Guide to the Tax-Free First Home Savings Account (FHSA)

This comprehensive guide will help you understand the tax-free first home savings account.

12 Minute read

Originally published: October 5, 2022

Updated: December 19, 2022

Guide to the Tax-Free First Home Savings Account (FHSA)

This comprehensive guide will help you understand the tax-free first home savings account.

12 Minute read

Originally published: October 5, 2022

Updated: December 19, 2022

Guide to the Tax-Free First Home Savings Account (FHSA)

Here is our Guide to The Tax-Free First Home Savings Account (FHSA) which is going to be available to all Canadians starting in 2023! This account combines some of the awesome features of the RRSP and the TFSA and makes it more convenient for Canadians to save up for their first home. The Tax-Free First Home Savings Account (FHSA) can be quite a beneficial account if it is used properly and if you already have some emergency savings set aside for yourself. This blog will cover: what is the Tax-free First Home Savings Account (FHSA), how the Tax-free First Home Savings Account (FHSA) works, the rules about the Tax-free First Home Savings Account (FHSA), and more!

In this article

What is the Tax-free First Home Savings Account (FHSA)?

In early 2022, the government announced launching the Tax-Free First Home Savings Account (FHSA) starting in 2023. This account allows potential first-time home buyers to be able to save $40,000 tax-free thanks to this new registered plan. While contributions would be tax-deductible, similar to a Registered Retirement Savings Plan (RRSP), and withdrawals for a first home would be tax-free, similar to a Tax-Free Savings Account (TFSA). People will be able to open this type of account in their banks starting in 2023. 

How does the Tax-free First Home Savings Account (FHSA) work

The FHSA combines elements of the Home Buyer’s Plan (HBP), a TFSA, and an RRSP. Your contributions, like those made to an RRSP, are tax deductible, allowing you to lower your taxable income when you file your tax return. However, withdrawals from the FHSA to purchase a home won’t be taxed, unlike withdrawals from an RRSP which are in fact taxed if withdrawn. And finally, investment income is not taxable (if used to purchase a home), similar to the TFSA.

Your annual contributions to the purchase of a home is basically a slight tax break off of your income tax which can help you reduce your tax bracket.

If the withdrawals from your FHSA are not used towards purchasing a home, you are not required to pay tax. The only way you can get a tax-free withdrawal on the FHSA is if the funds are used towards purchasing a home. Additionally, you must use the funds in the FHSA within 15 years of opening the account towards purchasing a home. If not, the account will be moved into your RRSP or a Registered Retirement Income Fund (RRIF) so you can start saving for retirement. Next in our Guide to the Tax-Free First Home Savings Account (FHSA) is the eligibility requirements for opening an FHSA.

Who is eligible to open a Tax-free First Home Savings Account (FHSA)

The FHSA account is easy to open as you can open it at any financial institution such as a bank, or credit union but it is important to know the requirements you need to meet in order to open this account:

  • An individual must be a Canadian resident and at least 18 years old in order to open an FHSA
  • Immigrants can open a FHSA, they just need to be a resident of Canada
  • An individual also needs to be a first-time home buyer, which means they haven’t owned a place to call their own during the year leading up to the account’s opening or any time in the four years before that
  • You are not opening a FHSA 15 years after the initial FHSA opening
  • You are not 71 years old or older 

We suggest that before you open the FHSA you talk to one of our financial experts who can help you open an account and can guide you to the investments that best fit your needs and wants, your risk tolerance and your financial goals. Please contact us to find out more about how accounts like the TFSA, RRSP, RESP, LIRA or FHSA might be good for you!

When is the Tax-free First Home Savings Account (FHSA) available?

The FHSA should be available to Canadians in April 1st, 2023, but according to the Canadian government this isn’t a solid date, but they expect it to be open sometime in 2023.

