FHSAs
These accounts allow you (and separately, your spouse) to save for a down payment without paying tax on your account contributions or on your investment earnings.
The First Home Savings Account (FHSA) is an investment account registered with the Canada Revenue Agency (CRA) that allows prospective first-time homebuyers to tax-shelter a certain amount of money each year towards the purchase of their first home in Canada. The FHSA combines features of the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). Contributions to the FHSA are tax-deductible, and withdrawals for purchasing a qualifying home are non-taxable, including any income gained from investments within the account.
Opening an FHSA
In British Columbia, you must be at least 19 years old to open an FHSA. You (and your spouse, if applicable) must also qualify as a first-time homebuyer. To open an FHSA, you will need to provide accurate information about your personal and financial circumstances.
When opening an FHSA:
- Understand what types of investments you can purchase through the account (e.g. mutual funds, ETFs, stocks, bonds).
- Understand if you will have access to other companies’ investment products or only to investment products sold by the company that created your account.
- Compare fees and charges related to the investments you purchase in your account. Examples of fees to consider include trading fees, advisory fees, withdrawal fees, account transfer fees, administration fees, and foreign exchange fees.
- If you do not feel confident investing on your own, or if you do not have time to properly research potential investments, then consider working with a registered investment advisor to align your investments with your financial goals.
- If you feel confident investing on your own and are willing to put in the time to properly research potential investments, then consider a self-directed FHSA. Self-directed accounts may provide access to a broader range of potential investments and at lower cost.
Contributing to an FHSA
You can contribute up to $8,000 per calendar year, with a lifetime contribution limit of $40,000. Unused contributions up to a total of $8,000 can be carried forward. Contributions to an FHSA are tax-deductible. Transfers from an RRSP to an FHSA are allowed on a tax-free basis, provided they don’t exceed your FHSA participation room.
Withdrawing Funds
Withdrawals for purchasing a qualifying home are tax-free, and you are not required to repay the funds. If you decide not to buy a home, funds can be transferred tax-free to an RRSP without affecting your unused RRSP contribution room.
Closing an FHSA
The FHSA must be closed within 15 years of opening or by the end of the calendar year in which you turn 71. At that time, funds can be transferred to an RRSP or Registered Retirement Income Fund (RRIF) tax-free. If funds are withdrawn for other purposes, they will be subject to income tax.
Advantages of an FHSA
FHSAs offer key benefits, including:
- Tax benefits: Contributions are tax-deductible, reducing your taxable income. Investment income earned within the FHSA is also tax-free.
- Flexible withdrawals: Withdrawals for purchasing a qualifying home are non-taxable, and there is no requirement to repay withdrawn funds.
- Variety of investment options: The FHSA can hold various types of investments, such as shares, bonds, mutual funds, ETFs, and GICs, allowing you to align investments with your financial goals and risk tolerance.
- Carry-forward contributions: If you don’t contribute the maximum $8,000 in a calendar year, up to $8,000 can be carried forward, increasing your contribution room in a future year.
- Transfer flexibility: Unused funds can be transferred tax-free to an RRSP or RRIF, ensuring they remain tax-sheltered.
Disadvantages of an FHSA
While FHSAs offer significant advantages, they also come with some drawbacks to consider:
- Eligibility restrictions: You must be an eligible first-time homebuyer who hasn’t owned a home in the past four calendar years to open an FHSA.
- Time constraints: The account must be used within 15 years of opening or by the end of the calendar year you turn 71, whichever comes first.
- Taxable withdrawals for non-qualifying purposes: If funds are withdrawn for non-qualifying purposes, they will be subject to income tax.
When is it Optimal to Use an FHSA?
- When you start early: Opening an FHSA as soon as you meet the eligibility criteria allows you to maximize contributions and benefit from tax-free compounding growth over time.
When you combine with other accounts: Use the FHSA in conjunction with an RRSP or TFSA for a diversified savings strategy tailored to both short-term and long-term financial goals.
For planning around life events: If you anticipate buying a home within the next 15 years, the FHSA is a valuable tool for accumulating a down payment while benefiting from tax savings.
Questions About FHSAs
For more information, consult your registered investment advisor or visit the CRA website.