Note: this post was updated in January 2023.
One of the many promises made by then candidate Justin Trudeau was to create a specific savings account for first-time home-buyers, if he was re-elected. Now that he was re-elected, it’s time for the Liberal Party to make good on this campaign promise.
But What is a FHSA Anyway?
FHSA stands for First Home Savings Account. This new account will allow Canadians who are 18 or older and haven’t owned a home in the current calendar year, or in the previous four calendar years, to save up to a total of $40,000 towards the purchase of a home.
The account will be available on April 1st 2023.
The FHSA combines elements of both the RRSP and the TFSA, but is exclusively geared towards the purchase of a home.
How Does The FHSA Work?
FHSA account holders can contribute up to $8,000 a year, while earning a tax deduction on the contributions, just like with an RRSP. Just like with an RRSP, you can claim the deduction at a later date, should it make more sense from a tax perspective.
Any money withdrawn from the account, as well as any capital gains, interests or dividends paid aren’t taxed, just like with a TFSA.
The maximum lifetime contribution is $ 40 000. Unused contributions will carry-over, just like the TFSA.
You can hold cash, stocks, bonds, mutual funds or ETFs in this account as well. You’ll probably need to stick to Canadian currency, government and companies if you want to make the most of the tax-free feature. It’s unlikely there will be any tax treaty with other countries for this account, just like with the TFSA.
The best feature of the FHSA is that you don’t have to reimburse the amounts withdrawn, unlike the RRSP Home Buyer Plan. You don’t have to declare these to CRA either. Your financial institution will handle the latter on your behalf.
The federal government also confirmed you can use both the FHSA and the RRSP Home-buyer plan….but not on the same home purchase.
Are There Limits to the FHSA?
Yes, there are.
- Home purchase only: if you use the money for something else, it becomes taxable.
- 15-year limit: you have 15 years to purchase a property once you open the account. After that, your account will be closed. You can transfer the money to an RRSP or a RRIF or pay tax on it otherwise.
- Turning 71: if you happen to turn 71, your FHSA will also be closed.
- Spousal contributions and attributions don’t apply: The only individual permitted to claim the tax deduction is the account holder, even if their spouse/partner contributed to the account.
- 1% monthly penalty on overcontributions
- No creditor protection: if you file for bankruptcy and have a FHSA, it will most likely be forfeited.
FHSA or HBP?
I previously wrote about the Home-Buying Plan program here.
If you’re just starting out and don’t have much saved, the FHSA is probably the better choice for you. Same applies if you’re not certain about home ownership, as you can transfer the money to your RRSP if you change your mind. You’ll be taxed and penalized under the HBP, even if you put the money back in your RRSP immediately.
If you already have an RRSP and/or other savings, the HBP is probably the better option. It will allow you to buy sooner. A lot can happen in 15 years….
Will The FHSA Helps with Home Affordability?
Sadly, no. It’s not the purpose of this product. Home affordability has nothing to do with Canadians’ abilities to save money.
Lack of supply and strong demand are the number one reason homeownership is so expensive in Canada. The FHSA won’t change this.
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