First Home Savings Account (FHSA)

1.???? Are you looking to buy your first home in Canada?

2.???? Are you a resident of Canada?

3.???? Are you above the age of 18 years?

If the answer to all the above 3 questions is YES, then this article is for you!

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Everyone dreams of owning a home in Canada someday. You may be able to afford multiple homes in your life but the feeling of becoming the first homeowner has a different vibe to it. And this dream is becoming challenging day by day for a lot of Canadians with the rising house prices and the cost of living. An average Canadian home that used to cost $400K before Covid in 2019 today costs upward of $600K in 2024. This means you need to have considerable savings for a downpayment to be able to afford to buy a home in Canada. For example, if you are looking to buy your first home valued at $500,000 and plan on making a 10% downpayment, you will need to save somewhere around $40,000 to $50,000 to be able to afford that home.

What is a First Home Savings Account (FHSA)?

A First Home Savings Account (FHSA) is a relatively new registered investment account with the Canada Revenue Agency (CRA)/Government of Canada that allows you to save money for the downpayment of your First Home in Canada. This was launched by the Canadian government in 2023 to help first-home buyers save money for the down payment of their first home. The earnings grow tax-free in a First Home Savings Account (FHSA) i.e. no tax is payable on the income earned whether it is interest, dividend (CAD) or capital gains.

What’s the benefit of having a First Home Savings Account (FHSA)?

First off, you are saving money for the downpayment of your first home in Canada.

Secondly, the key benefit of saving or investing in a First Home Savings Account is the tax deduction. For example, say your annual income is CAD 60,000. If you don’t save money in a registered account such as a First Home Savings Account (FHSA) or Registered Retirement Savings Account (RRSP), you will be paying taxes on $60,000 income. Now, if you were to invest say $5,000 in a year in a First Home Savings Account (FHSA), you will get a tax deduction of $5,000 meaning you will be paying taxes on $55,000 income only and not on $60,000. If you fall under a 20% tax slab in this case, you would be saving 20% of $5,000 which is $1,000. Imagine the savings if you save more money in a FHSA over the years and let it grow.

And thirdly, the money grows tax-free inside a First Home Savings Account (FHSA). Your $5,000 investment in a First Home Savings Account can become say $7,000 in 1-2 years. The extra $2,000 earnings is tax-free growth inside the FHSA that you can use towards your first home downpayment.

If you had saved the same money instead in a non-registered account, you would not get a tax deduction and the earnings would not be tax-free.

Who is eligible to open a First Home Savings Account (FHSA)?

You must be a qualifying individual to be eligible to open a First Home Savings Account (FHSA).

A qualifying individual is a person who is

·?????? 18 Years of age or older

·?????? A resident of Canada

·?????? A First Time Home Buyer

If you do not meet all of the above conditions, you are not a qualifying individual and hence are not eligible to open a First Home Savings Account (FHSA).

Please note that you should be younger than 71 years of age as of December 31 of the year you open your FHSA to be eligible.

You are considered a First Time Home Buyer if you have never lived in a qualifying home as your principal place of residence that you owned or jointly owned (With your spouse or common-law partner) in this calendar year or the previous 4 calendar years.

How much can I Invest in a First Home Savings Account (FHSA)?

You can contribute a maximum of $8,000 per person per year in a First Home Savings Account (FHSA). Your contribution room for FHSA starts to build the year you open the account. Calendar Year is from Jan to December. The lifetime contribution limit for saving in a First Home Savings Account (FHSA) is currently set at $40,000. This is the maximum amount one can save in a First Home Savings Account (FHSA) per person. Someone who opened the First Home Savings Account (FHSA) last year in 2023 would have a contribution room of $16,000 ($8,000 from 2023 and $8,000 from 2024). If you did not open the FHSA last year, you lost the $8,000 contribution room for last year. You can open one this year (2024) and by 2028, you will have a $40,000 contribution room.