What are the contribution limits and rules for the Tax-free First Home Savings Account (FHSA)

There are several contribution limits to the FHSA similarly to the TFSA and RRSP. Here are the several contribution limits and rules when it come to the FHSA: 

  • You are allowed to contribute a total of $8,000 annually, up to a maximum account value of $40,000 total
  • Contributions made during a specific calendar year would be subject to the annual contribution cap of $8,000
  • Contributions made by individuals during a specific tax year would be eligible for an income tax deduction 
  • Contributions made within the first 60 days of a calendar year will not be claimed as part of the prior tax year like they are with the RRSP
  • An individual could carry forward any unused portions of their annual contribution cap of up to $8,000. This means that an individual can contribute an additional money on top of their $8,000 annual contribution cap in a subsequent year if they contribute less than $8,000 in a particular year (but they are still subject to the lifetime contribution limit). For example, a person who made a $6,000 contribution to an FHSA in 2023 would be eligible to make a $10,000 contribution in 2024 (i.e., $8,000 plus the remaining $2,000 from 2023). Only after a person opens an FHSA for the first time would carry-forward amounts begin to accumulate 
  • You can open multiple FHSAs but this will not increase your annual or lifetime contribution amount
  • If you contribute to your FHSA after you make a qualifying withdrawal (buy your first home), the money contributed so forth will not be tax deductible
  • Yes, if you are married couple you can both open individual accounts and use your combined amount towards purchasing a home

What are the rules about withdrawing from the Tax-free First Home Savings Account (FHSA)?

There are also some withdrawal rules when it come to the FHSA, it is important to take not of these because you can be taxed if you do not follow the withdraw rules.

The follow are the qualifying withdrawal rules for the First Home Savings Account (FHSA): 

  • Maximum withdrawal available is $40,000
  • You are qualified to make a withdrawal if you’ve already signed a contract to purchase a house
  • You must be residing in the house you made a withdrawal for within a year of purchasing or constructing the house
  • A residence located in Canada is considered to be a qualifying home. It would also be acceptable if the taxpayer owned a share of a co-operative housing corporation that gave them the right to own and have an equity stake in a home situated in Canada. A share that only grants the right to tenancy in the housing unit, however, would not be qualifying.
  • The entire amount of available FHSA funds may be withdrawn on a tax-free basis in one withdrawal or a series of withdrawals so long as the account owner meets the qualifying withdrawal requirements
  • Both parties may contribute from their own FHSA funds if they are buying a house jointly (you and your spouse). The account must be closed within a year of making a tax-free withdrawal used to pay for a home, and an FHSA cannot be opened again after that. 
  • Must make qualifying withdrawals of the money in the FHSA within 30 days of moving into their home

These withdrawals can subject to withholding taxes: 

  • If you are a non-resident of Canada and withdraw the funds
  • If you are not residing in the house you intend to purchase of construct
  • Over-contribution to your FHSA will lead to a 1% tax for each month that the excess contribution remains in the account
  • If you are a US citizen you will be subjected to US taxation rules and Canadian tax rules
  • If you withdraw the funds and do not use it towards purchasing a property

What are the advantages of a Tax-free First Home Savings Account (FHSA)

There are several advantages to the FHSA because it combines really attractive features that can be found in the TFSA and the RRSP and combines them to help first time home buyers prepare to purchase a home and then finally purchase their first home. 

Check out these advantages of the Tax-free First Home Savings Account (FHSA):

Advantages of a First Home Savings Account (FHSA)

What are the disadvantages of a Tax-free First Home Savings Account (FHSA)?

Although this account might sound very appealing to many, it does have some disadvantages which make this account not the right choice for everyone. The disadvantages of the FHSA include: 

  • The FHSA will not be available to those who have already purchased their first home unfortunately 
  • The FHSA has a total contribution amount of $40,000 which is a good starting point for a down payment but not realistically not a large enough down payment for most houses on the market currently
  • There is strict withdrawal rules surrounding the FHSA which might make it an unsafe way to save due to the fact that you won’t have immediate access to your savings like you would in a TFSA 
  • Cannot be combined with the Home Buyers Plan 
  • The FHSA can only be open for 15 years, due to life circumstances this might not be enough time for some

How is the FHSA different from a TFSA or RRSP?

The FHSA has both features of the TFSA and the RRSP, therefore it is its own unique account so there are a couple of differences and similarities. This table will outline what the similarities and differences are between the FHSA, TFSA and RRSP:

The differences between a TFSA, RRSP, & FHSA

Is the Tax-free First Home Savings Account (FHSA) Tax Deductible?

