FHSA: Is it right for you?

A First Home Savings Account (FHSA) is a registered plan that provides potential first-time home buyers with the opportunity to save money for a future home purchase tax-free. An FHSA combines some of features of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) with some unique features to make homeownership more accessible to Canadians. Learn everything you need to know about this powerful savings option and discover if it’s the right fit for you.

• Eligibility
• Contributions to an FHSA
• Withdrawals from an FHSA
• Transfers to and from an FHSA
• Taxation on death
• FHSA vs HBP
• What’s the best option to save for a home?
• Compare features of registered savings plans

Eligibility

To open an FHSA account, an individual must be a Canadian resident, 18 years or older (but not more than 71 years old on December 31 of the year the account is opened), and a first-time home buyer. To be considered a first-time home buyer, you or your spouse¹ can’t have owned and occupied a home as a principal residence in the current calendar year or the four previous calendar years.

An element that differentiates FHSAs from RRSPs and TFSAs is that FHSAs have an expiry date, known as the maximum participation period. An FHSA must be closed at the earliest of:

• the year after a withdrawal to purchase a home.
• 15 years after it was opened.
• December 31 of the year the account holder turns 71.

FHSAs can hold the same qualified investments currently allowed for TFSAs or RRSPs. This includes mutual funds, segregated fund contracts, publicly traded securities, government and corporate bonds, and guaranteed investment certificates. The prohibited investment and non-qualified investment rules that apply to other registered plans are applicable to FHSAs.

Contributions to an FHSA

The lifetime limit for an FHSA is $40,000. The FHSA participation room is $8,000 in the first year an FHSA is opened. Individuals can claim an income tax deduction for contributions made in a particular calendar year. This is different from RRSPs where contributions made during the first 60 days of a calendar year can be attributed to the previous tax year. Also, like RRSPs, contributions made to an FHSA can be carried forward and deducted in future years.

Individuals can hold more than one FHSA, but the total amount they can contribute to all their FHSAs can’t exceed their FHSA participation room for the year and their lifetime FHSA limit. Like TFSAs, a 1% tax on overcontributions applies on the highest amount for each month (or part month) an individual exceeds the limits.

An individual may carry forward up to a maximum of $8,000 of unused FHSA participation room at the end of the year, subject to the lifetime FHSA limit. This allows an individual contributing less than $8,000 in a given year to contribute the unused FHSA participation room in a subsequent year. For example, if you contribute $6,000 to an FHSA in 2024, you could contribute $10,000 in 2025 ($8,000 plus the unused participation room of $2,000 from 2024). Note that FHSA participation room wouldn’t start accumulating until an individual opens an FHSA for the first time.

Unlike RRSPs, there are no spousal FHSAs. However, an individual can give funds to their spouse who can contribute to their own FHSA. In these cases, the attribution rules won’t apply on any income earned in the FHSA from those contributions. Further, the attribution rules won’t apply if cash is given to an adult child to contribute to their FHSA. Only the FHSA account holder can claim the deduction for the contribution on their tax return.

Withdrawals from an FHSA

There are two types of withdrawals you can make from an FHSA: qualifying and taxable.

Qualifying withdrawal

You must be a first-time home buyer (you didn’t own and occupy a principal residence in the current or previous 4 calendar years) and a resident of Canada at the time of the withdrawal. You must have a written agreement to buy or build a home you intend to occupy as your principal residence before October 1 of the year following the year of the withdrawal. The withdrawal can’t be later than 30 days after acquiring a home. These withdrawals are tax free.

Taxable withdrawal

If a withdrawal isn’t a qualifying withdrawal, it’s generally fully taxable income in the year it’s made. This excludes certain withdrawals such as removing an over-contribution.

Transfers to and from an FHSA

Individuals can transfer funds from an FHSA to another FHSA, or to an RRSP or registered retirement income fund (RRIF) on a tax-free basis. Funds transferred to an RRSP or RRIF would be taxable on the eventual withdrawal from these accounts. However, the transfer wouldn’t reduce an individual’s available RRSP contribution room or reinstate their lifetime FHSA limit.

Individuals can also transfer funds from an RRSP to an FHSA tax free, subject to the FHSA participation room and lifetime FHSA limit. Funds transferred to an FHSA wouldn’t be deductible and wouldn’t reinstate an individual’s RRSP contribution room. However, the eventual qualifying withdrawal from the FHSA would be tax free, effectively making it a tax-free RRSP withdrawal.

Although not a direct transfer, an individual can also contribute funds from a TFSA to an FHSA. This would be a tax-free TFSA withdrawal and subsequent tax-deductible FHSA contribution. As the TFSA contribution room from the withdrawal is reinstated the next year, this may be preferrable to using RRSP funds where the contribution room is never reinstated.

