your FHSA balance to an RRSP if you don’t buy a first home, and transfers do not affect your RRSP contribution room. Your FHSA account must be closed by December 31st, 15 years after you open it, or by the end of the year in which you turn 71 (whichever comes first).
What happens to my FHSA if I Die?
When you open an FHSA account, you can name a beneficiary who would receive the funds if you pass away while the account is open. If you’re married, your spouse can be a successor annuitant and funds can be transferred to their FHSA, RRSP, or RRIF.
Can you use the HBP and the FHSA together?
The FHSA can be used with other programs like the RRSP Home Buyers Plan or TFSA. The FHSA is a new program, but Canadians will employ many strategies that combine different accounts over time.
With that in mind, here are some key differences between the HBP and the FHSA:
- When you withdraw under the Home Buyers Plan, you borrow money from your RRSP. You must pay the money back into the RRSP over a 15-year period. With the FHSA, you can withdraw the money tax-free with no requirement to pay it back.
- HBP withdrawals are limited to $35,000 from your RRSP. With the FHSA, you can withdraw the entire amount from the account, including the growth, tax-free.
Are there benefits for students to use the FHSA?
The FHSA is a great way for anyone, including students, to save for a first home. If your income is less than $15,000 (aka most students), here are 2 options:
- If you contribute to the FHSA but don’t have much income, you can save the deduction for later or use the TFSA first.
- In the second year, you will lose the $8000 contribution room from the first year, so you may want to make the contribution to the FHSA before the TFSA and save the deduction for when you are making more than $15,000 of income
If your income exceeds $15,000, it makes sense to contribute to FHSA and use the deduction. Any tax savings is a bonus.
In most cases, if you are making to buy a first home, your FHSA and TFSA accounts should be prioritized over an HBP because of their flexibility. Just ensure you don’t spend your other short-term savings, i.e., emergency funds.
What if you don’t plan to buy a home?
Even if people don’t plan to buy a home, there still may be benefits in using the FHSA
Think of the FHSA as a bonus of $40,000 of RRSP contribution room. You can contribute to your RRSP to get a tax deduction AND contribute to the FHSA for an extra $8,000 tax deduction.
If you never buy a home, transfer the FHSA to an RRSP before the account closes. Remember that your marginal tax rate at contribution should be the same or higher than your MTR at withdrawal.
How can parents use the FHSA to help their kids buy a home?
While parents can not contribute directly to their adult child’s FHSA, they can gift or loan the money to the child to make the contribution to the FHSA. Many parents are helping kids with down payments anyway; this way, their child can benefit from a tax deduction and tax-free growth.
Can both spouses use the FHSA towards their first home?
Joe and Emily are saving for their first home. They can each contribute $8000 per year to a FHSA. Joe would get an $8,000 tax deduction for his FHSA contribution. Emily would also get an $8,000 tax deduction for her contribution to her FHSA.
In addition to the FHSA contributions, Joe and Emily could also contribute to their RRSP with the idea that they can borrow from their RRSP under the First Home Buyers Plan. If they contributed $7000 per year into the RRSP (assuming they have the RRSP contribution room), here’s how their contributions would look:
In total, they would be contributing $30,000 per year to the RRSP and FHSA
- $8000 to Joe’s FHSA
- $7000 to Joe’s RRSP
- $8000 to Emily’s FHSA
- $7000 to Emily’s RRSP
After 5 years, they could pull out $35,000 each from their RRSPs under the First Home Buyers Plan. This amount would have to be paid back to the RRSP over a 15-year period
They could also pull out $40,000 plus growth each from the FHSA tax-free. No repayment is required.
It all adds up to a total potential tax-free withdrawal of $150,000 towards their down payment.
Can the FHSA benefit self-employed Canadians?
The FHSA can benefit self-employed Canadians who pay themselves in dividends. Because dividend income doesn’t accumulate RRSP contribution room, a self-employed person may have difficulty saving for a down payment inside an RRSP and using the HBP.
However, the FHSA is still available because the contribution room is not based on your income. You can still contribute the maximum amount even if you pay yourself in dividends.
Can you transfer from a TFSA to FHSA?
You cannot transfer money from a TFSA to a FHSA without impacting your TFSA contribution room. You would simply have to withdraw money from your TFSA and then contribute the funds to an FHSA.
Depending on your available contribution room, you may have to wait until the following calendar year to replace the money in your TFSA. Remember that any withdrawals from the TFSA are tax-free.
Final Thoughts on the Tax-free First Home Savings Account
As mentioned in the outset of this article, the First Home Savings Account is Canada’s most powerful financial tool introduced since the Tax-Free Savings Account in 2009. If you plan to buy your first home in the next few years, consider opening an FHSA account now. The earlier you start saving, the more time your money has to grow tax-free. You also get the immediate benefit of an income tax deduction.