Yes, the tax-free First Home Savings Account (FHSA) is a tax deductible account like the RRSP. A tax deductible account is an account where your contributions are deducted from your income tax amount.

For example, the annual contribution amount for the FHSA will be $8,000 per year, this being said, if you are making the median income in Ontario of $52,000, then you are subject to a marginal tax rate of 29.69%. This means that after taxes, you are left with $40,721 and this is not counting an investment income or any income earned through other streams of income other than employment income. Now, if you focus on contributing $8,000 of your $52,000 to the FHSA throughout the year, then $8,000 will be deducted from your income tax. So this would drop your income tax rate to $44,000, this would make your marginal tax rate to 20.05%. Thus, after taxes you will be left with $42,000 after taxes. Next up in the Guide to the Tax-Free First Home Savings Account (FHSA) is the frequently asked questions (faqs) about the FHSA.

Can you invest with the Tax-free First Home Savings Account (FHSA)?

Yes, the Tax-free First Home Savings Account (FHSA) is a great way to invest. This account can hold the same investments as a TFSA, that means that you can invest in GICs, mutual funds, stocks, ETFs, bonds and more! This is a great way to generate some awesome income for yourself over the years which is tax-free. It is amazing to start this account as soon as it is available because it can be used to build income simply based off of investments for however long you plan to have the account for up to 15 years. Let’s continue on in our Guide to the Tax-Free First Home Savings Account (FHSA) with contribution rules.

What if Tax-free First Home Savings Account (FHSA) funds are not used towards a home?

You must use the funds in your FHSA for a qualifying first home purchase within 15 years after the FHSA was opened or before you turn 71 years old. Otherwise, you will have to close the plan and transfer the remaining balance into an RRSP or RRIF or withdraw it in a taxable form.

If the FHSA is not used before its designated termination date, the holder will have to include the fair market value of the FHSA possessions in their income, this can be avoided by transferring to an RRSP or RRIF before the FHSA loses its tax–sheltered status. Since an FHSA transfer to an RRSP or RRIF won‘t count towards your RRSP limit, an FHSA may be an attractive option for people who rent their homes. They may still qualify as a first–time home buyer and save on taxes, and if they don‘t buy a home, the funds can be moved to an RRSP or RRIF.

Can I deduct income by contributing to my spouse or child’s Tax-free First Home Savings Account (FHSA) funds?

Only a FHSA holder can deduct their own FHSA contributions from their taxes. It is not allowed to make contributions to your partner‘s FHSA and then claim a deduction. However, an individual can contribute to their own FHSA using money provided by their spouse without having to attribute the income earned in the FHSA. Furthermore, if you give money to an adult child to contribute to their FHSA, no attribution will arise. You are allowed to contribute to a spouse or child’s FHSA, but you will not be able to claim the amount you contributed on your income taxes. 

Transferring from Registered Retirement Savings Plan (RRSP) to First Home Savings Account (FHSA)

You are able to move money from an RRSP to a FHSA tax–freely, up to the $40,000 lifetime and $8,000 yearly contribution limits. These transfers will not renew your RRSP contribution room or generate a tax deduction. But, a subsequent qualifying withdrawal from the FHSA will be tax–free, essentially turning it into a no–tax RRSP withdrawal. To make the most of RRSP room, making contributions to an FHSA is the optimal choice. If funds are limited, the opportunity to use transfers from an RRSP will help you make the most of a potential tax–free withdrawal from your FHSA.

What happens to my FHSA if I die?

An individual can name their spouse as the successor holder of their FHSA, allowing the account to stay tax–free after the individual‘s death. The transfer does not affect the spouse‘s own FHSA contribution limits. If the original holder had an overcontribution, the spouse may be treated as making a contribution in the following month. This contribution would be the amount of the overcontribution, minus the value of any FHSA assets that were not kept in the spouse‘s account. This contribution may reduce the spouse‘s contribution room or create an overcontribution.