If you are planning to buy a home along with your spouse or common-law partner, both of you will have the opportunity to take advantage of $40,000 contribution room each meaning you both can save $80,000 in total in individual First Home Savings Account over the next 5 years.

How can I open a First Home Savings Account (FHSA)?

You can open a First Home Savings Account (FHSA) with a financial institution (Issuer) such as a bank, insurance company, credit union or trust company. You can open FHSA either online or in person. Check with your preferred financial institution for details on how to open a FHSA, what documents they need for account opening, whether there is a fee for opening or maintaining the account and what kind of investments can be held under the First Home Savings Account offered by them before making a decision.

Can I open a joint First Home Savings Account (FHSA)?

No, a First Home Savings Account (FHSA) is an individual account and cannot be opened or owned as a joint account.

What kind of investments are permitted or can I hold under a First Home Savings Account (FHSA)?

You can save money as cash and/or invest in Guaranteed Investment Certificates (GICs), Bonds, Mutual Funds, Exchange Traded Funds (ETFs) and Stocks in your First Home Savings Account (FHSA). Please check with your issuer on what kind of investments are available before opening the account.

Can I invest in US Securities (E.g. US Stocks) under a First Home Savings Account (FHSA)?

Yes, you can invest in US securities under a First Home Savings Account (FHSA). However, be mindful of your contribution room and the tax implications for investing in USD.

You can contribute to FHSA in USD as long as the converted amount in CAD is within your FHSA contribution room. For example, if your contribution room is $8,000, you may be able to contribute ~ USD 5,906 to your FHSA considering a USD to CAD conversion rate of 1.35 ($5906 USD*1.35 = $7,999). If you have more contribution room, you may be able to contribute more in USD as per the exchange rate on the contribution date.

Also, be mindful that dividend income earned from US investments under the FHSA may be subject to withholding taxes. Speak to your tax consultant or accountant before starting to invest in US securities in a FHSA.

How much money can I withdraw from my First Home Savings Account (FHSA)?

Once you have finalized a property and are ready to make the downpayment for your first home, you can (And you should) withdraw all of the funds from your First Home Savings Account (FHSA). Visit your issuer well in advance of the property closing date as withdrawal may take a few days to complete and it may take some time for the funds to arrive in your chequing or savings account.

Do I need to repay the amount withdrawn from the First Home Savings Account (FHSA)?

No, unlike Registered Retirement Savings Plan (RRSP) funds used as a First Time Home Buyer (FTHB), repayment of the withdrawn amount is not required for First Home Savings Account (FHSA). Once you have finalized a property and are ready to make the downpayment for your first home, go ahead and withdraw all of the funds from your First Home Savings Account (FHSA) and close the account.

What happens to my FHSA if I die?

You have the option to designate a Successor Holder or Beneficiary for your First Home Savings Account (FHSA). You can opt for this at the time of account opening or at a later time. The successor Holder can only be a spouse or common-law partner. Beneficiary can be anyone such as a spouse, child, parent, friend, relative etc. The proceeds from the First Home Savings Account will be transferred to the Successor Holder or the Beneficiary as per your preference or account setup.

What if I have more questions about FHSA?

I am more than happy to answer your questions regarding a First Home Savings Account (FHSA). Leave me a comment or message me directly and I’ll get back to you at the earliest. However, my responses may be a bit delayed due to limited time. You can refer to the Government of Canada website to access more information at the below link:

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account.html

* The default denomination is $CAD unless specified otherwise

About the Author

The author of this post, Nimesh Bhatia, is a Master of Business Administration (MBA) in Finance & Marketing and is a Financial Planning I (FP I), Investment Funds in Canada (IFC) and Personal Financial Services Advice (PFSA) certified professional. He has over 12+ years of rich industry experience and has worked with the top Canadian Banks in the last 3 years as a Financial Advisor. He takes pride in his financial acumen and has leveraged his customer service skills to help clients from all walks of life with their savings, investments and lending needs.