Announced in the 2022-2023 federal budget, the first home savings account, or FHSA, is now available through many Canadian financial institutions. The name says it all, and if you are planning to buy your first residence in the next few years, it will no doubt quickly become part of your vocabulary – not to mention your financial game plan.
Here are the need-to-know basics, in 10 questions.
What is the FHSA?
The FHSA is a new type of savings account that allows you to grow savings in a completely tax-sheltered environment in order to build a down payment for your first home.
Why is it noteworthy?
If you are already familiar with the tax-free savings account (TFSA) and the registered retirement savings plan (RRSP), you will quickly grasp the benefits of the FHSA, since it combines certain advantages of the other two. First, as with a TFSA, your investment income is tax-sheltered as it grows, and withdrawals to buy a qualifying home will be tax free. Second, as with an RRSP, your contributions can be deducted from your taxable income and thus may generate a tax refund. This means that the net cost of your contribution would actually be less than the amount you contributed. Moreover, as with both the TFSA and the RRSP, you can use a variety of investment products to grow your assets.
How much money can I put in my FHSA?
The maximum contribution is $8,000 per year up to a lifetime total of $40,000, regardless of your income. So, over a few years, a couple could accumulate a total of $80,000 in their FHSAs, plus the investment returns on that amount, which would not be taxable. And, once again, since the contributions are deductible, the net after-tax cost of the contributions would be less than the amount deposited in the account.
Tax-sheltered compound returns are a powerful feature of the FHSA. The following graph illustrates the scenario of a couple who each have their own account. The assumption here is that each spouse will contribute $4,000 every year, with an annual compound return, for illustrative purposes only, of 5% (this is just an example – your returns may differ). The bar graph shows that these contributions, totalling $80,000 after 10 years (i.e., the $40,000 maximum for each spouse in their respective FHSAs), could generate a substantial down payment.
- What are the eligibility criteria?
A number of conditions apply. You must:
be at least 18 years of age (19 in some provinces);
not be over 71 years of age on December 31 of the current year;
be a resident of Canada;
be a first-time home buyer.
You would be considered a first-time home buyer if you did not, at any time in the current calendar year prior to opening the account or in the preceding four calendar years, live in a qualifying home as your principal place of residence that you owned or jointly owned, or that your spouse owned or jointly owned.
Does the FHSA replace the other home ownership programs?
No. There are still three other federal home-ownership incentive programs, along with certain provincial programs, depending on your province of residence.
The Home Buyers’ Plan (HBP) is the best known of the three. It allows you to withdraw up to $35,000 from your RRSP to use as a down payment for your first home. Afterwards, however, the money must be repaid to your RRSP within a maximum of 15 years. The following table shows the main differences between the FHSA and the HBP.
Less familiar is the First-Time Home Buyer Incentive (FTHBI), where the federal government provides an extra 5% or 10% to add to the down payment on a first home. Upon resale or after 25 years, whichever comes first, you would have to repay the government 5% or 10% of the market value of the home, up to a set maximum.
Finally, there is the federal First-Time Home Buyers’ Tax Credit (HBTC), which can total up to $1,500 for first-time buyers who acquire a qualifying home.
Can I combine the FHSA with these other programs?
In theory, yes. In practice, this possibility could be limited by your total saving capacity and by other components of your financial game plan: after all, buying a home is probably not the only thing you want to finance. Think about consulting your advisor to get a sense of the big picture and to set up an appropriate strategy.
Can I carry forward my contributions?
Yes, but only one year’s worth. Before opening your FHSA, you might want to be sure that you will be able to sustain a steady rate of saving over several years. Similarly, if you’re just starting out in your career, you would likely want to wait until you’re in a higher tax bracket before claiming a deduction, in order to maximize your income tax refund. Feel free to talk to your advisor about this matter, too.
How long can I hold my FHSA?
The maximum time you can hold an FHSA is 15 years. Beyond that, you must either use the money to buy your first home, or do something else with it (see Question 10). Note that you also have to close your FHSA when you turn 71 years of age.
Can my spouse and I have a joint FHSA?
No. Each person has to open their own FHSA, and only the account holder can deduct their contributions from their income.
What happens if I don’t use my FHSA to buy a home?
You have two choices. One option would be to make a direct transfer into your RRSP or your registered retirement income fund (RRIF). This transfer would generally be tax free and would not affect your RRSP deduction limit, although some conditions apply. Indirectly, it could be an opportunity to enhance your retirement savings without being restricted by your RRSP contribution room. The second option would be to withdraw the money and possibly close the FHSA. This withdrawal would have to be included in your income and would therefore be taxable.
The Government of Canada has set up a website where all the ins and outs of the FHSA are explained in detail. You’ll find that the terms and conditions quickly get complicated. Talk to your advisor: he or she can help you make sense of all the information and suggest an appropriate strategy.
The following sources were used to prepare this article:
Bourse 101, “Calculatrice financière – Intérêt composé.”
Desjardins, “4 financial incentives for new homebuyers.”
Chaire de recherche en fiscalité et en finances publiques de l’Université de Sherbrooke, “Les paramètres du nouveau compte d’épargne libre d’impôt pour l’achat d’une première propriété (CÉLIAPP).”
HelloSafe, “How to Calculate Compound Interest.”
Les Affaires, “Le CELIAPP va-t-il remplacer le RAP?.”