What is an FHSA? And why it’s a must for first-time homebuyers

The first home savings account — better known as the FHSA — was first launched in April of 2023. By the end of that year, over 300,000 people had already opened one. Given its immediate popularity, the FHSA is clearly a useful savings account. However, it’s only been around for such a short time, so many people still know little about it.

In this article, we’ll reveal all the benefits of the FHSA, explain how it can save you a considerable amount in tax and why you should consider opening one if you’re thinking about buying your first home.

We’ll also answer some common FHSA questions, such as; who can open an FHSA; what is the FHSA contribution limit; what investments can you hold in an FHSA; what is the deadline for FHSA contributions; and is an FHSA right for you??

How the FHSA works?

As its name suggests, the first home savings account is designed to help Canadians save towards buying their first home. Given the increase in home prices across much of Canada, and the difficulties many people have in getting onto the property ladder, the FHSA was designed to make it easier to save for a down payment on your first home.

The FHSA provides three key tax breaks, making it a combination of the best parts of the RRSP and the TFSA:

1. Contributions to your FHSA are tax deductible. This means that, for every dollar you contribute to your FHSA, your taxable income will be reduced by a dollar (in the same way that RRSP contributions work). This will reduce your tax bill and potentially provide you with a considerable tax refund.
2. All growth in your FHSA (including income from interest, dividend payments and capital gains) is tax free. No matter how much you earn from your investments, you won’t pay a cent in tax.
3. All withdrawals from your FHSA are tax free (unlike with an RRSP, where withdrawals are classed as taxable income), as long as they’re used towards buying your first home.
4. Unlike with the Home Buyers’ Plan , you won’t need to pay anything back if you use the savings from your FHSA to buy a qualifying home.
5. You can combine the proceeds from your FHSA and the Home Buyers’ Plan to buy a home.

The tax deduction can provide you with extra money to save for your home, in the form of a tax refund, while tax-free investment growth means that your savings will grow even faster and? benefit further from compound returns.?

Who can open an FHSA?

Firstly, you need to be a Canadian resident aged between 18 and 71 in the year you open the account (although in some provinces the age of majority to open an account is 19).

You also need to qualify as a first-time home buyer, which means:

• You haven’t lived in a primary residence that you owned or jointly owned this calendar year or the previous four years.
• You haven’t lived in a primary residence that your spouse or common-law partner (if you have one) owned or jointly owned this calendar year or the previous four years.

How much can you contribute to an FHSA account?

There is an FHSA contribution limit, which is $8,000 per year, with a lifetime FHSA contribution limit of $40,000. Unlike with some registered accounts, there is no minimum holding period. This means that you don’t have to wait for a specific amount of time before withdrawing money from your FHSA account.

Any unused amounts can be forwarded to the following year. For example, if in the first year of saving you only contributed $2,000 to your FHSA account, in year two you could contribute up to $14,000.

You can open more than one FHSA account, but you can still only contribute up to the FHSA contribution limit each year for all accounts combined. If you go over the FHSA contribution limit, you will be taxed 1% per month on the overcontribution amount, either until you withdraw that amount from your FHSA account, or a new year begins and provides an adequate new contribution limit.?

What kind of investments can you have in an FHSA??

FHSA rules allow for a similar variety of investments as TFSAs and RRSPs. You don’t have to just hold cash in a first home savings account, you can also hold these types of investments:?

• Mutual funds.
• Most stocks and other securities listed on a designated stock exchange .
• Guaranteed investment certificates (GICs).
• Canada savings bonds and provincial savings bonds.
• Certain shares of small business corporations.

FHSA rules for withdrawing money

When you’ve found a home you want to buy, FHSA rules dictate that you have to fulfil a few conditions to make the withdrawal:

• Have an agreement to buy a home or build a new one by October 1 of the following year.
• Fill out Form R725 and send it to the financial institution that holds your FHSA account.
• Buy the home no more than 30 days before withdrawing the money.
• The home should be your principal residence within a year.??

You have the option to withdraw all the money at once or make several FHSA withdrawals.?

When do you have to close your FHSA?

Normally you would close your FHSA after you’ve withdrawn the money to buy your first home. However, if that doesn’t happen, the FHSA rules say that you would have to close your FHSA account when one of these events happens:

• The FHSA reaches its 15-year anniversary.
• You turn 71.
• You made a withdrawal from your FHSA in the previous year.?

In any of these situations, you would need to transfer your money to either a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) in order to move it out of your FHSA account without paying tax (until you then withdraw the amount from your RRSP or RRIF).

Otherwise, if you simply withdraw money from your first home savings account for reasons other than to buy your first home, the money will be treated as taxable income.?

FHSA versus Home Buyers’ Plan

Canadian first-time homebuyers can also use money from their RRSP as part of their down payment on a first home. Any money saved in an RRSP provides an immediate tax break and grows tax free while it remains within the savings plan (in the same way as money contributed to an FHSA).

The main differences are that you can only withdraw up to $35,000 from your RRSP (or $60,000 if the 2024 budget proposal passes) and you have to repay all of that money within a 15-year period. You can withdraw all of the money in your FHSA, with no limit, and you never have to pay it back, as long as it is used to buy a qualifying first home.

Is an FHSA right for you?

If you hope to buy your first home in the next 15 years, the first home savings account is probably right for you. It provides so many benefits with no real disadvantages: you receive an immediate tax break (which can be considerable if you contribute a large amount), your money grows completely tax free, and all withdrawals are tax free.

An FHSA account can help you grow your home down payment savings far faster than in a non-registered account, so if you are thinking of buying a home any time soon, it makes no sense not to open an FHSA account.?

FHSA FAQs

What is the FHSA contribution limit?

FHSA rules allow you to contribute up to $8,000 per year, with a lifetime maximum amount of $40,000.

What is the FHSA 15-year rule?

This is the FHSA rule that says that you have to close your FHSA account 15 years after you open it.

Can I use my FHSA for something other than buying a home?

If you don’t use some or all of your FHSA money to buy your first home, you can use it to go towards your retirement savings by transferring the money (with no immediate tax consequences) to your RRSP or RRIF. Otherwise, you can withdraw it (and pay income tax on it) and use it for any purpose.

What is the deadline for FHSA contributions?

December 31 is the last day you can contribute to your FHSA account for that tax year.

Is the FHSA available in Canada?

Yes, the FHSA is a registered savings plan created by the Government of Canada and is only available in Canada.?

How to open an FHSA?

When you want to start saving for a first home with an FHSA account, all you need to do is contact your financial institution to get the ball rolling.

However, an IG Advisor can help you to integrate your first home savings account into your financial plan. They’ll make sure it fits in with your other financial goals, such as improving your cash flow and paying down debt. They’ll also suggest the most suitable investments to hold in your FHSA, ensuring that they complement the rest of your portfolio.

Talk to your IG Advisor today to discuss getting started with your own FHSA account and getting you into your first home sooner. If you don’t have an IG Advisor, you can find one here .?

Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.

Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).

Sergiu is a senior financial consultant with IG Wealth Management where he partners with Canadian families, incorporated professionals and business owners with strategic advice and services to create and maintain a holistic financial plan. He brings over 25 years' experience in the financial services industry. Before joining IG in 2017 he worked at one of Canada's leading banks. Sergiu is a Certified Financial Planner and a Fellow of the Canadian Securities Institute . Sergiu is based in Richmond Hill, Ontario and operates in the broader GTA.

Sergiu's contact details can be found on his web-page .

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