The tax-free First Home Savings Account

By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

The first home savings account goes live on April 1, 2023. [It was confirmed in Tuesday’s 2023 federal budget.] The FHSA is a program to help first time home buyers save for a home, in tax-free fashion. The program can be used on top of the current Home Buyers Plan (HBP) that is part of the RRSP savings vehicle. We can also throw in the Tax Free Savings Account (TFSA) for ways that Canadians can save in tax-free or tax-deferred fashion. The first home savings plan is a wonderful addition to the Canadian saving and investing landscape.

Here’s the government of Canada link for the first home savings plan.

And here is a simple overview from TD Bank.

And special thanks to financial planner Mark McGrath for his tweets and help. Mark is a Wealth Advisor at Wellington-Altus Private Wealth.

Be sure to follow Mark on Twitter. He often provides wonderful insights on financial planning basics, and is always happy to answer questions.

What is the first home savings account?

The First Home Savings Account is a type of registered savings plan for Canadians saving to buy their first home. Canadian residents aged 18 years or older can open an FHSA to save towards the purchase of a home in Canada.

There are limits to how much you can put in your FHSA:

• $8,000 – yearly contribution limit
• $40,000 – lifetime contribution limit

Contribution amounts are tax deductible, just like the RRSP program. They will reduce the amount of income taxes that you will pay. The annual contribution limit would apply to contributions made within a particular calendar year. Unlike RRSPs, contributions made within the first 60 days of a given calendar year can not be attributed to the previous tax year.

Contribution room carries forward to the next year if you don’t put in the full amount. Carry-forward amounts only start accumulating after you open an FHSA for the first time. The carry-forward room does not automatically start when you turn 18.

An individual would be allowed to carry forward unused portions of their annual contribution limit up to a maximum of $8,000. For example, an individual contributing $5,000 to an FHSA in 2023 would be allowed to contribute $11,000 in 2024 (i.e., $8,000 plus the remaining $3,000 from 2023).

Who can open a first home savings account?

To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. In addition, an individual must be a first-time home buyer, meaning you cannot have lived in a home that you or a spouse/common-law partner owned in the current year or the previous 4 calendar years. And you can only use the FHSA once.

Combine FHSA with the RRSP home buyer’s plan

As you may know you can remove up to $35,000 from an RRSP account to be used for a first time home purchase. It’s called the Home Buyer’s Plan (HBP). You can use monies from both the HBP and the FHSA for that first home purchase. You can combine amounts.

There is no limit to how much you can use from your first home savings plan. Meaning, for your first home purchase.

What can you hold in an FHSA?

An FHSA can hold savings or investments. The same qualified investments that are allowed to be held in a TFSA can also be held in an FHSA. This could include ETFs, stocks, mutual funds, bonds, savings accounts and GICs.

What if you don’t use the FHSA funds for a home purchase?

Any savings not used to purchase a qualifying home could be transferred on a tax-free basis into an RRSP or Registered Retirement Income Fund (RRIF) or would otherwise have to be withdrawn on a taxable basis. Individuals that make a qualifying withdrawal could transfer any unwithdrawn savings on a tax-free basis to an RRSP or RRIF until December 31 of the year following the year of their first qualifying withdrawal.

Withdrawals that are not qualifying withdrawals would be included in the income of the individual making the withdrawal. Financial institutions would be required to collect and remit withholding tax on non-qualifying withdrawals, consistent with the treatment applicable to taxable RRSP withdrawals.

Transferring your FHSA to your RRSP or RRIF

Your FHSA must be closed by December 31st on the soonest of:

a) the 15th year after you open it

b) the year you turn 71

c) the year following the year of your qualified home purchase The balance can be taken as taxable cash or rolled over, tax-deferred, to your RRSP.

An individual could transfer funds from an FHSA to another FHSA, an RRSP or a RRIF on a tax-free basis. Funds transferred to an RRSP or RRIF will be subject to the usual rules applicable to these accounts, including taxability upon withdrawal. These transfers would not reduce, or be limited by, an individual’s available RRSP contribution room.

Individuals will also be allowed to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits. That may be beneficial as you don’t have to pay back the FHSA, as you must with an RRSP HBP withdrawal.

What if you over-contribute?

Like the RRSP, TFSA, and RESP, if you over-contribute, there are penalties. It’s 1% of the excess amount per month until withdrawn.

How do I withdrawal / qualify to use the FHSA?

How do I withdraw money from my FHSA? To qualify as tax-free, you must buy the home by October 1st of the year after the withdrawal. So if you withdraw it in 2026, you must buy the home by October 1st, 2027, regardless of the month you withdrew the funds in 2026.

You can also withdraw funds from your FHSA up to 30 days after you purchase the home. So if you buy the home first, you must withdraw the funds within 30 days. If not, the withdrawal will be fully taxable. You’ll need to provide purchase details to your financial institution.

Treatment Upon Death

Like TFSAs, individuals would be permitted to designate their spouse or common-law partner as the successor account holder, in which case the account could maintain its tax-exempt status. If named as the successor holder, the surviving spouse would become the new holder of the FHSA immediately upon the death of the original holder provided the surviving spouse meets the eligibility criteria to open an FHSA. Inheriting an FHSA in this way would not impact the surviving spouse’s contribution limits.

First home savings account summary and comparison chart

Thanks to Aaron Hector for the chart.

More thoughts from Mark

Mark McGrath offers …

Think about filling your FHSA before your RRSP since you can always transfer the FHSA to the RRSP if you don’t use it. Once maxed, any remaining savings for your home purchase can go to a TFSA, RRSP, or non-registered account, depending on your circumstances.

Mark also suggests that you open an FHSA even if you don’t plan on buying a home. It’s free RRSP room. You can preserve your RRSP room for later use.

Parents and grandparents with ample savings can gift monies to family so that kids and grandkids can fill up that first home savings plan. That will allow them to save their RRSP space.

What to put in your FHSA account

Time horizon is key. If you plan to use the FHSA account (and/or your HBP) within the next 5 years, you might strongly consider using high interest savings accounts and GICs.

Here’s my review of EQ Bank. Savings accounts pay 2.5% or 3.0%. GICs rates are in the area of 3.5% to 5.0%. These accounts can qualify for CDIC insurance.

If you have a longer time horizon, you might then invest (within your risk tolerance) in a portfolio that includes stocks and bonds and REITs. For the amount or risk to embrace, check out the chart on the asset allocation ETF page.

At Questrade, you can buy ETFs for free.

Keep in mind that you will have to de-risk the portfolio as you approch the date when you need to withdraw funds for home purchase. That is similar to the de-risking required for an RESP. Check out this post on how to execute that de-risking strategy.

The smart way to invest in the RESP with Justwealth.

Where can you open a first home savings account?

Coming soon, April 1, 2023.

Please help out your fellow Canadians. When you hear of an institution offering the FHSA please add a note in the comment section of this post, or send me an email via the contact form on this blog.

Thanks for reading. Keep checking in on this post for institutions that are offering the first home savings accounts. And help me update that list.

And please share this post (it is good news) with friends and family, and by way of the share buttons.

Dale Roberts is the owner operator of the Cut The Crap Investing blog,  and a columnist for MoneySense. This blog originally appeared on Cut the Crap Investing on March 1, 2023 and is republished on the Hub with permission.