Canada’s tax-free First Home Savings Account (FHSA) is a tax-exempt savings account designed for residents to save for purchasing a home. Similar to RRSP and TFSA, the FHSA is a registered savings account that can hold a variety of investment securities, including equity investments like stocks, fixed-income investments (bonds and GICs), as well as other investments like options, ETFs, and precious metals. Note that the Canada Revenue Agency may categorize active trading profits in tax-exempt registered accounts as taxable business income.
This program offers first-time homebuyers an annual contribution limit of $8,000 CAD for the FHSA (per calendar year), with a lifetime total contribution limit of $40,000 CAD per person. Similar to other registered accounts, you can open multiple FHSA accounts at different institutions, but all accounts share the annual and lifetime contribution limits.
The FHSA combines features of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). Similar to an RRSP, contributions are tax-deferred, reducing your taxable income when you file taxes. Qualified withdrawals for purchasing a first home are tax-free, just like TFSA withdrawals. In essence, if you contribute $8,000 CAD annually for buying a house, it’s as if the government is providing you with a tax-free benefit.
Unlike the Home Buyers’ Plan, FHSA funds do not need to be repaid. However, if the withdrawn money is not used for the down payment of a home, these withdrawals will be taxed. If you decide to use this money for purposes other than a home, you can transfer it to an RRSP or RRIF without affecting your contribution space.
How can you prove that you used the withdrawal for buying a home? You must purchase or construct a qualified home in Canada by October 1 of the year following the withdrawal year and provide written proof. You also need to intend to make it your primary residence within a year of purchasing or constructing the eligible home.
When opening an FHSA account, consider the following points:
- You need to be a Canadian resident aged 18 or older and planning to purchase your first home.
- Age limits: You should open your FHSA before turning 71 or within 15 years.
- Unlike RRSP contributions, which are allowed within the first 60 days of the following year, all your FHSA contributions should be made by December 31 of each year to qualify for the deduction for that year.
- Deduction amounts can be carried forward to future years to reduce taxable income.
- Once the account is opened, any unused portion of the annual contribution limit can be carried forward, up to a maximum of $8,000 CAD (based on the lifetime contribution limit).
Despite the high housing prices in Canada, the FHSA limit may appear modest. Nevertheless, having an additional tax-free savings tool is beneficial.