Tax-Free First Home Savings Account (FHSA): Everything You Need to Know

The Tax-Free First Home Savings Account (FHSA) is a newly instituted initiative designed to help Canadians save for their first home purchase. With the high cost of housing in Canada, this program aims to provide an accessible and tax-efficient way for potential first-time homebuyers to save up for their dream home. In this comprehensive guide, we will cover everything you need to know about FHSA, from its benefits and eligibility criteria to opening an account and making withdrawals.

Have questions? Call now to speak to a mortgage broker!

Benefits of the Tax-Free FHSA

There are several important benefits to using a First Home Savings Account to save for your first home:

1. Tax-Free Growth: Similar to the popular Tax-Free Savings Account (TFSA), all investment growth within an FHSA is tax-free. This means that interest, dividends, and capital gains earned in the account will not be subject to income tax, allowing your savings to grow faster.
2. No Tax on Withdrawals: When you withdraw funds from your FHSA to purchase your first home, you will not be taxed on the withdrawal. This is a significant advantage over other savings vehicles like Registered Retirement Savings Plans (RRSPs), which are subject to income tax upon withdrawal.
3. Flexible Investment Options: Similar to a TFSA, you can invest your First Home Savings Account funds in a variety of investment products, including stocks, bonds, mutual funds, and Guaranteed Investment Certificates (GICs), allowing you to tailor your investment strategy to your risk tolerance and financial goals.
4. No Impact on Government Benefits: Importantly, withdrawals from your FHSA will not affect your eligibility for government benefits, such as the Canada Child Benefit or Old Age Security, since they are not considered taxable income.

Eligibility Criteria for FHSA

To be eligible to open a Tax-Free First Home Savings Account, you must meet the following requirements:

1. Be a Canadian resident
2. Be at least 18 years of age, except in certain provinces/territories where the legal age to enter into a contract, which includes opening an FHSA, is 19 years of age. 
3. Have a valid Social Insurance Number (SIN)
4. Be a first-time homebuyer, meaning you have not previously owned a home or lived in a home owned by a spouse or common-law partner.

How to Open an FHSA

Opening a First Home Savings Account is a straightforward process:

1. Research financial institutions that offer FHSA accounts, such as banks, credit unions, and trust companies.
2. Choose a financial institution and visit their website or a local branch to open an FHSA account.
3. Provide your date of birth, SIN and any other required identification documents.
4. Transfer funds to your new FHSA account, either as a lump-sum deposit or through regular contributions.

Did You Know? You can open more than one First Home Savings Account, but the total amount you contribute to all of your FHSAs cannot exceed your FHSA contribution room for the year. Otherwise, you’ll be hit with a penalty tax.

FHSA Contribution Limits and Rules

Of course, there are specific rules and limits regarding contributions to an FHSA that you have to keep in mind:

1. Currently, the contribution limit for a First Home Savings Account is $8,000 in the first year, and unused contribution room can be carried forward to future years. The lifetime limit of your FHSA is set at $40,000. Note: like TFSAs, if you overcontribute to your First Home Savings Account for that year, you will be subject to a monthly tax of 1% on the highest excess amount in that month. That monthly 1% tax will continue to be applied until the excess amount is eliminated.
2. Similar to RRSP contributions, you are generally able to deduct your FHSA contribution from your income tax and benefit return, but transfers from an RRSP to an FHSA are not deductible. Learn more about tax deductions for FHSA contributions.
3. If you withdraw funds from your FHSA for non-home-buying purposes, that amount will need to be claimed as taxable income.

Withdrawals from FHSA

When you are ready to purchase your first home, you can withdraw funds from your FHSA tax-free, provided you meet the following conditions:

1. You have not lived in a principal residence that you owned or jointly owned in the same calendar year that you made the withdrawal or the preceding four years.
2. The funds will be used to purchase or build a qualifying home in Canada.
3. The home will be your principal residence.
4. Construction or purchase of the home must be completed before October 1st of the year following the date of the withdrawal.

If you meet these conditions, you can withdraw the entire balance of your FHSA, including the tax-free growth, to put toward your first home purchase. Be sure to notify your financial institution of your intention to withdraw funds, as they may require additional documentation.

Learn more about withdrawing from your FHSA.

FHSA vs. RRSP Home Buyers’ Plan

The FHSA is not the only government program designed to help Canadians save for a home. The RRSP Home Buyers’ Plan (HBP) is another popular option that allows first-time homebuyers to borrow up to $35,000 from their RRSP to buy or build a home. It is essential to understand the differences between the two programs to choose the best option for your unique financial situation:

1. Tax Treatment: Both FHSA and HBP allow for tax-free withdrawals to purchase a home while also providing a tax deduction with contributions.
2. Repayment Requirements: The HBP requires you to repay the borrowed funds to your RRSP over 15 years, starting the second year after the withdrawal. In contrast, the FHSA does not require any repayments, as the withdrawn funds are not considered a loan.
3. Contribution Limits: The FHSA has a lower annual contribution limit ($8,000) compared to the RRSP, which is determined by your earned income (18% of your yearly income, up to a maximum of $31,560 for 2023).

You may choose to use one or both programs to save for your first home, depending on your financial goals and personal circumstances.

The Team at the Mortgage Station Can Help You Achieve Your Homeownership Dreams!

It’s clear the Tax-Free First Home Savings Account is an excellent tool for Canadians to save for their first home purchase in a tax-efficient way. The program’s benefits, such as tax-free growth and withdrawals, provide a significant advantage for aspiring homeowners.

As a full-service mortgage broker, The Mortgage Station is committed to helping you achieve your goal of purchasing your first home! Our team of experts is ready to guide you through the home-buying process, whether you’re using an FHSA, RRSP Home Buyers’ Plan, or other financial strategies. To learn more about how we can help, visit our mortgages page and explore our educational blog for additional resources. Together, we can make your dream of homeownership a reality!

Speak to a mortgage agent today by contacting us at info@themortgagestation.ca or 1-877-512-0007!