The Tax-Free First Home Savings Account (FHSA), introduced by the federal government in their 2022 budget, is now available at Educators Financial Group… and is a real plus in a real estate market that remains challenged by high prices and higher interest rates.
So, how exactly does this new account work and how can education members leverage it to save for their first home? Here’s what you need to know.
To open an FHSA, you must be a Canadian resident between the ages of 18 and 71 years old and a “first-time homebuyer” – meaning you or your spouse or common-law partner did not own a qualifying home that you lived in as your principal residence in the year the account is opened or in any of the four preceding calendar years.
You can contribute up to $8,000 per year, up to a maximum of $40,000 during the lifetime of the account, which is 15 years from the date it was opened, or by December 31 of the year you turn 71 (whichever comes first).
Any unused contribution room can also be carried forward to the following year, up to a maximum of $8,000 per year on top of the contribution limit of $8,000. In other words, you can’t contribute more than $16,000 in any one year.
Educators Certified Financial Planner professional Kody Fanara explains, “Let’s assume Isabel opens an FHSA in 2023 and contributes a total of $3,000. In 2024, Isabel will be allowed to contribute up to $13,000 to her FHSA ($8,000 plus the $5,000 from the previous year) without incurring any penalties.”
Tip: Your contribution room starts the year you open your FHSA, so consider opening one even if you’re only thinking about a future home and have limited cashflow.
Like TFSAs or RRSPs, over-contributions will be taxed 1% for each month excess amounts stay in your FHSA.
Contributions to an FHSA are tax-deductible, like an RRSP. That means that if you contribute $8,000 to an FHSA, you can deduct $8,000 from your taxable earnings in the year you contribute or be carried forward to a later year. Plus, any withdrawals from a FHSA are not taxed, like a TFSA, as long as the money is used towards the cost of your first home. Though, unlike RRSPs, contributions made in the first 60 days of a subsequent year can’t be deducted in the current tax year.
Tip: If you’re just starting out and lower on the pay grid, you may want to consider deferring the tax deduction to a later year when your income (and tax rate) is higher.
Another benefit is that, although spousal contributions (with their deduction claims) are not allowed, you can lend a spouse or partner money for an FHSA without paying taxes on any income earned in the account.
Essentially, any investment that can be held in an RRSP or a TFSA can be held in your FHSA, including mutual funds, publicly traded securities, bonds, and GICs.
When you’re ready to buy your first home, you can make a qualifying, tax-free withdrawal from your FHSA if the following conditions are met:
Once these conditions are met, the funds can be withdrawn tax-free in a single withdrawal or a series of withdrawals. The FHSA must be closed by the end of the year following the first qualifying withdrawal and you are not permitted to have another FHSA in your lifetime.
“The good news is that amounts saved in an FHSA can be transferred to a Registered Retirement Savings Plan or Registered Retirement Income Fund (RRIF) if you decide not to buy a home,” says Kody. “This is the equivalent of gaining an extra $8,000 a year up to $40,000 in RRSP contribution room.”
Tip: As an education member, it can be challenging to save for retirement, because your pension contributions limit how much you can contribute to your RRSP. If you’re not sure if you will ever buy a home, you may still want to consider contributing to an FHSA anyway since funds can eventually be transferred tax-free to your RRSP or RRIF, thus extending your RRSP contribution room.
Once transferred, the funds are subject to RRSP and RRIF rules, including that the funds will be taxable when you withdraw them from the account.
The FHSA can be used in combination with an RRSP Homebuyers’ Plan and your TFSA. Here’s how they compare:
|FHSA||RRSP Homebuyers’ Plan||TFSA|
|Contributions are Tax Deductible||Yes||Yes||No|
|Withdrawals For Home Purchase are Tax-Free||Yes, if they meet certain conditions 2 3||Yes, but must be paid back into your RRSP within 15 years 4 5||Yes|
|Unused Contributions Carry Forward||Yes, but you can carry forward a maximum of $8,000, for a maximum contribution of $16,000 in a given year||Yes||Yes|
|For 1st Time Homebuyers Only||Yes||Yes||No|
|Total Contribution Limit||$40K||$35K||Cumulative|
1 Minimum investment value of $1,000 required. One winner will be selected to win up to a maximum value of $2,500 towards one month’s rental costs for the winner’s current residence. The winner must submit a verified photocopy of their original lease to confirm their monthly rent costs. Odds of winning a prize are dependent upon the number of entries received during the Contest Period. Terms and conditions apply. View full terms and conditions.
2 Withdrawals will only be tax-free if they meet certain conditions. This includes being a first-time homebuyer at the time you make the withdrawal, having a written agreement to buy or build your home before October 1 of the year after you make the withdrawal, and intending to occupy that home as your principal place. The home must be in Canada.
3 After making a withdrawal to buy your qualifying home, you will be required to close your FHSA by the end of the following year and will not be permitted to open another FHSA.
4 Amounts withdrawn under the HBP must be repaid to an RRSP within a maximum of 15 years, beginning as early as the second year following the year of withdrawal.
5 When the amount repaid to the RRSP is eventually withdrawn, it will be taxable at that time.