Saving up for a down payment on a home can be a daunting task, especially for young Canadians who are just starting out. The recent economic trends certainly haven’t made things any easier for first time home buyers. Mortgage rates are up, house prices at an all-time high, inflation is up, and incomes trimmed. The Canadian government recognizes these issues and has introduced a new savings account called the First Home Savings Account (FHSA), aimed at helping Canadians save for their first home.

Discussions for FHSA dates far back as 2019, but finally, it is becoming a reality from April 1, 2023.

What is First Home Savings Account (FHSA)?

The FHSA is a tax-free savings account that allows individuals to save up to $40,000 towards the purchase of their first home. Keep in mind that the annual contribution limit to this account is capped at $8,000. So, if you decide to contribute the maximum contribution room each year, it would take 5 years to fill up the account.

An important thing to remember is that your contribution limit can be carried forward. Meaning if you do not contribute any amount this year, your contribution room for the next year will be doubled.

However, a very important thing to remember is that your contribution limit kick starts only if you open a First Home Savings Account. For example, if you chose not to open a FHSA in 2023, your contribution limit will still be $8,000 when you open the account in 2024.

Tax Free Growth and Withdrawals?

What makes this savings account unique is that it provides Canadians with a tax-free way to save for a down payment on their first home, which can be a significant financial barrier for many young people.

Does this remind you of another great savings account provided by the Canadian government? If you thought of the Tax-Free Savings Account (TFSA), you are right. FHSA inherits this amazing feature of the TFSA where the money you save in this account grows without getting taxed at any point. Say, you contributed the max cap of $40,000 to this account today, and your money grows to $50,000 over the next couple of years, you can withdraw this amount towards the payment of a qualified home purchase without being subject to any form of tax including capital gains tax.

Another benefit of the FHSA is that it allows individuals to withdraw the funds at any time without penalty, making it a flexible savings option. This is especially important for young people who may have other financial priorities, such as paying off student loans or starting a family.

Tax Deductible?

A very important feature of FHSA is that contributions to this account are tax deductible. This means that your income tax will be calculated on the earnings after your contribution to FHSA. Does this remind you of another great savings account introduced by the Canadian government? Yes, the Registered Retirement Savings Plan (RRSP).

So, a little money hack with this system is, if you believe you will be earning a higher salary next year or a few years down the line, you can open a FHSA today and accumulate the contribution room until you need to lower your tax.

Essentially, a FHSA contains the best of both worlds of TFSA and RRSP–the OG savings/investment accounts in Canada.

Who can contribute to FHSA?

There are three major criteria one need to fulfill to open a FHSA;

1. Must be a Canadian resident
2. Must be of age of majority in the province of residence
3. Must not have owned a home in the past 4 years.

Qualifying homes include new or existing homes, as well as mobile homes, condominiums, and co-operative housing.

Who offers FHSAs?

You can open a First Home Savings Accounts with a qualified FHSA issuer such as a bank, financial institution, credit union, or an insurance company. Reach out to your favorite bank or financial institution about this new product and what investment opportunities they provide with the account.

Self-directed FHSA can be maintained as well. This is when you decide where to invest the money within the FHSA instead of the bank or financial institution doing it for you.

Closing your Fist Home Savings Account?

The FHSA closure shall come to effect at the earliest of the following three incidents;

1. 15 years after opening the account,
2. you turn 71 years of age
3. 1 year after your first qualifying withdrawal (a qualifying withdrawal is a withdrawal made towards a qualifying home purchase).

Transfers between accounts

Following transfers are allowed in your FHSA;

1. from one FHSA to another you own
2. from FHSA to RRSP or RRIF
3. from RRSP to FHSA

Transfers from Registered Retirement Income Fund (RRIF) to FHSA are not allowed.

The CRA also states that transfers from FHSA to RRSP or RRIF will NOT impact the contribution room of the RRSP or RRIF accounts. From a tax perspective, both FHSA and RRSP serve the same purpose. Since both amounts are tax deductible, it would seem to not matter where the money actually sits.

FHSA Withdrawals

There are three ways to make a qualifying withdrawal from your FHSA without being subjected to tax;

1. make a qualifying purchase of a home
2. any excess amount contributed to FHSA
3. any amount otherwise included in your income

The intended or qualifying withdrawal from a FHSA is subject to following conditions;

• must be a first-time home buyer
• must have a written agreement to buy or build a home with the acquisition or construction completion date before October 1 of the year following the date of the withdrawal
• must not have acquired the qualifying home more than 30 days before making the withdrawal
• must be a resident of Canada from the time of withdrawal to time of occupying the home
• must occupy or intend to occupy the qualifying home as your principal place of residence within one year after buying or building it

CRA has published a comprehensive guide including different complications one could expect with residency, occupancy, non-qualifying withdrawals, etc. Head over to the official website for more information.

The FHSA is a great option for young Canadians who are looking to enter the housing market. With flexible withdrawal options, tax-free interest, and the ability to use the funds towards the purchase of a qualifying home for any beneficiary, the FHSA is an attractive savings option that can help young Canadians achieve their dream of homeownership.

In conclusion, the FHSA is an amazing opportunity for new home buyers in Canada. In essence, the FHSA allows Canadians to save for the down payment of a new home without being subject to taxes.

Snapshot of First Home Savings Account (FHSA)
Eligibility:	– Resident Canadians above age of majority – First time home buyer
Contribution start:	April 1, 2023
Maximum contribution limit:	CAD 40,000
Annual maximum contribution:	CAD 8,000
Number of accounts allowed:	No limit (total of all accounts should not exceed any contribution limits stated above)
Excess contribution penalty:	1% per month on the excess contribution
Tax deductible:	Yes
Tax on withdrawals:	No (on qualifying withdrawals only)
Contribution carryforward:	Allowed
Transfers:	Allowed to transfer FHSA balances to RRSP and RRIF without taxes
Withdrawals:	One-time or series of withdrawals for qualifying home purchases are tax free