First Home Savings Account (FHSA) in Canada?

The First Home Savings Account (FHSA) is a new registered savings account introduced by the Canadian government to help individuals save for their first home. This innovative financial tool combines the tax advantages of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) to make homeownership more accessible for first-time buyers.

This guide provides a detailed explanation of the FHSA, including how it works, its benefits, eligibility criteria, and how it compares to other savings options like the RRSP and TFSA.

What Is the First Home Savings Account (FHSA)?

The First Home Savings Account FHSA is a registered account designed to help first-time homebuyers save for the purchase of their first home. Contributions to an FHSA are tax-deductible, meaning they reduce your taxable income in the year of contribution, similar to an RRSP. Additionally, qualifying withdrawals used to purchase a first home are tax-free, much like a TFSA.

This unique combination of tax benefits makes the FHSA an attractive option for Canadians looking to achieve homeownership.

How Does the FHSA Work?

The FHSA offers a flexible and tax-efficient way to save for your first home. Here’s how it works:

Contributions

• Annual Contribution Limit: $8,000 per year.
• Lifetime Contribution Limit: $40,000.
• Contributions are tax-deductible, reducing your taxable income in the year you contribute.
• Unused contribution room can be carried forward to future years, up to a maximum of $8,000.

Example:

• In 2024, you contribute $5,000 to your FHSA.
• The remaining $3,000 contribution room can be carried forward to 2025, allowing you to contribute up to $11,000 in that year ($8,000 + $3,000).

Investments

Funds within an FHSA can be invested in various eligible assets, such as:

• Mutual funds
• Exchange-traded funds (ETFs)
• Stocks
• Bonds
• Guaranteed Investment Certificates (GICs)

Investment growth, including interest, dividends, and capital gains, is tax-free while the funds remain in the account.

Withdrawals

• Withdrawals are tax-free if used for a qualifying first home purchase.
• Non-qualifying withdrawals are taxed as income, similar to RRSP withdrawals.

To qualify for tax-free withdrawals, you must meet specific criteria, including being a first-time homebuyer and using the funds to purchase a home in Canada.

Who Is Eligible to Open an FHSA?

To open an FHSA, you must meet the following eligibility criteria:

1. Age: You must be at least 18 years old (or the age of majority in your province/territory).
2. Residency: You must be a resident of Canada.
3. First-Time Homebuyer Status: You must not have owned a home in the year you open the account or in the preceding four calendar years.

Example:

• If you open an FHSA in 2025, you must not have owned a home between January 1, 2021, and December 31, 2025.

Key Benefits of the FHSA

The FHSA offers several advantages for first-time homebuyers:

1. Tax-Deductible Contributions

Contributions to an FHSA reduce your taxable income, potentially lowering the amount of tax you owe.

Example:

• If your annual income is $60,000 and you contribute $8,000 to an FHSA, your taxable income is reduced to $52,000.

2. Tax-Free Withdrawals

Qualifying withdrawals used to purchase your first home are tax-free, meaning you pay no tax on the funds you withdraw or the investment growth within the account.

3. Investment Growth

Like a TFSA, the FHSA allows your investments to grow tax-free, helping you build your savings faster.

4. Flexibility

If you decide not to purchase a home, unused funds can be transferred to an RRSP or Registered Retirement Income Fund (RRIF) without affecting your RRSP contribution room.

FHSA vs. Other Savings Options

The FHSA combines features of the RRSP and TFSA but is specifically designed for first-time homebuyers. Here’s how it compares:

Using the FHSA and Home Buyers’ Plan (HBP) Together

If you’re eligible, you can combine the FHSA with the RRSP’s Home Buyers’ Plan (HBP) to maximize your savings. The HBP allows first-time homebuyers to withdraw up to $35,000 from their RRSP tax-free to purchase a home, provided the funds are repaid within 15 years.

Example:

• FHSA Savings: $40,000
• HBP Withdrawal: $35,000
• Total Available for Home Purchase: $75,000

This strategy provides a significant boost to your homebuying budget while leveraging the tax benefits of both accounts.

Practical Example

Scenario: Saving for a First Home

Emma, a first-time homebuyer, opens an FHSA in 2024 and contributes $8,000 annually for five years, reaching the lifetime contribution limit of $40,000. She invests the funds in a diversified portfolio that grows to $50,000.

In 2029, Emma withdraws the full $50,000 tax-free to purchase her first home. The contributions reduced her taxable income each year, and the investment growth was completely tax-free.

Tips for Maximizing Your FHSA

1. Start Early: Open an FHSA as soon as you’re eligible to maximize your savings and investment growth.
2. Contribute Regularly: Take advantage of the annual contribution limit to maximize your tax deductions.
3. Invest Wisely: Choose a diversified investment portfolio to optimize growth while managing risk.
4. Combine with the HBP: Use both the FHSA and HBP to increase the funds available for your home purchase.
5. Monitor Eligibility: Ensure you remain eligible for tax-free withdrawals by meeting the first-time homebuyer criteria.

Conclusion

The First Home Savings Account (FHSA) is a game-changer for Canadians looking to save for their first home. With its combination of tax-deductible contributions, tax-free withdrawals, and investment growth, the FHSA offers unparalleled benefits for first-time homebuyers. By understanding how the FHSA works and taking full advantage of its features, you can accelerate your journey toward homeownership.

For expert assistance with your FHSA or other financial planning needs, contact BOMCAS Canada at info@bomcas.ca or visit BOMCAS Canada. Our team of professionals is here to help you navigate the complexities of Canada’s tax and savings systems and achieve your financial goals.