Added to the alphabet soup of Canadian tax-advantaged accounts is the new First Home Savings Account (FHSA). Despite what its name suggests, the newest registered account is more than just a “savings account” and can be used for more than just purchasing a home.
The new FHSA is in many ways a Frankenstein of Canada’s other popular registered accounts: the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA).
The primary purpose of this account is to save to buy a house. To open the account, you must be a resident of Canada, be 18 years old (19 in some provinces), and have not lived in a home you, or your spouse, has owned in the last four years.
Once the account is opened, you can start saving. Upon opening the account, you gain $8,000 per calendar year in “participation room” and can maximize this annually until you reach the lifetime limit of $40,000. If you can’t save the full room each year, you can carry forward up to $8,000 of unused room into the next, in addition to the $8,000 for that year.
| Year | Contribution Room | Contribution | Carryforward Available |
| 2023 | $8,000 | $3,000 | $8,000 – $3,000 = $5,000 |
| 2024 | $8,000 + $5,000 = $13,000 | $2,000 | $13,000 – $2,000 = |
| 2025 | $8,000 + $8,000 = $16,000 |
As shown above, if you only contribute $3,000 in 2023, you can carry over $5,000 to 2024 plus the $8,000 in new room. If in 2024, you only contribute $2,000, only $8,000 can be carried over to 2025, not $11,000. The difference of $3,000 is lost and cannot be contributed later.
Your FHSA can remain open until December 31 of the year in which the earliest of the following three scenarios occur:
Don’t let the “savings account’ in First Home Savings Account fool you: you can invest in more than just high-interest savings. Stocks, bonds, and mutual and exchange-traded funds are allowed too. You can contribute cash or other investments to your FHSA, or you can ask your financial institution to transfer your existing investments from your RRSP to your FHSA.
For assets contributed directly, you will be able to claim the amount as a deduction on your income taxes, just like an RRSP. However, unlike an RRSP, contributions in the first 60 days of the year cannot be deducted against last year’s income. For a direct transfer between RRSP and FHSA, there are no tax consequences: no deduction allowed since it can already be claimed as an RRSP contribution and no need to include the transferred amount to your income.
As long as you only invest in eligible investments and don’t over-contribute, your investments will grow tax free within the FHSA until you decide to make a withdrawal.
There are a few ways to take funds out of an FHSA: withdrawing to purchase a home, making other withdrawals, or transferring funds to an RRSP.
If you fall under the Canada Revenue Agency’s definition of a first-time home buyer, you can empty your FHSA, withdraw the funds without paying tax (just like a TFSA), and use them to buy your new home. You can also combine these funds with a maximum RRSP withdrawal under the Home Buyer’s Plan of $35,000 for a potential $75,000+ down payment. Double it if you have a spouse!
It is also important to note that once you make a withdrawal to purchase a home, you can no longer deduct new contributions against your income and the timer begins to close your FHSA.
If you choose to make a withdrawal for any reason other than to purchase a home, the amount of the withdrawal will be taxable and added to your income for the year.
If you decide home ownership is not for you, you can also transfer funds from your FHSA to your RRSP without using up your RRSP contribution room. For many, this is a great way to leverage your FHSA to enhance your retirement savings. For example, if you maximize your participation room every year to attain your maximum lifetime room of $40,000, while your investments compound in a 60/40 portfolio (using PWL’s Financial Planning Assumptions), you could create over $90,000 in RRSP room by transferring your FHSA to your RRSP at the end of the 15-year period.
The FHSA is a great way to grow your home savings tax free by getting the best of the RRSP and TFSA in one. For parents of first-time home buyers, the FHSA can be a valuable tool to help your kids save for a home tax efficiently. At a minimum, it can help boost retirement savings by creating additional RRSP room.
For complete details on the FHSA, please refer to the Canada Revenue Agency’s webpages on the topic.
