What is a First Home Savings Account?

The First Home Savings Account (FHSA) in Canada: Your Comprehensive Guide

Buying a home is a goal for many people, but saving for that first down payment can be a daunting task. Which is why the Government of Canada introduced the First Home Savings Account (FHSA)—a savings account designed to help first-time homebuyers achieve their dreams of homeownership faster. Launched in 2023, the FHSA combines the benefits of a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP) to give first-time buyers a financial boost towards purchasing a home.

In this blog, we will explain how the FHSA works, its benefits, eligibility requirements, and tips to maximize its potential.

What is the First Home Savings Account (FHSA)?

Available since 2023, The First Home Savings Account (FHSA) is a registered savings account that allows eligible Canadians to save up to $40,000 toward the purchase of their first home.

Contributions to a FHSA are tax-deductible (like an RRSP), and withdrawals—including any returns on investment made while the funds are in the FHSA—are tax-free (like a TFSA) when used to buy a home. This makes the FHSA a powerful tool for saving for a down payment, as it combines immediate tax savings with long-term tax-free growth.

Key Features of the First Home Savings Account (FHSA)

Contribution Limits:

• Annual contribution limit: $8,000.
• Lifetime contribution limit: $40,000.
• Unused contribution room can be carried forward to the following year (up to $8,000).

The annual contribution limit for a First Home Savings Account (FHSA) is $8,000, while the lifetime maximum contribution limit is $40,000. Similar to a Tax Free Savings Account (TFSA), the $40,000 contribution limit does not include any returns made on your investments while they are in the FHSA. For example, if you contribute $5,000 towards your FHSA and make $200 from that investment, the $200 does not impact your $40,000 total contribution limit.

Tax Benefits:

• Contributions to your FHSA reduce your taxable income for the year.
• Returns on investment within the account are tax-free.
• Withdrawals from your FHSA for a qualifying home purchase are also tax-free.

You can use these savings towards your first home without having to pay back or pay tax on your FHSA withdrawals.

Maximum Participation Period:

• 15 years from the time you open your FHSA
• OR Until December 31^st of the year you turn 71

The maximum amount of time that you can have an FHSA is 15 years or until the end of the year you turn 71, whichever comes first.

Combining your purchasing power by using a FHSA, RRSP, and TFSA:

To maximize the amount of money you have for a down payment on your first home, you can combine these three investment options:

• RRSP
  • Up to $60,000 through the Home Buyers’ Plan (HBP)
• FHSA
  • Up to $40,000 plus returns
• TFSA
  • Your account balance plus returns

Who is Eligible for the First Home Savings Account (FHSA)?

To open a First Home Savings Account (FHSA), you must:

• Be at least 18 years old (or the age of majority in your province).
• Be a Canadian resident with a social insurance number (SIN).
• Be under 71 years of age.
• Have not lived in a qualifying home in Canada that you or your spouse owned during the year you opened your FHSA or at any time during the previous 4 years.

How Does the First Home Savings Account (FHSA) Work?

• Open an Account: Visit your bank, credit union, investment firm, or talk to your financial advisor to see if they offer the First Home Savings Account (FHSA).
• Contribute and Invest: Deposit up to $8,000 annually into your FHSA and then invest the funds in options such as mutual funds, exchange-traded funds (ETF), stocks, or bonds. Investments grow tax-free, maximizing your savings.
• Buy Your First Home: When you’re ready to buy a home, withdraw funds tax-free to put toward your down payment. The funds must be used within 30 days of withdrawal for a qualifying home purchase.
• Decide Not To Buy A Home?: If you don’t buy a home within 15 years of opening your FHSA, you can transfer the funds to a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) without affecting their contribution room. You can also withdraw the funds from your FHSA as taxable income.

Benefits of the First Home Savings Account (FHSA)

• Tax Savings: Contributions to your FHSA lower your taxable income, which can lead to significant savings at tax time.
• Tax-Free Growth: Investment gains within the FHSA grow tax-free, helping you build wealth faster.
• Flexible Savings: If your circumstances change, the unused FHSA funds can be rolled into an RRSP or RRIF for retirement savings, or transferred to yourself as taxable income.

Tips to Maximize Your FHSA

• Start Early: The sooner you open an FHSA, the more time your investments have to grow tax-free.
• Invest Wisely: Consider a diversified portfolio of investments to balance growth and risk.
• Plan Contributions: Maximize your $8,000 annual contribution to fully leverage tax savings.
• Combine Savings Strategies: Use the FHSA alongside the Home Buyer’s Plan (HBP) and other savings methods to maximize your buying power.

Conclusion

The First Home Savings Account (FHSA) is a game-changer for first-time homebuyers in Canada. By combining tax deductions, tax-free growth, and flexible options for unused funds, the FHSA provides a practical, efficient way to save for your dream home. Whether you’re just starting to save or planning to buy a home soon, taking advantage of the FHSA can help you reach your goal faster.

If you’re interested in opening a FHSA or looking for financial advice, you can book an appointment with me using the button below.