The new First Home Savings Account (FHSA) was proposed in the 2022 Federal Budget as the first truly tax-free investing account in Canada.
The FHSA rules will come into force on April 1, 2023. Once in force, every prospective first-time homebuyer meeting the program’s criteria will want to open one. A truly revolutionary new account structure, the FHSA is a best-of-all-worlds mix between the RRSP, the TFSA, and the Home Buyers Plan (HBP) programs: never has an account allowed for tax-deductions on your contributions, and tax-free access upon withdrawal.
Here are the key details about this new program.
What is the FHSA?
The FHSA is a new tax-sheltered account structure that allows prospective first-time homebuyers to save up to $40,000 tax-free.
Like the RRSP, you generate a tax deduction on contributions.
Like the TFSA, growth within the FHSA is fully tax-sheltered and withdrawals (either to purchase a home or to transfer to your RRSP) are tax-free. You can invest in the same financial vehicles via the FHSA as you can in a TFSA (stocks, bonds, GICs, mutual funds). You cannot invest in non-arms length vehicles such as land, shares of private corporations and general partnership units.
Who is eligible?
To be eligible to use the FHSA account, you must meet the following criteria:
- You must be an individual resident of Canada
- You must be at least 18 years of age
- Neither you nor your spouse / common law partner have owned a qualifying home that you lived in as a principal residence in the year you open the account, nor have owned a home in the prior 4 calendar years. This includes homes owned in foreign countries.
If a home is owned by your spouse / common law partner during the relevant time period, it is only a disqualifier if they are still your spouse / common law partner when the FHSA is opened. For instance, if you wanted to open an FHSA in 2023 and in 2020, your common law partner owned a home, but that person is no longer your common law partner, you will be eligible to open the FHSA.
You will be able to contribute $8,000 per year, including 2023 (even though the program only comes in force in April 2023). Lifetime, you can contribute up to $40,000.
You can carry forward up to $8,000 of unused contribution room for use in a later year. Carry forward amounts do not accrue until your FHSA has been opened.
Over-contributions to your FHSA are punitively taxed. Exactly like RRSP and TFSA, over-contributions are taxed 1% per month. So, a $1,000 over-contribution will see a $10 monthly tax levied until you’ve resolved the over-contribution.
Over-contributions can be resolved by waiting a year to receive your new annual contribution amount, thus absorbing some/all of your over-contribution, by transferring to an RRSP, or via a taxable withdrawal.
If you withdraw from the FHSA to purchase a qualifying home, this withdrawal is not taxable. To qualify, a withdrawal must meet these conditions:
- You must be a first-time home buyer when you make the withdrawal, but there is an exception allowing you to make a qualifying withdrawal within 30 days of moving into the qualifying home
- A qualifying home is a housing unit in Canada
- You must have a written agreement to buy or build a qualifying home before October 1st of the year following the year of withdrawal and you must intend to occupy the home as a principal residence within a year of buying or building it
Can I combine the FHSA and the HBP to buy the same home?
Yes, you can use both programs to purchase the same qualifying home. This is one of the more significant changes from the original proposed FHSA structure. This means you can withdraw a maximum of $40,000 (vian FHSA) + $35,000 (via HBP) for a total of $75,000 on the same qualifying home purchase.
Can I transfer RRSP funds to my FHSA?
You can transfer from RRSP to FHSA, provided you respect the annual and lifetime contributions limits of $8,000 and $40,000, respectively.
Qualifying withdrawals from the FHSA are tax-free, making effectively making them tax-free RRSP withdrawals.
To maximize your RRSP room, contributing to an FHSA may be the preferred approach; however, if you do not have the means to maximize both the RRSP and the FHSA, the ability to transfer funds from an RRSP to an FHSA will help maximize your FHSA’s potential tax-free withdrawal.
What happens if I don’t use my FHSA to purchase a home?
If you don’t wind down your FHSA for a qualifying home purchase, you must close your FHSA at the end of the 15th year after it was opened OR at the end of the year you turn 71, whichever happens first. At this point, you must close the FHSA. Any unused balance can be transferred to an RRSP or RRIF, or you can withdraw it on a taxable basis.
What happens to my FHSA in the case of marital breakdown?
In the event of breakdown of a marriage or common law relationship, amounts can be transferred from the FHSA of one spouse to an FHSA, RRSP or RRIF of the other spouse. The transfer would not restore contribution room of the transferor (sending spouse), nor would it consume contribution room of the transferee (receiving spouse).
I’m a U.S. citizen. Can I open an FHSA?
Double taxation problems of TFSA and RESP account structures for cross-border taxpayers mean these account structures are not worthwhile to open and use. Unfortunately, the FHSA falls into this category. We do not recommend opening an FHSA if you are a U.S. citizen.
Combining all the “pros” and none of the “cons” of the RRSP and TFSA effectively creates the first truly tax-free account; you get the tax benefit on contributions, enjoy tax-sheltered growth while invested, and you get the tax benefit on redemptions (no tax or HBP repayment obligation) for your qualifying first home purchase.
If you have any questions about this new savings vehicle, how it works, and if it applies to you, let us know. We would be happy to walk you through how to take advantage of this program.