Keep in mind that it's possible to transfer assets from a spousal RRSP to an FHSA tax free, provided there haven’t been any spousal RRSP contributions in the year of transfer or the prior two calendar years (attribution period). When a contribution was made in the attribution period, the transfer is instead treated as a taxable withdrawal and a new FHSA contribution, with the income being attributed to the contributor spouse.

Taxation on death

Like a TFSA, an FHSA could maintain its tax-exempt status at death by designating a spouse as the successor account holder. The surviving spouse will become the new holder immediately on the original holder’s death if they meet the FHSA eligibility criteria. Inheriting the FHSA doesn’t impact the surviving spouse’s FHSA participation room and lifetime FHSA limit and would be subject to the spouse’s maximum participation period.

If the spouse is designated as beneficiary, or the FHSA is paid to the estate and the spouse is an estate beneficiary, the funds can be transferred to an FHSA, RRSP or RRIF, or the spouse can make a fully taxable withdrawal.

When the FHSA is paid to the estate and the spouse is an estate beneficiary, a joint designation must be made by the estate’s legal representative and the surviving spouse to make a transfer or have the FHSA taxed as their income.

If the beneficiary of an FHSA isn’t the deceased account holder’s spouse, the funds would be withdrawn and paid to the beneficiary. However, unlike RRSPs or RRIFs, where the value of the plan is generally taxable on the deceased’s final return, the payment will instead be taxable to the beneficiary and subject to withholding tax.

FHSA vs HBP

The Home Buyer’s Plan (HBP) allows an individual to withdraw up to $60,000 from their RRSP towards the purchase of a home. The individual must be a first-time home buyer, meaning they or their spouse didn’t own and occupy a home as a principal residence 30 days before the HBP withdrawal and any of the prior 4 calendar years. Contributions can be made up to the individual’s RRSP limit.

Both plans can be used together to purchase a home. The biggest difference is that an FHSA requires multiple years of contributions to reach the $40,000 lifetime limit. This is offset by the fact that the withdrawals are tax free and not repayable.

The HBP can be fully funded at least 90 days before an eligible withdrawal if the individual has the available RRSP room. Otherwise, the contribution to the RRSP is not tax deductible. However, the trade-off is that HBP withdrawals must be repaid over 15 years, starting five years after the year of a withdrawal between January 1, 2022 and December 31, 2025.

What’s the best option to save for a home?

With three registered plans and non-registered savings as options to choose from, first-time home buyers may be wondering which account to use. Here are some thoughts on where to start:

• If your cash flow permits, contribute to both an FHSA and an RRSP. If not, and you have RRSP assets, consider transferring to an FHSA.

While these transfers aren’t tax deductible and will reduce your remaining lifetime FHSA limit, your total future withdrawals could be higher than withdrawing from just one account. For example, if your RRSP balance is $70,000, you could open an FHSA and transfer $8,000. If you bought a home, you could withdraw $68,000 ($60,000 from your RRSP and $8,000 from your FHSA) instead of only $60,000 from your RRSP under the HBP.

• If you have a shorter time horizon (less than five years), consider using both the FHSA and RRSP.

Contribute to the FHSA in each calendar year, including when you plan to buy a home, and delay your RRSP contribution until at least 90 days before you intend to withdraw your funds. This can allow you to maximize your tax-deductible contributions and your withdrawal for a home purchase while minimizing any repayment required under the HBP.

• If you have a longer time horizon before an expected home purchase (five years or more), consider the FHSA.

Be sure to contribute the maximum annually and hit the lifetime FHSA limit of $40,000. The contributions are tax deductible, and the longer time horizon allows your contributions to benefit from compounded growth. Withdrawals for a home purchase are tax free, and there’s no repayment required.

• The tax savings from an FHSA or RRSP contribution can be used to contribute to the other plan or even to a TFSA. This can help increase your contributions without impacting your cash flow.

• If you think you may need to use your savings for something other than a first-time home purchase, consider the TFSA. Your TFSA contribution limit begins to accrue as soon as you’re 18 years old and carries forward. If you use a TFSA to fund future FHSA or RRSP contributions, those contributions will be tax deductible and the withdrawals will be added to your TFSA contribution limit the following year.

1 Includes a spouse or common-law partner as defined by the Income Tax Act (Canada) 2 Any income attributable to deliberate over-contributions will be taxed at 100%. 3 Subject to the exception for a specified distribution as defined in subsection 207.01(1) of the Income Tax Act (Canada). 4 Contributions made after a qualifying withdrawal aren’t deductible.