These are challenging times for first-time home buyers in Canada. The combination of unprecedentedly high home purchase prices — particularly in urban area such as Toronto, southern Ontario and Vancouver — and fast-rising interest rates for mortgages has made the goal of home ownership a daunting challenge. The need for an accelerated savings program to aid in making that first downpayment has never been more timely.
The Canadian federal government, with its eyes on this demographic, has responded with the First Home Saving Account (FHSA), a registered investment program that creates a savings account to help qualified Canadians save for a down payment for their first home.
In this guide, we are going to walk you through the FHSA and how to use it as an investment vehicle. Let’s get started.
What is the Tax-Free First Home Savings Account (FHSA)?
An FHSA can be applied by first-time home buyers toward the purchase price of a residence in Canada. To qualify, a first-time home buyer must be a Canadian resident 18 years or older.
As of April 1, 2023 first-time buyers can register for an FHSA. They can be issued by banks, credit unions, insurance companies and trust companies such as Wealthsimple or Questrade — so long as they qualify under the terms of the program.
How much can I contribute?
The FHSA will allow you to contribute up to $8,000 as an annual tax-deductible contribution. The plan has a lifetime contribution maximum of $40,000 per person. A couple, both first-time buyers, can contribute to separate accounts, allowing them to double the lifetime limit.
Am I going to be Taxed?
Your contributions to an FHSA are tax deductible when you file your taxes for the year in which they were contributed.
An FHSA is taxed similarly to an RRSP where contributions can be used to lower your net income. Like a TFSA (Tax Free Savings Account), those contributions can be withdrawn tax-free when you go to purchase your first home. Unlike contributions to a TFSA, your annual contributions are tax deductible, allowing purchasers to maximize the benefit using this first-time Home Buyer Incentive.
For the purposes of the plan you are considered a first-time home buyer if you have not owned and occupied a home in the current calendar year or any of the preceding four calendar years. You must also be opening the account to save for buying a home in Canada.
RRSP vs TFSA vs FHSA
Don’t think of the FHSA as an ‘instead of’ but as a ‘in addition to’ investing vehicle to your TFSA and RRSP. Just the same way you use your TFSA to complement your RRSP, you can now add a FHSA to the mix.
Used together, they allow you more:
- Contribution room
- Tax savings
- Opportunities for growth
Just as you do with an RRSP or TFSA, your FHSA can be used to invest in many investment vehicles such as:
- Stocks
- ETFs
- Government and corporate bonds
- Guaranteed investment certificates (GICs)
- Mutual funds
- And more
As to be expected, there are subtle differences.
The annual contribution limit of $,8000 is based on a hard limit and not based on your personal income. It has this in common with the TFSA, while an RRSP limit is based on your personal income.
Additionally, similar to both an RRSP and TFSA, you can carry forward unused contribution room from your FHSA from year-to-year. However, you can only carry forward a maximum of $8,000, for a total contribution of $16,000 in a given year.
Also, your FHSA contribution room only start once you have opened your account - not like an RRSP where your room accumulates whether you have an account or not.
Now that you understand what the FHSA is and how it compares to similar registered accounts, let’s get started with how to use it as an investment vehicle:
Step One: Opening Your FHSA
You can get started on your FHSA by registering with your financial institution. Currently there are just a few institutions offering the FHSA, but it’s expected more will enter the market soon.
Questrade FHSA or Wealthsimple FHSA
Which should you choose? Well, right now the chose is simple: a Questrade FHSA are currently available while the Wealthsimple FHSA are waitlist only.
Your Questrade FHSA can be used in combination with Questrade Mortgage, an online mortgage service designed for those looking to buy a home or renew their mortgage.
To register simply log in to your Questrade account. On the Accounts summary page, select Open an account. Then select either a self-directed FHSA or a Questwealth Portfolio FHSA.
Connect Your FHSA To Passiv
Opening an FHSA with Questrade or Wealthsimple? You can connect it to Passiv in less than two minutes.
Get StartedStep 2: Planning For Which Assets You Can Use In A FHSA
Your FHSA can be used to invest in many investment vehicles such as stocks, ETFs, options and more. Among the investments eligible for use within the FHSA are mutual funds, publicly traded securities (such as stocks and exchange-traded funds), government and corporate bonds and Guaranteed investment certificates (GICs).
Not available to be used are land, shares of private corporation or general partnership units. The FHSA is designed for personal home purchases and does not permit investments in land or investment properties.
Your approach to investing in your FHSA will vary depending on your risk tolerance and goals, which is the next step.
Step 3: Planning How To Use Your FHSA
You can continue to contribute to the FHSA until you’ve reached the lifetime limit of $40,000 or 15 years after the account’s opening.
