FHSA: First Home Savings Account

In 2022, the Canadian government announced the creation of a new tax-free savings account to help potential home buyers save for their first home, called the First Home Savings Account, or the FHSA. When it was first announced, I wasn’t interested as I wasn’t eligible. But now that we’re in the first year when Canadians can open an account and as we’re getting closer to the end of the year, I have seen many questions about the FHSA. I decided to take a closer look.

What is an FHSA?

An FHSA is a tax-free savings account that Canadians can open at their brokerage. It combines the benefits of both an RRSP and a TFSA in that contributions to an FHSA are deductible and eligible withdrawals are tax-free. The purpose of an FHSA is to help potential home buyers save for their first home. Note that it doesn’t have to be your first home if you have not lived in a home that you own within the last 4 years.

Who is Eligible?

Canadian residents may open an FHSA if they meet the following criteria:

• Must be of legal age (18 or 19) when you open the FHSA, or younger than 71 before the end of the calendar year.
• Must be a Canadian resident.
• Must not have lived in a home as a principal residence that you owned or jointly owned in the last 4 years.
• Must not have lived in a home as a principal residence that your spouse (married or common-law) owned in the last 4 years, if you had a spouse.

What loophole does this open? Although you may own a rental property, as long as you have been renting or otherwise lived with family for the last 4 years, you’re eligible.

Contributing to an FHSA

You may contribute up to $8,000 per year into an FHSA up to a lifetime maximum of $40,000. For a couple, that’s $80,000 to put toward the purchase of a first home! Unused contribution room rolls forward, but only up to $8,000 per year. That means that if you’re planning to open an FHSA next year, there’s no reason to defer opening an account right now (end of December) because you will then be eligible to contribute $16,000 next year.

You may also contribute to your FHSA by directly transferring from your RRSP. However, transfers from your RRSP do not restore RRSP contribution room. Thus there is no benefit to transferring from an RRSP. It’s more beneficial to contribute directly to an FHSA because you can deduct the FHSA contribution at tax time while still maintaining the RRSP contribution room. An FHSA is like having additional RRSP contribution room.

Like with an RRSP, there is a penalty of 1% on any overcontributed portion. Withdrawal of the overcontribution can be done without reporting the withdrawal as taxable income.

You will receive a tax slip from your brokerage that summarizes contributions to and transfers into your FHSA.

Withdrawing From an FHSA

You may withdraw money at any time from an FHSA, but only some conditions will be considered tax-free withdrawals.

Conditions for tax-free withdrawals include:

• Purchasing a home. There are conditions for withdrawals for home purchase.
• Withdrawing excess contributions.
• Direct transfer your FHSA amount to an RRSP or RRIF.

If you subscribe to the idea that buying a home is not necessary, opening and contributing to an FHSA gives you an additional $40,000 in RRSP contribution room because any amount that you accrue can be transferred into an RRSP tax-free. If you’re eligible to open and contribute to an FHSA, there is simply no downside risk.

Investments in an FHSA

An FHSA is like any other registered account. You can buy GICs, stocks, ETFs, etc.

One word of caution is that there is no tax treaty between the US and Canada for this new account. So just like in a TFSA, any dividends paid by US companies incur a 15% withholding that you cannot reclaim.

But like other registered accounts, I can imagine some Canadians YOLO-ing their account. Remember that excessive trading in a TFSA can be flagged by the CRA and I imagine that they will use the same tools to flag excessive trading in an FHSA. Additionally, think of an FHSA as saving for a down payment. Conventional wisdom tells you that you should put your down payment into a HISA. If you truly are saving to buy a home, you wouldn’t want the down payment that you’re relying on to fluctuate. Remember that the stock market can crash in the short term and take years to recover.

Tax Benefits

As you can see, an FHSA combines the tax benefits of a tax-deferred RRSP and a tax-sheltered TFSA. You can deduct contribution amounts from your taxes and you don’t have to pay income tax on any gains. It’s a win-win for anyone eligible.

Closing an FHSA

The FHSA will close after any of these conditions are met:

• If the FHSA account has been open for 15 years.
• If you turn 71-years old.
• The year after you withdraw to buy a home.

What this means is that you have 15 years to contribute to your FHSA and buy a home. If you have plans to buy a home but don’t think that you’ll buy a home within that time frame, I would delay opening an FHSA.

Special Considerations for US (Dual) Citizens

There is no tax treaty between the US and Canada for this new account. While you can open an FHSA, Canadian residents who are US citizens should treat an FHSA like any non-registered, taxable account. Any trading activity, gains, dividends, etc. must be reported on US tax forms. Additionally, avoid Canadian ETFs or anything else that may be considered a passive foreign investment company (PFIC).

For the purposes of Canadian taxes, contributions to an FHSA are deductible. But for the purposes of US taxes, they are not.

How is this Different Than the Home Buyers’ Plan (HBP)?

The HBP is a tax-free loan of $35,000 from your RRSP. You have to repay your loan within 15 years. Unlike the HBP, an FHSA is not a loan and does not require repayment. Additionally, you withdraw the full amount from your FHSA for the purchase of a home, including any gains in the account.

You may use the HBP and the FHSA together for the purchase of the same home.

Conclusion

With the drastic increase in home prices over the years, buying a home feels out of reach for many Canadians. The First Home Savings Account (FHSA) is a brand new way for Canadians to save for the purchase of a home. Whether you plan to buy a home in your lifetime or not, the tax benefits of an FHSA are huge. It makes sense to open an FHSA account and contribute.