If the surviving spouse is not able to open a FHSA, the funds can be transferred to an RRSP or RRIF, or taken out by being subjected to tax. When the FHSA beneficiary is not the deceased person’s spouse, the money must be withdrawn and given to the beneficiary. The account holder’s terminal return will not include the value of the plan, but the beneficiary will need to pay tax on it. If the beneficiary is the deceased’s estate and the surviving spouse is an estate beneficiary, the estate can pay the plan proceeds to the spouse. This may allow the spouse to transfer the money to their FHSA, RRSP, or RRIF and if not, they will be taxed on the income. If the plan proceeds are paid to another estate beneficiary, the income may be taxable to them, and the payment is subject to withholding tax. Now read up on the frequently asked questions (FAQs) about our Guide to the Tax-Free First Home Savings Account (FHSA). 

What happens to my FHSA if I get divorced or separated?

In the event of a divorce or separation, it may be possible to transfer funds directly from one spouse’s FHSA to another spouse’s FHSA, RRSP, or RRIF. This transfer won’t limit the contribution room of either spouse, however, if the transferor has exceeded their contribution limit, the amount available for transfer will be diminished.

Frequently Asked Questions (FAQs) about the FHSA

In early 2022 the government announced launching the Tax-Free First Home Savings Account (FHSA) to start in 2023. Allowing potential first-time home buyers to  be able to save $40,000 tax-free. Where contributions would be tax-deductible, similar to a Registered Retirement Savings Plan (RRSP), and withdrawals for a first home would be tax-free, similar to a Tax-Free Savings Account (TFSA). 

Well, if you think that you might buy a home in the next 15 years, and you are comfortable with saving much money that you will not be able to access unless it is towards purchasing a home, then you might want to consider the FHSA. This account has very attractive features such as the ability to have $8,000 in it yearly up to a total of $40,000. This is also a tax deductible account and you and your spouse can have individual accounts to reduce your income tax as well as use your combined savings towards purchasing a house together. 

Yes, the FHSA can be used toward deducting your overall income tax up to an amount of $8,000 yearly or up to the carry over amount that you have available. Which makes this account great for people who are expecting to have a salary increase in the future. 

The FHSA is just a savings account but it combines the attributes of a TFSA and a RRSP. Basically, the FHSA lets you save money, with the ability to invest with the same investment vehicle as the TFSA (GICs, mutual funds, stocks, bonds, and ETFs). The FHSA is also a tax deductible account which can help you to decrease your yearly income tax, just like a RRSP. When you want to withdraw the money from the account you must have signed a contract to purchase the home and then you can make your withdrawals in a lump sum amount or over a series of payments. The best is that this account is tax-free just like the TFSA, that means all growth and fees in the account are tax-free. You must use the account within 15 years or the money will have to get transferred to a RRSP, or RRIF.

Pros of the Tax-free First Home Savings Account (FHSA):

  • The account being open for 15 years allows for young Canadians to save up for their future with ease
  • Couples can open individual savings accounts and use their savings towards a house they are buying
  • Account is tax deductible 
  • Qualifying withdrawals are tax-free
  • Carry over amounts are moved over year after year for future saving
  • Can be used to invest

Cons of the Tax-free First Home Savings Account (FHSA)

  • Unavailable to those who have already bought their first home
  • 15 year time limit might not be enough for everyone
  • $40,000 total contribution limit is simply not enough for a solid downpayment if the housing market is booming 
  • Withdrawals are strictly for buying a home, thus this is not an ideal savings account if you need access to your money 
  • Cannot be combined with the Home Buyers Plan (HBP) if you have already been saving in your RRSP

The FHSA will have the same investments available as the TFSA. You can invest with the following investments: 

  • mutual funds
  • securities listed on a designated stock exchange
  • guaranteed investment certificates
  • bonds
  • certain shares of small business corporations
  • ETFs 

Yes, you can combine the funds from your FHSA and the Home Buyers Plan (HBP) together, this allows you to contribute up to $35,000 from your HBP and $40,000 from your FHSA which is a grand total of $75,000 towards purchasing a home. 