*And yes, they are eligible to be managed in your Passiv portfolio as is done with RRSPs and TFSAs.
An added benefit is the ability to accumulate unused tax contributions for future years so long as you remain within the limits of the plan. This is an asset to those who plan to grow the account slowly as their income increases.
There’s no reason to wait to open your account; the sooner you open it the more contribution room you earn for yourself. For example:
FHSA Contribution Room
Accumulate Unused Tax Contributions for Future Years
| Amount Contributed | Usnused Contribution | FHSA Contribution Limit/Year | |
|---|---|---|---|
| Year One | $3,000 | $5,000 | $8,000 |
| Year Two | $8,000 | $5,000 | $8,000 |
| Year Three | $10,500 ($8,000 + $2,500) | $2,500 | $8,000 |
| Year Four | $8,000 | $2,500 | $8,000 |
| Year Five | $10,500 ($8,000 + $2,500) | $0 | $8,000 |
| Total | $40,000 | $0 | $40,000 |
Similar to a TFSA, interest rates on funds held within your FHSA are a plus. Like a TFSA, an FHSA can be used as a high-interest savings account earning you interest on the cash you deposit into it.
Step 4: Combining An FHSA With a Home Buyers Plan
Where there is real power with the FHSA is using it in conjunction with a Home Buyers’ Plan (HBP).
As an individual you can borrow up to $35,000 from your RRSP via your HBP. And when buying a home jointly with another person, you can combine your FHSA and HBP withdrawals for a sum of at least $80,000 from your FHSAs and $70,000 through the HBP, for a total of $150,000. That’s equal to a 20 percent down payment on a home priced at $750,000.
Combining your FHSA and HBP
Combining your FHSA and HBP
| Single | Couple | |
|---|---|---|
| HPB | $35,000 | $70,000 |
| FHSA | $40,000 | $80,000 |
| Total | $75,000 = 20% down on house worth $375,000 | $150,000 = 20% down on house worth $750,000 |
As a bonus, these calculations do not account for potential tax-free investment growth in the FHSA, nor any money you may have saved in a TFSA, both of which would boost the total amounts available for a down payment.
Note that HBP withdrawals are taxed if not repaid within 15 years.
Step 5: Withdrawing From Your FHSA To Purchase Your Home
When you are ready to withdraw non-taxable funds from your First Home Savings Account, you need to follow these steps:
- You must be a first-time homebuyer in Canada
- The home you're buying or building must qualify
- You need a written agreement before October 1st of the following year
- You have to plan on making that home your primary residence
Once you meet the requirements, you can make one or more withdrawals. But don't forget to close the account by next year. Sorry folks, no more FHSA accounts for you in the future.
Step 6: What If You Decide Not To Buy A Home?
This is one of the great powers of the FHSA.
If you decide not to use money in an FHSA for a home purchase — you may decide that renting is better for you (like those pursuing the FIRE lifestyle), you live with someone who already owns their place, or you inherit real estate — you can transfer the funds to an RRSP or a registered retirement income fund (RRIF) without being penalized or affecting your RRSP contribution room.
In essence, the FHSA creates additional RRSP contribution room, up to $40,000, for all Canadians who meet the definition of first-time home buyer. Any unused contribution room is treated the same as an RRSP.
Think of it: you can open a FHSA, reap nearly all the benefits it provides, and then simply transfer to the RRSP - without ever having intended to buy a home at all.
Step 7: Bear In Mind A Bear Market For the FHSA
While real estate has seemingly made homes into cash boxes the past generation there is always the prospect of a downturn in the housing market in your area.
In extreme circumstances — such as the 2008 derivatives crisis — a home’s value may be less than there indebtedness on the home. So investors should use prudence when using the FHSA program.
Step 8: Comparing Competing FHSA Programs
One final note about the FHSA. When the market becomes more competitive providers should offer attractive interest rates on funds held within your FHSA, as they do with tax-free savings accounts (TFSAs).
Unless you need to get started immediately, waiting for these competitive rates to arrive is the ideal time to open your FHSA
An FHSA that pays interest might be the answer for people who simply want to earn tax-free interest on their cash, without the risk of investing in securities. If that’s your strategy, go with the account offering the highest interest rate on your savings.
Learning More
Questrade is currently offering webinars to familiarize customers with the benefits and requirements of an FHSA. Visit their site for all the details.
Start your FHSA journey with Passiv. Give five more minutes to continue learning about other accounts:
"How To" Maximize The Power of RRSPs
TFSA FAQ: How To Supercharge Your After-Tax Savings
