Although you have likely heard of the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) here in Canada, the First Home Savings Account (FHSA) was launched very recently, in 2023.
The new plan helps first-time home buyers to save up to $40,000 for the purchase of a new home. Contributions to the FHSA are tax-deductable (like RRSP contributions), and withdrawals are non-taxable (like TFSA withdrawals).
You are getting the best of both account types as part of the new FHSA. The First Home Savings Account has an $8,000 annual contribution limit and a $40,000 lifetime contribution limit.
I’ll go over the Tax-Free First Home Savings Account further below and outline why this is a fantastic tool to help you save money for your first property.
The Purpose of the Tax-Free First Home Savings Account
If you have been watching parts of Canada’s real estate market over the past several years, you will know that prices have skyrocketed for properties (especially in hot spots like Toronto and Vancouver). Putting aside the money for a down payment can be difficult.
The FHSA is designed to help Canadian residents who are at least 18 years of age and first-time home buyers. The Tax-Free First Home Savings Account can be kept open until the 15th anniversary of the FHSA account opening or if an individual turns 71 years of age.
Any assets in an FHSA that is not used to buy a home that qualifies can be transferred tax-free into a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF).
Once a qualifying withdrawal has been made from an FHSA, the remaining balance of the account can be transferred to an RRSP or RRIF by December 31st of the year after the qualifying withdrawal.
By allowing you to contribute pre-tax income to an FHSA, the account can quickly grow to meet the minimum down payment values of some properties in Canada. It gives eligible first-time homebuyers a huge tax advantage over those who are not using an FHSA.
The FHSA and how it Compares to the Home Buyers’ Plan
The Home Buyers’ Plan is an older program that allows Canadians to withdraw from their RRSP accounts in order to build or buy a qualifying home. The HBP withdrawal limit (for withdrawals after March 19, 2019) is currently $35,000.
Amounts that are withdrawn from the Home Buyers’ Plan must be repaid back to your RRSP within 15 years. Your repayment period to the RRSP account starts two years after the year in which you first took out the HBP funds.
You can learn more about the Home Buyers’ Plan as part of an RRSP in Canada through my RRSP first-time home buyer’s guide.
What Type of Investments can you hold in a Tax-Free First Home Savings Account?
The investments that can be held in a Tax-Free First Home Savings Account must be considered qualified investments and are the same as those that can be held within a Tax-Free Savings Account (TFSA). These include:
- Cash
- Bonds
- Stocks
- Funds
- GICs
- High-interest savings accounts (HISAs)
Opening a Tax-Free First Home Savings Account
The new FHSA can be opened just like you would open an RRSP or TFSA at your broker of choice. In Canada, bank-owned brokers generally have the highest account support (in most cases).
Before you can open an FHSA, you will want to check that your brokerage supports the account. As an example, Wealthsimple Trade does not currently support FHSA accounts (they have lower account diversity than most peers). Implementing support for the account can arrive later in 2023 or beyond.
Bank-owned discount brokerages can also be expected to be slower to adopt the FHSA as a supported account type. Opening an FHSA through a local branch advisor can seem straightforward but likely comes with the high fees that are involved with working with a human advisor.
Be sure to keep an eye out on your brokerage’s “account types supported” page in order to find out when the FHSA is added (if it isn’t already).
Contributing to a Tax-Free First Home Savings Account
The full annual contribution limit of $8,000 is available to qualifying Canadians as early as 2023. Canadians can claim an income tax deduction for the FHSA contribution. Contributions that are made in the first 60 days of the year can’t be considered part of the previous tax year (unlike for RRSPs).
Unused contribution portions can be carried forward into future years. Amounts to be carried forward only start accumulating after an FHSA is opened for the first time.
Canadians can have more than one FHSA account, even across multiple financial institutions or brokerages. You are responsible for making sure that you do not contribute more than the annual limit to your FHSA account in total across all accounts.
Only the FHSA owner can contribute to the account. Similar to overcontributions to a TFSA, overcontributions to an FHSA are taxed at 1% per month.
Transfers
Funds can be transferred between an FHSA account and the following accounts tax-free:
- Another FHSA
- RRSP
- RRIF
When you are transferring money between these accounts, you must follow the rules for each account type.
The Home Buyers’ Plan continues to be an option for Canadians in terms of also helping them to secure a home. A qualifying Canadian is not allowed to make both a Home Buyers’ Plan and FHSA withdrawal for the same qualifying home purchase.
There is an abundance of additional information on the Tax-Free First Home Savings Account on the Government of Canada website. It is an excellent resource to consult for more specific questions about the FHSA.
Frequently Asked Questions
First Home Savings Account Release Date
The FHSA account is available to qualifying Canadians as of the start of 2023. Canadians that qualify can contribute up to a maximum of $8,000 to the account (for the year).
Although the account was proposed by the government in 2022, it was not available at that year for Canadians to access.
First Home Savings Account Eligibility
Examples of FHSA issuers (institutions in Canada) include Canadian trust companies, credit unions, banks, and insurance companies.
In order to be eligible to take advantage of the Tax-Free first home savings account, a Canadian resident must be at least 18 years of age.
You must also qualify as a first-time home buyer, meaning that you have not owned a home in which you have lived during part of the past calendar year (or in any of the preceding four calendar years).
First Home Savings Account at TD?
TD currently does offer the FHSA through its broader advisory networks. It currently does not allow clients to open a Tax-Free First Home Savings Account through TD Direct Investing, the bank’s discount brokerage.
First Home Savings Account at RBC?
RBC also offers the FHSA through its broader advisory networks. RBC Direct Investing, the bank’s discount brokerage, does not currently allow clients to open a Tax-Free First Home Savings Account.
Conclusion
If you think that saving up for a first home in Canada is a daunting task, the good news is that the Government of Canada has made it substantially easier to do so. The ability to avoid paying income taxes on contributions and to withdraw funds from the FHSA tax-free is an incredible benefit.
Although you can take advantage of both the FHSA and the HBP within an RRSP, they can’t both be used for the same property.
When combining the FHSA with other tax-advantaged accounts, these accounts become an excellent way to reduce the amount of taxes that you pay back to the government over time.
If you are wondering how to start saving money for a down payment, be sure to read my guide on how to save money for a house down payment in Canada.
I think that saving up for a first home in Canada is a daunting task