The First Home Savings Account (FHSA)
Published June 12, 2022
Damien Burleigh, CFP®, CLU® - Analyst, Client Needs
What is an FHSA? A First Home Savings Account – also referred to as a Tax-Free First Home Savings Account – is a proposed government-registered, tax-free investment savings account to which you can contribute up to a lifetime maximum of $40,000 to purchase your first home.
The plan is currently awaiting royal assent but is anticipated to be available to Canadians in 2023.
New FHSA details available
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These newly released details are identified and italicized in the content below, and include the following topics:
- Carrying forward contributions
- Spousal contribution and attribution rules
- Over-contributions
- Qualified investment holdings
- Administration upon death
Using funds to purchase a home
The FHSA is designed to encourage first-time buyers to save toward buying their first home. Account holders will have 15 years from account opening to use the funds in the FHSA toward the purchase. If two people are purchasing a home together, both may use their own FHSA funds toward the purchase, giving them a maximum of $80,000 if both contribute the full amount. After making a tax-free withdrawal toward the purchase of a home, the account must be closed within one year, and another FHSA cannot be opened in the future.
How does an FHSA work?
To be eligible to open an FHSA, a contributor must meet specific criteria.
Eligibility to open an FHSA:
- Be a resident of Canada.
- Be at least 18 years old, but not have reached age 71.
- Not lived in a home owned by the contributor in the year that the account is opened, or the previous four years.
- Not have had a previous FHSA used to buy a home.
Making contributions to the account
Starting in 2023, eligible contributors will be able to contribute up to $8,000 per calendar year and up to a lifetime maximum of $40,000 over a 15-year period.
Carrying forward contributions
One new feature announced in the draft legislation is that an individual can carry forward any unused FHSA contribution room to future years.
For example, if in 2023, you contribute $4,000 and in 2024, you contribute $5,000, in 2025, your contribution room will be $15,000 (the remaining $4,000 from 2023, plus $3,000 remaining from 2024 and the full $8,000 from 2025). Note that you can only carry forward contribution room after you have opened an FHSA.
Account holders can hold more than one FHSA account, but the annual and lifetime limits are per person, not per account.
Over-contributions
According to the updated draft legislation for the FHSA, there will be a 1% tax penalty per month for contributions over the set contribution room limit.
That said, at the beginning of each year when an account holder’s contribution limit is reset, over-contributions for the previous year may no longer be such, allowing the individual to deduct the over-contributed amount for the year in question – unless a qualifying withdrawal is made before the over-contribution ceases. In such a case, the over-contribution would stand, and no deduction would be allowed for the over-contributed amount.
Spousal contributions and attribution rules
Only the FHSA account holder will be allowed to contribute to the FHSA. While it isn’t possible to make contributions to a spouse/partner’s FHSA, an account holder will be able to make contributions to their own FHSA with funds gifted to them by their spouse/ partner without attribution rules applying.
Withdrawal rules
The Canadian government has established s
- The funds must be used toward the purchase of a qualifying first home, such as:
- A housing unit in Canada.
- A share in a co-operative housing corporation that affords the individual an equity interest in a housing unit in Canada.
- The qualifying home must be used as the individual’s principal home.
If an account holder withdraws the funds with the intent to buy or build a home, the individual must have a written agreement to do so by October 1 of the following year and be living in it as the primary residence within one year of purchase.
Transfers
If funds contributed to an FHSA are not used within 15 years from account opening, the account holder will have the option to transfer the accumulated funds into their RRSP/RRIF tax free, even if they don't have contribution room. Such a transfer would not reinstate the individual’s FHSA contribution room.
- Contributions will be tax deductible. However, you can choose not to deduct your contribution the year you make it and carry it forward to deduct in a later tax year if you wish.
- Withdrawals will be tax free, according to the Canadian government, if the funds are used toward the purchase of a qualifying first home.
- FHSA investment income, losses and gains will not be included when determining income for tax purposes, or to determine eligibility for income-tested benefits and credits.
- Transfers to another FHSA, RRSP or RRIF are not taxable upon transfer, but withdrawals from the plans are taxable as income, unless used towards the purchase of a qualifying home.
Qualified investment holdings
The federal government also provided new information on the types of investments FHSAs can hold, which include mutual funds, publicly traded securities, government and corporate bonds and guaranteed investment certificates (GICs).
Administration upon death
The updated FHSA legislation provided additional details that cover the death of an account holder.
Spouse or common-law partner
The federal government released that if account holders designate their spouse or common-law partner as the successor to their FHSA account, then the account will be able to maintain its tax-exempt status, as long as the designated successor meets FHSA eligibility criteria and takes immediate account ownership.
Inheriting a spouse’s/common-law partner’s FHSA would not affect the surviving spouse’s/common-law partner’s personal contribution room.
If the surviving spouse/common-law partner does not meet FHSA eligibility requirements, then the FHSA funds must be transferred to an RRSP or RRIF of the designated successor, or the funds will need to be withdrawn and subject to taxes.
Other successor
If the FHSA account successor is someone other than the spouse or common-law partner, the funds will need to be withdrawn by the successor and included in that individual’s taxable income. In such cases, withholding tax would also be applied.
Closure of FHSAs
If FHSA funds are not used or transferred after 15 years, the account holder must withdraw the funds as taxable income and close the account.
Bankruptcy
At this time, FHSAs would not be protected from creditors.
How do they compare?
When it comes to first time homebuyers, there are options to help you save.
Below is a detailed comparison between a first-time homebuyer’s options.
First Home Savings Account | RRSP Homebuyers' Plan** | Tax Free Savings Account*** | |
|---|---|---|---|
| Annual contribution limit | $8,000 | *RRSP contribution limit | $6,000 |
| Contributions are tax deductible | Yes | Yes | No |
| Limit toward first home purchase | $40,000 | $35,000 | Entire Balance |
| Taxable Withdrawal if used for home purchase? | No | No | No |
| Taxable withdrawal if used for other purpose? | Yes | Can’t withdraw from RRSP under HBP for any purpose other than home purchase | No |
| Repayment | Not required | Within 15 years – starting 2nd year after withdrawal | Not Required |
| Contribution room carryforward | Yes | If RRSP contribution room available, yes | Yes |
| Tax-free rollover to surviving spouse when named as beneficiary | Yes | Yes | Yes |
| Impact on eligibility for government benefits | No | No | No |
| Maturity limit | 15 years from account opening or age 71, whichever occurs first | Must mature by the last day of the year in which account holder turns 71 | None |
| Penalty for exceeding contribution limits | 1% per month | 1% per month if exceeding RRSP limit by more than $2,000 (exceptions apply) | 1% per month |
| Spousal contributions | Not allowed. However gifted amounts from spouses/partners can be invested by FHSA account holder and attribution rules will not apply | Allowable to a Spousal RRSP, 3-year attribution rule applies | Not allowed. However gifted amounts from spouse/partner can be contributed by TFSA account holder and attribution rules will not apply |
Awaiting royal assent
As we wait for royal assent, we will keep you up to date on developing details as they become available.
How we can help
If you or someone close to you is thinking of buying their first home, we can help. Your Edward Jones financial advisor can develop a savings strategy while helping you navigate the different account options
Important information :
*Those planning to purchase a home soon may still consider the Homebuyers' Plan since it will take 5 years to build up the $40,000 inside the FHSA.
**The RRSP Home Buyer’s Plan and FHSA cannot be used together toward the purchase of a home.
*** Both the TFSA and the FHSA can be used together toward the purchase of a new home.