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FHSA: frequently asked questions

December 8, 2022

In its 2022 budget, the Government of Canada announced the creation of a new registered account that provides tax-free savings for first-time home buyers: the Tax-Free First Home Savings Account (FHSA), which will become available at some point in 2023. Since then, the Department of Finance released draft legislative proposals that provided additional details on the design of the FHSA and then tabled Bill C-32 in Parliament. The bill finally received royal assent on December 15, 2022. Here's what we know so far. 

What are the tax-free first home savings account eligibility?

To open an FHSA, you must be a resident of Canada and at least 18 years old. You must also be a "first time homebuyer": This means that you and your current spouse or common-law partner must not have owned a home that you lived in as your principal place of residence, at any point during the portion of the calendar year before the account was opened or in the 4 preceding calendar years.

How much can I contribute to an FHSA?

The lifetime limit on contributions will be $40,000, with an annual contribution limit of $8,000. If you make the maximum contributions every year, you'd hit the lifetime maximum in 5 years

Is there a penalty if my FHSA contributions exceed the maximum?

Yes. Just like with tax-free savings accounts (TFSA), a 1% tax on over-contributions to an FHSA would apply for each month.

Can unused contribution room can be carried forward?

Yes! Individuals will be allowed to carry forward unused portions of their annual contribution limit up to a maximum of $8,000. For example, if you contributed $5,000 to an FHSA in 2023 you'd be allowed to contribute $11,000 in 2024.

"As long as you're considered a first-time home buyer, it could be a good idea to open an FHSA account as soon as possible and put a small amount in it. This way, you'll accumulate contribution room each year."

– Angela Iermieri, Financial Planner, Desjardins

Is there a maximum age to contribute to an FHSA?

Yes. If the money has still not been used to purchase a qualifying first home, the FHSA will cease to be an FHSA after December 31 in the year in which the earliest of these events occurs: 

  • the 15th anniversary of the opening of the first FHSA
  • The account holder reaches age 71.

The money in the account can:

  1. be transferred to a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF), without affecting RRSP contribution room and without paying tax in the year of the transfer, OR
  2. it can be withdrawn (and taxed)

Because the FHSA can only be open for 15 years, you should think carefully about when you plan to buy a qualifying home before opening your account.

Will FHSA contributions be deductible?

"Your FHSA contributions will be deductible and may entitle you to a refund when you prepare your tax return. That money can be reinvested in your plan to buy a home."

– Angela Iermieri, Financial Planner, Desjardins

Yes. Contributions made to an FHSA will be eligible for a deduction, which reduces taxable income by the same amount.

"For example, a student who works part-time could contribute $1,000 but wait until they have a good-paying job after they graduate before applying the corresponding deduction. So they could then get a more advantageous tax savings."

– Angela Iermieri, Financial Planner, Desjardins

There will be no requirement to deduct contributions in the year they are made. That means that contributions you make in a low-income year could be used to reduce your taxable income in a future year when you'll be subject to a higher tax rate.

Contributions must be made no later than December 31. Unlike RRSPs, contributions made in the first 60 days of a year cannot be used to reduce taxable income for the previous year. 

Will FHSA withdrawals be taxable?

Money you withdraw to buy an eligible home will not be taxable (under certain conditions). However, if you use the funds for any other purpose the withdrawal will be taxable. Any FHSA accounts must be closed no later than December 31 of the year following the first eligible withdrawal. 

Could you withdraw more than $40,000?

Since the FHSA is a tax-efficient investment vehicle, any returns are tax-free. Depending on your investor profile, the investment strategy and resulting gains, you may be able to withdraw more money than the total contributions, if you earned a good return. "For example, investing $153 every week, with an average annual interest rate of 5%, would result in $45,248 after 5 years," says Angela lermieri.

Calculate how much your savings will be worth

Will I be able to transfer money from an RRSP to an FHSA?

Yes, you can transfer funds from your RRSP to your FHSA without tax implications as long as you don't go over your annual and lifetime FHSA contribution limits. But doing that will reduce your FHSA contribution room without restoring RRSP contribution room, and will not allow you to claim a new deduction.

Can i contribute to my spouse's FHSA?

"However, nothing prevents you from personally providing your spouse with the funds needed to contribute to their own FHSA. In addition, the investment income earned in the FHSA will not be attributed to the spouse who provided the funds."

– Angela Iermieri, Financial Planner, Desjardins

No. Only the holder of an FHSA can claim deductions for the contributions made to it.

FHSA or HBP: How do i choose?

Did you know that you don't have to choose between the FHSA and HBP? You can use both when buying your first home (if it's eligible).

Here are some key details and benefits of the FHSA and HBP.

 Overview of the HBP

  • The HBP allows eligible individuals to withdraw up to $35,000 from their RRSP tax-free to buy their first home.
  • Money withdrawn from the RRSP must be repaid within 15 years of the second year following enrolment in the HBP without being eligible for a deduction.
  • If you already have money in an RRSP, you could become a homeowner faster than with the FHSA.
  • If you have unused contribution room, the RRSP loan can be used to get a tax refund and increase your down payment.

Overview of the FHSA

  • The FHSA will be available will be available at some point in 2023, but not until April 1, 2023 (when it will take effect).
  • There is no limit on the amount that can be withdrawn, depending on the return obtained.
  • The money you withdraw doesn't have to be repaid.
  • The lifetime limit on contributions will be $40,000, with an annual contribution limit of $8,000. So it takes at least 5 years to reach the full contribution limit, which means that the FHSA is a more long-term savings vehicle..

If you have unused contribution room, you could take out a loan to make up the difference. The potential tax refund could boost your down payment. That said, interest on a loan like that wouldn't be deductible, same as for a RRSP and TFSA.

This new tax-free first home savings account has many tax advantages, but depending on when you plan to buy a home and your existing savings, a different approach may be more beneficial. Weighing your options and using the right strategy to bring your plan to life is the best way to achieve your goals. The FHSA could help you achieve your real estate dream!