The highest amount of such excess that exists in each month (or part of a month) would be subject to a 1% tax on over-contributions to an FHSA, similar to TFSAs. Over-contributions from prior years may no longer be considered over-contributions because a taxpayer’s annual contribution cap is reset at the start of each calendar year. An amount that was over contributed for a specific year may be written off by the taxpayer in the tax year in which it stops being an overc-ontribution, but not earlier. However, no deduction would be made for the over-contributed amount if a qualifying withdrawal is made before the over-contribution stops being an over-contribution.

The First Home Savings Account (FHSA) can remain open for a maximum of 15 years from when you open it. After 15 years, if you have not made a qualified withdrawal yet, then the funds have to be transferred to a RRSP.

The maximum contribution limit for the First Home Savings Account (FHSA) is $8,000 annually, and a lifetime contribution of $40,000. 

No, you cannot open a joint FHSA but luckily everyone can open an individual FHSA, and say for example you and your spouse want to purchase a house, you are allowed to both put the funds in your individual FHSA towards purchasing a home so long as you plane to have joint ownership of the home. 

Yes you can have a beneficiary but The money must be withheld and paid to the beneficiary of an FHSA if that person is not the deceased accountholder’s spouse or common-law partner. Any payments made to the beneficiary would be considered part of their income for tax purposes. When such payments are made, withholding tax will be applied to the beneficiary’s payment.

You can withdraw funds tax-free from your account to cover expenses up to 30 days after moving into your new home. If there are any remaining funds after this grace period, you have until December 31st of the following year to transfer them to an RRSP or RRIF without any tax penalties. However, if you choose to withdraw any remaining funds as taxable income after this period, it will be subject to withholding tax.

No you can use it for any expenses associated with purchasing a home, this can include closing costs, moving fees, and legal fees.

No, it doesn’t. Unlike a TFSA, taking out funds from an FHSA does not restore the ability to contribute or deduct the same amount the next year.

No, tax-free withdrawals from an FHSA are only applicable for homes located within Canada.

No, joint accounts are not allowed for FHSAs. However, both you and your significant other can each open and use your own separate FHSA accounts towards your first home purchase. Unlike joint RRSPs where you can contribute directly to your partner’s account, your partner will have to make any contributions into their own FHSA account.

Similar to other registered accounts, the account holder of an FHSA can name beneficiaries. If the FHSA is inherited by a current spouse, it can be transferred to an FHSA or RRSP without tax penalties. However, if it is inherited by someone else, it will be subject to withholding tax before the ownership is transferred.

In a divorce, FHSAs are treated like any other asset. As part of a settlement, an FHSA can be transferred to the other party’s FHSA, RRSP, or RRIF without any tax penalties. This transfer won’t affect the contribution room of the recipient or reinstate any contribution room from the transferrer.

Recipients will still be subject to FHSA restrictions, including age limits and homeownership status. If the recipient is ineligible for an FHSA, the balance can be transferred to an RRSP or RRIF without any tax penalties.

Whether co-operative homeownership counts as homeownership depends on the percentage of your ownership. If you own less than 10%, it doesn’t qualify as homeownership of a qualifying property. You can purchase a stake of more than 10% in a qualifying property using your FHSA, but you cannot open an FHSA if you already own more than 10% of your current home.

As per the government’s definition of homeownership outlined in the RRSP Home Buyer’s Plan restrictions, any property that you don’t live in or don’t plan to live in (if it’s under construction) won’t affect your status as a first-time homeowner. Unless otherwise specified in further legislation, these same definitions should apply for qualifying for an FHSA.

Finding the best investment plan for you! 

Thanks for reading our Guide to the Tax-Free First Home Savings Account (FHSA)! If you’re not sure of what’s the best investment or retirement plan for you, working with our financial specialists can help you find the best solution to fit your particular situation. At Protect Your Wealth, we’ve been providing expert advice for all types of life insurance and retirement and investment planning since 2007. As your trusted life Insurance broker and financial planner, we work with you to create a plan for your family or business that covers and meets your needs.

Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today. We’re proudly based out of Hamilton, and service clients anywhere in Alberta, British Columbia, and Ontario, including areas such as Airdire, Calgary, Kelowna, Maple Ridge, Markham and Toronto.

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