FHSA Is A Must Have For First-Time Home Buyers

  3/1/2023 |   SHARE
Posted in First Time Home Buyers by Anthony (Tony) Barone | Back to Main Blog Page

Couple Browsing For Homes

Move over RRSP Home Buyers' Plan (HBP) - there's a new kid in town. 

The Tax-Free First Home Savings Account (FHSA) arrives on April 1st, 2023.

  • What is it?
  • How does it work?
  • What are the benefits?
  • What strategies can you use to make the most of it?

Lots of questions I know, but before we get into it a big Thank You to Aaron Hector, CFP and Mark Grath, CFP as much of this comes from their work.

1. What is the FHSA?

A brand new type of account that Canadian residents can use to save for their first home in Canada.

It blends characteristics of both RRSPs and TFSAs and, when used correctly, can fully bypass income tax.

A rare feat indeed.

2. How does it work?

Contributions are tax-deductible - just like an RRSP. 

And withdrawals can be tax-free - just like a TFSA.

The lifetime contribution limit is $40k, and the annual contribution limit is $8k.

Unlike the HBP, you don't need to pay it back.

Contributions do not impact your RRSP room. 

And they do not need to be deducted in the year they are made.

Like an RRSP, if you contribute but want to carry the deduction forward to a year when you're in a higher tax bracket - you can.

Contribution room also carries forward, but you can only catch up by $8k per year.

But unlike an RRSP, TFSA, or RESP, room doesn't accumulate until you actually open an FHSA.

So the shortest amount of time it takes to fully fund an FHSA after you open it is 5 years.

Here's an example:

- You open an FHSA in 2023 and contribute $3k
- In 2024, you can put in $13k - that's $5k for the previous year, plus another $8k in new room for 2024

But say in 2024, you only contribute $4k instead.

How much can you contribute in 2025?


You have $9k in unused room but can only catch up $8k from the previous years, plus $8k in new room for 2025. 

In 2026, you could contribute $9k. 

That's the last $1k in carried forward room, plus $8k in new room for 2026.

Then you would be caught up.

You can invest your FHSA in stocks, bonds, mutual funds, ETFs, GICs, and savings accounts.

Like a TFSA, there is no limit on how much you can withdraw, only how much you can contribute. 

And investment income earned while in the plan is tax-free.

Your FHSA must be closed by December 31st on the soonest of:

a) the 15th year after you open it
b) the year you turn 71
c) the year following the year of your qualified home purchase

The balance can be taken as taxable cash or rolled over, tax-deferred, to your RRSP.

3. Who can open one?

First-time home buyers between the ages of 18 and 71.

A first-time home buyer means you cannot have lived in a home that you or a spouse/common-law partner owned in the current year or the previous 4 calendar years.

And you can only use the FHSA once.

For example, if you've already used an FHSA to buy a qualifying home, you can't sell it, rent for 5 years, and then open an FHSA again.

It's one-time use only.

Like the RRSP, TFSA, and RESP, if you over-contribute, there are penalties.

It's 1% of the excess amount per month until withdrawn.

Unless you know a way to get guaranteed 13% annualized returns (you don't, even with dividend stocks), don't over-contribute.

4. How do I withdraw money from my FHSA?

To qualify as tax-free, you must buy the home by October 1st of the year after the withdrawal.

So if you withdraw it in 2026, you must buy the home by October 1st, 2027, regardless of the month you withdrew the funds in 2026.

You can also withdraw funds from your FHSA up to 30 days after you purchase the home.

So if you buy the home first, you must withdraw the funds within 30 days.

If not, the withdrawal will be fully taxable. 

You'll need to provide purchase details to your financial institution.

5. Can it be used with the RRSP Home Buyers' Plan?


The first draft of the legislation specifically said no - you would have to choose one or the other.

However, in the final version, this language was omitted.

You can use both for the same home purchase.

6. What about incorporated professionals and business owners?

It's fantastic.

If you pay yourself only dividends, you don't generate any RRSP room.

But with the FHSA, you're given $40k in free room to transfer to your RRSP later. 

If you qualify, max it out.

And even if you do pay yourself a salary, and have RRSP room - consider the FHSA first.

Since you can always transfer the FHSA to an RRSP later, this preserves your RRSP room and takes advantage of the $40k in FHSA room while you qualify as a first-time home buyer.

7. What are the downsides?


None that I can think of.

At best, it fully bypasses income tax to buy your first home.

At worst, it's a free $40k in RRSP contribution room.

My guess is they will slowly phase out the Home Buyers' Plan in favour of the FHSA.

8. Any tips and tricks?


Many, in fact.

- Think about filling your FHSA before your RRSP since you can always transfer the FHSA to the RRSP if you don't use it.

Once maxed, any remaining savings for your home purchase can go to a TFSA, RRSP, or non-registered account, depending on your circumstances.

- Consider transferring money from your RRSP to your FHSA up to the annual & lifetime limits.

Useful if you've been funding an RRSP, won't be able to max both the HBP and the FHSA, and don't want to repay the withdrawal from the HBP.

You won't get a tax deduction, though.

- If you're gifting money to your adult kids, consider funding an FHSA for them. 

There's no tax on cash gifts to adult kids.

They can carry the deductions forward and use them in years with higher tax brackets. 

This will preserve their RRSP room for use in later years.

- Fund your spouse or common-law partner's FHSA too

While you can't fund a spouse's RRSPs without invoking the attribution rules, you can fund a spouse's FHSA. 

No tax will be attributed back to you on the withdrawal, regardless of whether you use it for your first home.

- Use the HBP and the FHSA together if you can. 

With a spouse, this could be over $150k in total funding for a down payment.

Just keep in mind the HBP portion needs to be paid back over 15 years at most, starting the second year after the withdrawal.

- Open an FHSA even if you don't plan on buying a home.

It's free RRSP room in that case. 

You can preserve your RRSP room for later use.

Why not take it?

- It can be used if you have a rental that you never lived in

If you bought a rental but never a primary residence, you might still qualify under the definition of a first-time home buyer. 

Remember, to qualify, you cannot have lived in a home you or your spouse owned.

Lastly, here's a great chart courtesy of @AaronHectorCFP that breaks down some of the similarities and differences between RRSPs, TFSAs, and the FHSA:

FHSA comparison to RRSP, TSFA, RESP

The FHSA should be high on your consideration list as the first option for funding a home purchase. 

When used properly it combines the best parts of the RRSP and the TFSA. 

And at worst - it's free RRSP contribution room.


FHSA, First Time Home Buyers, TaxFree First Home Savings Account

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