Canadians have a new savings option when it comes to building up their down payment on a starter home. The Tax-Free First Home Savings Account (FHSA) was first outlined in April 2022 as a $10 million spending package to tackle housing affordability and give first-time home buyers a leg up in a hypercompetitive housing market. One year later, it was finally introduced in the federal budget. As of April 1, 2023, it will be offered by banks, insurance companies and credit unions across the country.
The FHSA is a registered savings account that allows prospective homeowners to contribute up to $8,000 a year to a lifetime limit of $40,000 over the course of 15 years, or by the time you turn 71 (whichever is soonest). As the name implies, the First Home Savings Account caters to first-time buyers — this includes residents of Canada who have not lived in a home owned by themselves nor their spouse or common-law partner in the previous five years.
It’s similar to existing registered savings plans with some unique differences. Like an RRSP, contributions to FHSAs are tax-deductible. As with a TFSA, withdrawals are tax-free — including on any investment gains you accrue inside the FHSA. And just like both RRSPs and TFSAs, you can open multiple accounts with different financial institutions, as long as your total contributions don’t exceed the annual and lifetime limits.
Opening an FHSA helps you reach your goal of homeownership faster. Along with the tax benefits inherent to a tax-free account, homebuyers can combine the FHSA with the Home Buyers Plan (HBP) to maximise how much they put down on a house. The HBP allows you to withdraw a maximum of $35,000 from your RRSP, penalty-free, with a repayment period of 15 years.
As an added perk, unmet contribution limits can be transferred over to the next year. That means that if you only contribute $6,000 one year, you can contribute up to $10,000 the next year (again, up to lifetime contribution limit of $40,000).
Another benefit of an FHSA is that if you eventually decide not to put your funds into a down payment, you can transfer your full FHSA balance, including any capital gains, over to an RRSP without any penalties or impact on your RRSP contribution room — though you will have to eventually pay any required taxes on your withdrawals, just like any RRSP withdrawal. If you decide to withdraw from your FHSA early, your withdrawal amount will be considered taxable income.
Once you’ve found a property and you’re ready to take the plunge, you can access your funds tax-free, as long as you meet the following conditions:
There’s no catch. A First Home Savings Account does exactly what it sounds like: It helps Canadians save up for their first home, by making their money go further with tax-deductible contributions and the opportunity to invest in a range of interest- and dividend-generating assets like bonds, ETFs and publicly traded stocks without having to pay taxes on those gains. Combined with the HBP, homebuyers can fast-track their savings to $75,000 (and more, based on capital gains) for their down payment.
But critics have pointed out that the fact that a registered savings account doesn’t do much to help other barriers that hold young people and prospective homeowners back from buying a home – namely, overall housing affordability due to tightening supply and high interest rates. Meanwhile, lower income earners are still encouraged to keep their money in a TFSA over a FHSA, as money can be more easily freed up in a pinch.
First time homebuyers who are already saving up for a down payment would do well to stow their funds in a FHSA, since contributions can lower their taxable income, plus any additional interest or investment gains won’t be taxed upon withdrawal when used on a home. And when you’re ready to take the plunge, it’s worth it to compare mortgage rates to make sure you continue to save your money over the long term.