FHSA: First Home Savings Account Explained for Canadians

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The FHSA: The Best Savings Tool for First-Time Buyers

Since its launch in April 2023, the FHSA has become an essential savings vehicle for Canadians planning to purchase their first property. By combining the tax deductibility of contributions (like an RRSP) with tax-free withdrawals for a qualifying purchase (like a TFSA), the FHSA offers a unique tax advantage that did not previously exist in any other registered plan. For Quebec residents, this benefit is twofold since Revenu Québec fully recognizes the program.

How It Works and Contribution Rules

The FHSA allows contributions of up to $8,000 per year, with a lifetime cap of $40,000. Unused contribution room can be carried forward from one year to the next, but the maximum carry-forward is limited to $8,000. Thus, an individual who did not contribute the previous year could contribute up to $16,000 the following year. Contributions are deductible from taxable income, meaning an $8,000 contribution at a 45% marginal tax rate generates a tax savings of $3,600. Investment growth within the account is also tax-sheltered.

Eligibility and Account Opening

Be a Canadian resident aged 18 to 71 (in Quebec, the age of majority is 18).
Not have owned a home that served as your principal residence during the year of account opening or the four preceding calendar years.
Have a valid Social Insurance Number (SIN).
The account can be opened at most Canadian financial institutions, including banks, Desjardins credit unions, and investment dealers.

Qualifying Withdrawal: How to Use the Funds

Enter into a purchase agreement: It is necessary to have a written agreement to purchase or build a qualifying home in Canada before making a qualifying withdrawal from the FHSA.
Complete the withdrawal form: Submit Form RC725 to your financial institution to request a qualifying withdrawal. The institution will process the withdrawal without source tax withholding.
Complete the purchase within the deadline: The home must be acquired before October 1 of the year following the withdrawal. It is necessary to establish it as your principal residence within one year of purchase.
Report the withdrawal on your tax return: The qualifying withdrawal is reported on your fédéral and provincial tax returns but is not included in your taxable income. No repayment is required, unlike the HBP.

Optimal Strategy: Combining the FHSA and HBP

To maximize the available down payment, first-time buyers in Quebec can combine the FHSA and HBP. An individual could accumulate up to $40,000 in their FHSA over five years and simultaneously withdraw up to $60,000 from their RRSP through the HBP, for a total of $100,000 per person. For a couple of eligible buyers, the combined total can reach $200,000. It is important to note that funds transferred from an RRSP to an FHSA are not eligible for the HBP for the same amount. Planning with an AMF-certified mortgage broker and a tax advisor allows you to optimize the combination of both programs based on your purchase horizon and tax situation.

What Happens If You Don't Buy?

If no qualifying withdrawal is made within 15 years of opening the FHSA, the funds can be transferred to an RRSP or RRIF tax-free and without affecting your RRSP contribution room. This fallback option makes the FHSA an advantageous savings vehicle even if the purchase of a first property does not materialize. However, if the funds are withdrawn directly without being transferred, they will be included in your taxable income for the year of withdrawal.

Frequently Asked Questions

Who is eligible for the FHSA?

The FHSA is available to Canadian residents aged 18 to 71 who have not owned a home that served as their principal residence during the year the account was opened or the four preceding calendar years. It is necessary to have a valid Social Insurance Number (SIN) and file a Canadian tax return.

How much can I contribute to the FHSA?

You can contribute up to $8,000 per year, with a lifetime maximum of $40,000. If you do not contribute the maximum in a given year, you can carry forward up to $8,000 of unused room to the following year. For example, if you contribute $5,000 in the first year, you can contribute up to $11,000 the following year ($8,000 + $3,000 carried forward).

Are FHSA contributions tax-deductible in Quebec?

Yes. FHSA contributions are deductible from taxable income at both the fédéral (CRA) and provincial (Revenu Québec) levels. The deduction reduces your tax payable for the year of the contribution, similar to an RRSP contribution. Additionally, qualifying withdrawals for the purchase of a first home are entirely tax-free at both levels of government.

Can I combine the FHSA and the HBP?

Yes. The FHSA and HBP are two distinct programs that can be used simultaneously for the same acquisition. An eligible buyer could use up to $40,000 from the FHSA and up to $60,000 from the HBP, for a total of $100,000 per person. The HBP must be repaid over 15 years, while FHSA withdrawals do not need to be repaid.

What happens if I don't buy a property after opening an FHSA?

If you do not make a qualifying withdrawal within 15 years of opening the account, it is necessary to either transfer the funds to your RRSP or RRIF (without affecting your RRSP contribution room) or withdraw the funds on a taxable basis. The account will be closed no later than December 31 of the 15th year after opening.

Is the FHSA preferable to the HBP?

It depends on your situation. The FHSA offers the advantage of not requiring repayment after withdrawal, unlike the HBP which must be repaid over 15 years. On the other hand, the HBP allows a larger immédiate withdrawal ($60,000) if the funds are already in the RRSP, while the FHSA requires several years of accumulation to reach the $40,000 cap. The ideal approach is often to combine both.