Tax Free First Home Savings Account

It’s no secret Canada’s housing market is a little crazy… okay, it’s completely out of control! If a home purchase feels out of your reach, you’re not alone. This is why the Canadian government is planning to introduce the Tax Free First Home Savings Account, or FHSA for short. 

Currently, the average annual income in Canada is roughly $75,500. The average Canadian home price in 2022 was $704,000. If the standard down payment is 20% of the home price, that means Canadians need to save $140,800 before even considering a home purchase. With the current average income, it would take Canadians about 10 years to save for a home purchase if they set aside 20% of their income each year. These figures assume there’s no unexpected financial burdens and you don’t have the misfortune of facing a layoff (and in 2023, you might not be so lucky). It also assumes you aren’t saving for other things, like retirement, vacations, education or other life milestones, like getting married and having kids.

Plus, the carrying cost of a home is expensive between property tax, repairs and maintenance, and unexpected home costs. Even if you do manage to purchase a home, the carrying cost of the property might be unaffordable. On top of all that, 10 years is a long time and what happens if housing prices are even more expensive by the time you save a down payment? In short, there’s a lot of things working against Canadians wanting to buy a home. 

Tax Free First Home Savings Account

Enter the Tax Free First Home Savings Account. The FHSA is sort of a hybrid between a TFSA and a RRSP. The main difference between the FHSA and other registered accounts is that the FHSA is for saving to purchase your first home. The Tax Free First Home Savings Account is not available to Canadians just yet, but here’s what we know about the account so far. 

What is a Tax Free First Home Savings Account?

The Tax Free First Home Savings Account (FHSA) is a newly registered account available to Canadians. It’s similar to the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) in that it’s a powerful financial tool with various tax advantages. 

The FHSA came to light within Budget 2022. The government proposed the Tax Free First Home Savings Account to give prospective first-time home buyers the ability to save up to $40,000 tax free. Similar to the RRSP, contributions are tax deductible. Like the TFSA, withdrawals to make a first home purchase would be non-taxable, including investment income. Currently, the annual contribution limit is $8,000 and the lifetime contribution limit is $40,000. However, these numbers are still in the proposal stage and may change.

At the time of writing, Canadians cannot open a FHSA yet. The government anticipates Canadians can open and start using the FHSA sometime during 2023. The idea behind this new account is to help Canadians afford their first home purchase.

Related Reading: TFSA Contribution Limit By Year to 2023

tax free first home buyers account infographic

Who qualifies for FHSA?

To qualify for a Tax Free First Home Savings Account, you must meet the following criteria: 

  • Be at least 18 years of age
  • Be a resident of Canada
  • Be a first time home buyer; more specifically, you or your spouse/common law partner did not own a home that qualifies as a principal residence at any time in the current year or the previous four calendar years

When can I open an FHSA?

The FHSA is not available to Canadians yet. It’s still in the proposal stage, but it should become available to Canadians sometime during the 2023 year.

How to open a Tax Free First Home Savings Account

When FHSA becomes available to Canadians, the process should be fairly similar to opening a TFSA or RRSP. Simply put in a request with your bank to open a FHSA, provide any necessary documentation, and begin making contributions. 

When can you start contributing to a FHSA?

The FHSA rules are expected to come into effect some time during the 2023 year. The current estimated date is April 1, 2023. Although, there could be delays or changes to the legislation. 

In terms of contributing at the individual level, you must be at least 18 years of age to open a FHSA and begin making contributions. Unfortunately, the Tax Free First Home Savings Account is not available to children. In other words, parents cannot contribute to a FHSA before their child turns 18. 

How much can you contribute? 

You can contribute up to $40,000 in your lifetime and up to $8,000 in any given year. If you contribute less than $8,000 in a year, the remaining contribution room does not vanish. Rather, it rolls over into the next year. For instance, if you only contribute $6,000 in 2023, you can contribute up to $10,000 in 2024. 

If you over-contribute to your Tax Free First Home Savings Account, the amount over the limit is subject to a 1% tax, similar to RRSPs and TFSAs. It’s best to keep an eye on your contribution room and don’t go over it. If you do exceed the limit, be sure to withdraw the excess amount as soon as you can. 

Is FHSA tax deductible?

Yes, contributions to a Tax Free First Home Savings Account are tax deductible. Similar to the RRSP tax deduction, Canadians can reduce their taxable income by the amount of their FHSA contributions. 

Withdrawing from a Tax Free First Home Savings Account

Withdrawals from a FHSA are not taxable if they’re used for a qualifying home purchase. The withdrawal must meet the following criteria in order to be non-taxable: 

  • You are a first-time home buyer at the time of withdrawal
  • You have a written agreement to build or purchase a qualifying home
  • You intend to occupy the home within one year after building or purchasing
  • The qualifying home is located in Canada

If your FHSA withdrawal does not meet the above criteria, it will be considered taxable income. You must report it on your annual tax return and tax will be withheld at the source. 

Any unused amounts in a FHSA can be transferred to a RRSP or RRIF on a penalty free and tax deferred basis. Transfers do not limit or reduce the available room in your RRSP. Lastly, withdrawals and transfers do not replenish the contribution limit of the FHSA. 

Related Reading: How to Withdraw Money from TFSA

Can I use FHSA and RRSP at the same time?

Canadians can hold and contribute to a FHSA, RRSP and TFSA at the same time. They are not mutually exclusive.

The Home Buyers Plan (HBP) allows Canadians to withdraw up to $35,000 from a RRSP for a home purchase. Over a period of 15 years or less, the RRSP holder repays the withdrawn amount into the account. With a FHSA, you can withdraw from the account for a home purchase, but repayment isn’t required. Unfortunately, HBP withdrawals and FHSA withdrawals cannot be used for the same home purchase.

What is the difference between FHSA and TFSA?

The Tax Free First Home Savings Account and Tax Free Savings Account have a lot of similarities. They’re both registered accounts, have tax sheltering benefits, and are subject to contribution and withdrawal rules. 

On the other hand, there are some key differences between FHSA and TFSA. The Tax Free First Home Savings Account funds must be used to purchase the account holder’s first real estate property. Whereas Tax Free Savings Accounts don’t have restrictions as to what the money can and cannot be spent on. In other words, TFSAs are a lot more flexible. Another key difference is the tax implications. FHSA contributions are tax deductible but TFSA contributions are not. 

What are the advantages of a FHSA?

  • Helps Canadians save for their first home purchase on a tax free basis
  • Transfer unused amounts to a RRSP without repercussions
  • Allows Canadians to use RRSPs and TFSAs for retirement and other savings, instead of for home purchases
  • May help Canadians who otherwise couldn’t afford to purchase a home

What are the disadvantages of a FHSA?

  • Opportunity cost of investing your money elsewhere
  • May not help Canadians buy a home in ultra expensive cities, like Toronto and Vancouver, where down payments can be over $100,000
  • Might be a band aid solution to Canada’s current economic and housing issues
  • Financial literacy is required to effectively utilize the FHSA

Should I open a FHSA?

If you’re not currently a home owner and you’re interested in buying a home in Canada, it’s definitely worthwhile to open a FHSA. Otherwise, it may take you longer to save for a down payment or property purchase. 

At the time of writing, the Tax Free First Home Savings Account is not available to Canadians. It is still in the proposal stage, but is expected to become available on April 1, 2023. As soon as we have information about the FHSA availability, we’ll let you know!

Read More: TFSA vs RRSP: Where to Put Your Money

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