First-Time Home Buyer's Savings Account (FHSA)

Feb 7

In 2022, the Government of Canada created a new type of savings account specifically for first-time home buyers. It’s called the First-TIme Home Buyer’s Savings Account or FHSA.

The FHSA is a tax-free way for Canadians to save up to $40,000 to buy their first home. Depending on your mortgage, this is often enough for a down payment.

Is the Account Tax-Free?

Yes, the savings account is tax-free.You’re able to make an income tax deduction on the money you put into the account, similar to TFSAs and RRSPs.

Unlike RRSPs, contributions made within the first 60 days of the year can’t be attributed to the year before.

When Can You Open an FHSA Account?

The Tax-Free First Home Savings Account (FHSA) was first proposed in 2022. The legislation was officially released on November 4, 2022, as part of Bill C-32 (Fall Economic Statement Implementation Act, 2022). Assuming the bill passes, the FHSA will be available on April 1, 2023.

Who Can Open an FHSA Account?

To open an FHSA, you need to be:

A resident of Canada
At least 18 years old
A first-time home buyer

Being a first-time home buyer means you, or your spouse or common-law partner, did not own a qualifying home that was your principal residence at any time in the year the account is opened or the preceding four calendar years.

For the purposes of the first-time home buyer’s savings account, a home owned by your spouse where you lived during the relevant period would only make you ineligible if that person is still your spouse when the FHSA is opened.

How Much Money Can You Put in the Account?

You can put up to $40,000 overall and $8,000 in any one year into your FHSA. This includes 2023, even though the account isn’t available until April 1, 2023.

You can carry forward up to $8,000 of your unused annual contribution amount to use in a later year, as long as you stay under the $40,000 limit.

For example, if you open an FHSA in 2023 and contribute $4,000, you can contribute up to $12,000 in 2024. That’s the $4,000 you didn’t use in 2023, plus the $8,000 limit you’d have in 2024.

Carry-forward amounts do not start accumulating until after you open an FHSA. You can have more than one FHSA, but the total amount you can put in all of your FHSAs cannot exceed your yearly and lifetime contribution limits.

Like TFSAs and RRSPs, anything over your limit is subject to tax for each month that the account is over the limits. The tax is 1% which applies to the highest dollar amount that was in the account that month.

How Can You Invest Your FHSA?

If you have a TFSA, the investing rules are the same for both FHSAs and TFSAs. Possible investments include:

Mutual funds
Publicly traded securities
Government and corporate bonds
Guaranteed investment certificates

There are also some investments that are not allowed with FHSAs. Non-qualified investments include “non-arm’s length” investments and investments in assets such as land, shares of private corporations, and partnerships.

Does the Money Have to Be Used on a House?

Generally speaking, yes, the money from your FHSA does have to be used on a house if you want it to be tax-free.

You can take money out at any time for other purchase, but it will not be tax-free. You will have to pay income tax on it, just like any other income source.

If you do make a withdrawal, your contribution limits will not increase. For example, If you have $40,000 in your FHSA and took out $10,000 to buy a car, you couldn’t put $10,000 back into your FHSA.

What Happens if I Don’t Use the Money to Buy a House?

If you don’t use the money in your FHSA for an eligible home purchase by either:

The end of the 15th year after the plan was opened; or
The end of the year you turn 71 years old;

Then your FHSA will stop being an FHSA, and you must close the savings account. Any unused balance in the plan can be transferred into an RRSP or RRIF.

What’s Better: FHSA, TFSA, or RRSP?

There are pros and cons for each type of savings account. The account that’s right for you will depend on your circumstances, reasons for saving, and the amount you can contribute.

If you’re saving to buy your first house specifically, an FHSA is likely a good choice, as it’s designed exactly for that. An FHSA can also be helpful to avoid spending the money on other purchases, as the withdrawal rules are quite strict.

That said, if you’re saving money more generally or if you’re not sure you’ll use the money for your first house, a TFSA is a more flexible option. Unlike an FHSA, you can use the money in your TFSA for any purchase, not just your first home.

There is also the Home Buyers’ Plan, which allows people to use up to $35,000 from their RRSP to purchase a home without having to pay tax on the withdrawal. Note that you must repay the money within 15 years, starting the second year after you made the withdrawal.

The Home Buyers’ Plan will still exist after the FHSA is available. So, you could make both an FHSA withdrawal and RRSP withdrawal for the same home purchase. Since RRSP withdrawals have to be repaid though, you’re likely better off using an FHSA if your plan is to buy a home with the money.

Alternatively, you could max out an FHSA and put any additional savings into a TFSA. This would allow you to save beyond the contribution limit of an FHSA and still get tax-free savings, without the restrictions and repayment requirements of an RRSP.

Can I Contribute to my Spouse’s or Child’s FHSA?

