Dreaming of owning a home? With soaring real estate prices and rising interest rates, home ownership can feel out of reach to many Canadians. Over the past decade, there has been a precipitous drop in homeownership rates for all age groups, but especially for those under age 35.
Canadians between the ages of 30–34 saw their home ownership rates fall by 6.9 percentage points to 52.3% between 2011 and 2021. Those between the ages of 25–29 saw their home ownership rates slip to 36.5%, down 7.6 percentage points over the same period. 1
The best antidote to these challenges is to have a meaningful down payment, but saving such a hefty amount is easier said than done. One problem is that Canadians have had to co-mingle their home-related savings with their other assets in the same account, making it difficult to keep those dollars dedicated to a down payment. On April 1, 2023, that changed: Canadians can now open a tax-free First Home Savings Account (FHSA).
Here’s what may make this account an ideal savings vehicle for Canadians who want to buy their first home.
What is a First Home Savings Account (FHSA)?
An FHSA is a registered account that can make it easier for Canadians to save for a down payment. The new account combines elements from the Home Buyers’ Plan (HBP) provision under the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). While Canadians are already taking advantage of the HBP and the TFSA to save for a home, the FHSA offers a few additional advantages that make it a potentially better way to grow a down payment.
Like all registered accounts, the investments held within an FHSA grow tax free, allowing you to benefit from compound growth. While contributions to an FHSA are tax deductible, just like an RRSP, withdrawals from the account for the purchase of a home are completely tax free like with a TFSA. An RRSP HBP does allow you to remove money saved within an RRSP in order to buy a home without a tax hit, however, all the money you withdraw has to be paid back over the next 15 years. There are no repayment requirements with the FHSA.
- Any Canadian resident between the ages of 18 and 71 can open an account, provided you have not owned a home in the past four calendar years.
- FHSAs allow holders to contribute up to $8,000 per year, up to a contributed maximum of $40,000 over the lifetime of the account.
FHSA benefits and limitations
The main benefit of an FHSA is knowing that every dollar you contribute, plus any investment gains that accrue to it, go toward your down payment on a qualifying home anywhere in Canada. Here are some of the other perks of using this account:
- You can contribute up to $40,000 to your FHSA.
- Investment gains in the account grow tax free and there is no tax on withdrawals.
- Should you decide you don’t need the money for a down payment or that owning a home is no longer a priority, you can transfer the funds from your FHSA to an RRSP. The money doesn’t count against your RRSP contribution room.
Apart from there being a cap on contributions, there are a few limitations to the account:
- The savings in the FHSA must be used to make a qualifying home purchase within 15 years of opening the account.
- Overcontributions are subject to a tax of 1% per month, payable in the current income tax reporting year.
What types of investments can you hold within an FHSA?
An FHSA can hold the same types of investments you can hold in other registered accounts, including:
- Mutual funds
- Exchange-Traded Funds (ETFs)
- Guaranteed Investment Certificates (GICs)
While you can’t contribute to your partner’s FHSA and claim a deduction, your spouse or partner can transfer the funds to you if you are eligible to hold the account and you can claim the deduction. Of course, if neither you nor your spouse or common-law partner has owned a home, then you can open two accounts and collectively save even more.
A marriage breakdown can affect many of your financial assets, and the money kept inside an FHSA is no exception. If your marriage or common-law partnership goes bust and you have to divide up your assets, the funds inside your FHSA may be transferred to an FHSA, RRSP or RRIF in your spouse or partner’s name. While the transfer would not count against the contribution room of the recipient, the transfer would also not reinstate contribution room to the transferor.
With an FHSA, you can designate a spouse or common-law partner as the successor account holder to preserve the tax-exempt status of the account in the event of your death. The surviving spouse would become the new account holder, assuming that individual meets the criteria to open an FHSA. Otherwise, the funds could be transferred to an RRSP or RRIF or be withdrawn on a taxable basis. In either scenario, the transfer would not count against the contribution room of the surviving spouse.
If the beneficiary is not a spouse or common-law partner, the funds would need to be withdrawn and taxed in the hands of the recipient.
There are no special creditor protections for FHSAs under the Bankruptcy and Insolvency Act.
Key differences and similarities when the purpose of your savings is to buy a home
|FHSA||RRSP Home Buyers’ Plan||TFSA|
|How does it help me buy a house?||Invest your contributions and use them for a home purchase.||Withdraw your RRSP investments temporarily and use them for a home purchase.||Invest your contributions and use them for a home purchase (or anything else you want).|
|What are the contribution rules?||$8,000 annual maximum contribution to a maximum of $40,000. The account can be held for 15 years.||You can borrow up to $35,000 from your existing RRSP, but the funds must be paid back within 15 years.||The contribution limit for 2023 is $6,500. Available contribution room accumulates starting the year you turn 18. No lifetime limit on contributions.|
|Who’s eligible?||Canadian residents aged 18 to 71 who have not owned a home in this or the past four calendar years.||Canadian residents who hold an RRSP. Neither you nor your spouse/common-law partner can have owned a home in this or the past four calendar years.||Any TFSA holder can use their funds to purchase a home. You can be a current homeowner and use the funds to buy another property.|
|Will I get a tax deduction?||Yes. Contributions are tax deductible (But not transfers from an RRSP). There is no tax on investment growth or on withdrawals for a home purchase.||Yes. Contributions to RRSPs are tax deductible. There is no tax on investment growth or on temporary withdrawals for a home purchase.||No. But there is no tax on investment growth or on withdrawals for a home purchase.|
|Key Advantages||Growth of tax-advantaged investments may mean more money for a home purchase.||Growth of existing tax-advantaged investments may mean more money for a home purchase or can be used for retirement.||Investments can be used for anything you like, including a home. No timeline means you can save for more than 15 years.|
|Limitations||If you don’t buy a home within 15 years, funds must be transferred to an RRSP.||Under the Home Buyers’ Plan, any RRSP withdrawals must be returned to your RRSP within 15 years.||Contributions are not tax deductible.|
When can I open a First Home Savings Account?
You can open an FHSA as soon as you turn 18, but before you open an account, you should try to consider when you might need the funds. As soon as you open an account, you start the clock on when you have to withdraw money for a down payment — meaning that if you were to open an account at age 18, you would have to be in a position to buy a house by age 33.
Can you use both the Home Buyers Plan (HBP) and First Home Savings Account (FHSA)?
Yes. If you have the ability to contribute to both your FHSA and your RRSP, you can combine the new registered account with the RRSP Home Buyers’ Plan to make an even larger down payment. Just note that you will have to return the money to your RRSP over the next 15 years, whereas there is no such requirement for the FHSA.
Can you transfer from a TFSA to an FHSA?
Yes. So long as you do not exceed the contribution limits, you can transfer funds from your TFSA to your FHSA. The transfer will also trigger a tax deduction that you can use to offset any income taxes owing.
Who qualifies for an FHSA?
Any Canadian resident between the ages of 18 and 71 who has not owned a home in the past four calendar years can open an FHSA.
- https://www150.statcan.gc.ca/n1/daily-quotidien/220921/dq220921b-eng.htm ↩