Yes, you can contribute money to a spouse or child’s FHSA. However, these contributions will not be tax deductible. You can only make tax deductions to your own FHSA.

What Happens to Your FHSA if You Die?

Like TFSAs or other assets, you can specify who the money will go to when you die. When you open the account, you can choose a “successor account holder” who will take over the account, often a spouse. The rules are slightly different for when a spouse takes over vs. another successor (child, parent, etc.).

If the spouse meets FHSA eligibility criteria, they automatically become the FHSA’s new owner immediately upon the original owner’s death. The transfer does not affect the successor’s own FHSA contributions limits if they already have one.

The only exception is if there was an overcontribution to the original owner’s account in the month before their death. In that case, the overcontribution would need to be addressed by the spouse. If the spouse does not meet FHSA eligibility criteria, then the money in the FHSA can be transferred to an RRSP or RRIF, or withdrawn from the account (which would be subject to tax).

If the successor is not a spouse, the money needs to be withdrawn from the FHSA and paid out.

In cases where an FHSA is not closed by the end of the year the account holder died in, it becomes a deemed income inclusion. The deemed income inclusion is equal to the fair market value of all property of the FHSA immediately before the termination of the FHSA status. It will go to the beneficiaries named on the account, and if there are none, it will go to the original account holder’s estate.

What Happens to an FHSA in a Divorce?

In the case of a divorce or breakdown of a common-law partnership, money can be transferred directly from the FHSA of one partner to the other’s FHSA, RRSP, or RRIF. These transfers don’t reset contribution limits, but they don’t add to contribution limits either.

If the person making the transfer has overcontributed, then the amount eligible for transfer will be reduced by the overcontribution.

What Happens to My FHSA if I Move Out of Canada?

You can still add money to your FHSA after moving from Canada, but you can’t make a qualified withdrawal if you are not a Canadian resident. This means any money you take out of the account won’t be tax-free.

Can I Open an FHSA if I Just Moved to Canada?

Once you are a Canadian resident, you can open an FHSA as long as you meet all of the other requirements.

If you currently own or previously owned a property in another country within the last 4 years, you likely won’t be considered a first-time home buyer. In this case, you won’t be able to open an FHSA.

Can US Citizens Open an FHSA?

US citizens typically have to pay US taxes on income earned outside of the US. Any income earned in a Canadian account is generally taxed as it is earned, with the exception of retirement plans. Retirement plans like RRSPs and RRIFs can be tax-exempt under the Canada-United States income tax treaty.

Other Canadian savings accounts like TFSAs and RESPs can create some issues for US citizens, like double tax problems and reporting requirements. FHSAs might have similar tax issues, so it’s best to speak to a US tax expert before opening an FHSA.

Can I Transfer Money from my RRSP to an FHSA?

Yes, you can transfer money from your RRSP to your FHSA. This is tax-free up to the $40,000 lifetime and $8,000 annual contribution limits.

Transfers from your RRSP to an FHSA do not increase your contribution room or create a tax deduction. However, a qualifying withdrawal from your FHSA would be tax-free, which basically makes it a tax-free RRSP withdrawal.

How Do I Know if My Home Purchase Qualifies?

When you’re ready to buy your first home, you won’t pay tax on the money you take out of your FHSA, as long as it is a qualifying home purchase. To qualify, you must meet these conditions:

Be a first-time home buyer
Have a written agreement to buy or build your home before October 1 of the year after you made the withdrawal
Make the home your primary residence within one year of buying or building it
Buy a home located in Canada

Any money left over after buying your home can be transferred to an RRSP or registered retirement income fund (RRIF).

You won’t have to pay penalties or taxes, as long as you transfer the remaining funds by December 31 of the following year, since the plan will stop being an FHSA then. Transfers do not reduce or limit your available RRSP room.

Plan for Your First-Time Home Purchase

Prospective first-time home buyers should review the details of any savings account, including an FHSA, to know what the option is for their goals.

The Government of Canada is also releasing other housing-related incentives, including the Multigenerational Home Renovation Tax Credit and the doubling of both the First-Time Home Buyers’ Tax Credit and Home Accessibility Tax Credit. The proposed legislation for these two measures is also included in Bill C-32.

The government aims to make FHSAs available to Canadians after March 2023, but at the time of writing this blog, the enabling legislation has not been enacted. Since the rules are still in draft form, any decisions on how best to save for the purchase of a home should be delayed until the final rules have been decided on if possible.

Buying a home can be complicated, especially if it’s your first home. The mortgage professionals at Spire Mortgage have helped countless first-time home buyers, so we can explain everything you need to know about buying your home.

For questions about your mortgage, contact us. We can help you plan your mortgage so buying your first house is as easy as possible.

Renee Huse