Over the past couple of years, we have opened many First Home Savings Accounts for individuals who are looking to purchase a first home. With the introduction of the FHSA, we are seeing even more advanced planning for one of life’s biggest purchases.
In many cases we have clients that are self funding the FHSA with their own earnings and savings. In other cases, the FHSA contributions gifts provided from parents, grandparents or other family members.
One of the questions we ask our clients when preparing a Total Wealth Plan is whether they would like to assist their adult children in purchasing a home. Our goal is to make sure all our clients who are over the age of 18 know about the FHSA.
We have had many conversations with parents on how to assist their children in obtaining the financial knowledge and resources to buy their first home. In some cases, parents do not have the financial resources; however, guidance with knowledge can go a long way.
Housing affordability is becoming more and more of a concern. Coming up with the 20 per cent down payment all at once can be a far greater financial hurdle than funding education costs.
First Home Savings Account (FHSA)
In our opinion, every person who is serious about purchasing their first home should learn about the FHSA. To give a brief overview of the criteria:
• You need to be a resident of sa国际传媒
• You will need to be at least 19 in British Columbia (the age of majority)
• You can’t own a home at any time in the year the account is opened or during the previous four calendar years.
The FHSA will have an annual contribution limit of $8,000 and a lifetime contribution limit of $40,000. Essentially, the FHSA can be maximized in as few as five years. The maximum period that a FHSA can be kept open is 15 years.
The FHSA takes the best components of a RRSP and a TFSA.
When you contribute to a RRSP, you can claim a deduction for the amount contributed. You are not able to claim a deduction for contributions into a TFSA. With the FHSA, the contributions will be tax deductible. This is especially advantageous the higher your income is.
Other than the Home Buyers Plan (HBP) exception, withdrawals from a RRSP are taxable as you received the deferral/deduction for originally putting the money in.Withdrawals from a FHSA are tax free provided it was used to purchase a qualifying home purchase. The FHSA and TFSA can each grow in value and all the growth is also tax free.
The two components that will be variable for people contributing to a FHSA are the level of taxable income and the time that the FHSA remains invested. Rushing to open a FHSA in a non-taxable income year may not be the most strategic move (we will explain below). Tax deductions and tax-free deferral is especially good for individuals who have higher taxable income.
If taxable income is not high, some strategy will still need to be factored in when making FHSA contributions.
If you know that you will be buying a home for sure within the next five years, then strategy is not as important — just contribute to the FHSA.
If you feel that it will be longer than five years, and your taxable income is soon to be increasing, then using this strategy may not make sense. This is especially the case if you have not already maximized your Tax Free Savings Account.
Contribution limits and rules
You may contribute up to $8,000 annually to a FHSA, subject to any available carryforward room, and up to a $40,000 lifetime contribution limit.
Like a RRSP, contributions to a FHSA will be tax deductible, but all withdrawals to purchase a first home would be non-taxable, like a TFSA. Indeed, a FHSA essentially combines the benefits of a RRSP and a TFSA in one account.
Unlike a RRSP, contributions you make within the first 60 days of a subsequent year cannot be deducted against your income in the previous tax year, as FHSA contributions are deductible on a calendar year basis.
Similar to RRSP contributions, you will not be required to claim the FHSA deduction in the tax year in which a contribution is made. The amount can be carried forward and deducted in a later tax year, which may be beneficial if you expect to be in a higher marginal tax bracket in a future year.
The maximum amount of unused FHSA contribution room that can be carried forward to a subsequent year is $8,000, which means that for any year after the year in which you open a FHSA, the maximum FHSA contribution room may be upwards of $16,000 ($8,000 carried forward contribution room plus $8,000 current year contribution room).
A FHSA is permitted to hold the same types of qualified investments that are currently allowed in a RRSP and TFSA, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates.
You may open multiple FHSAs, but the total amount you can contribute to all of your FHSA’s cannot be more than your FHSA contribution room for the year.
Unlike RRSPs, you cannot contribute to your partner’s FHSA and claim a deduction. However, you can give your partner the funds to make their own FHSA contribution without the normal spousal income attribution rules applying.
Over-contributions
A one per cent penalty tax on over-contributions to a FHSA will apply for each month (or part of a month) to the highest amount of such excess that exists in that month.
When your annual contribution room is reset at the beginning of each calendar year, over-contributions from a previous year may cease to be an over-contribution. You would be allowed to deduct an over-contributed amount for a given year in the tax year in which it ceases to be an over-contribution, but not earlier.
However, if a qualifying withdrawal is made before an over-contribution ceases to be an over-contribution, no tax deduction would be allowed for the over-contributed amount.
To ensure you do not overcontribute to your FHSA, you may find the details about your FHSA contribution room on your sa国际传媒 Revenue Agency (CRA) notice of assessment or reassessment.
Withdrawals and transfers
Funds withdrawn to make a qualifying home purchase are not subject to tax if certain conditions are met. First, you must be a first-time home buyer at the time of withdrawal.
Interestingly, the definition of a first-time home buyer for withdrawal purposes does not take into consideration your partner’s home ownership, which is different from the definition for the purposes of opening a FHSA, as explained above. So, even if you lived in your partner’s home before your FHSA withdrawal, you may be considered a first-time home buyer and benefit from the tax-free withdrawal to help purchase your new home.
You must also have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal, and you must intend to occupy that home as your principal place of residence within one year after buying or building it. The home must be in sa国际传媒.
If you meet these conditions, the entire balance in the FHSA can be withdrawn on a tax-free basis in a single withdrawal or a series of withdrawals. The FHSA must be closed by Dec. 31 of the year following the year of the first qualifying withdrawal, and you are not permitted to have another FHSA in your lifetime.
Any funds not used toward a home purchase can be transferred to a RRSP or Registered Retirement Income Fund (RRIF) penalty-free and tax-deferred. These transfers will not affect your RRSP contribution room, nor will they reinstate your $40,000 FHSA lifetime contribution limit. Funds transferred to a RRSP or RRIF become subject to the rules applicable to those plans. Funds can also be withdrawn from a FHSA on a taxable basis if not required for a first home purchase.
You will also be permitted to transfer funds from a RRSP to a FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits. These transfers would not be tax deductible and will not reinstate your RRSP contribution room.
Impact of taxable income
Let’s look at the impact on taxable income for a FHSA contribution.
- A person who has savings from past years, is 22 years old and in university currently earning no income. A FHSA can be opened, and a contribution made; however, the tax savings is $0 for the contribution. Deferring income is not as important as there is no taxable income to begin with.
- A person who is making $40,000 per year and puts $8,000 into a FHSA will have tax savings of approximately $1,605 and will benefit from not having investment income taxed at a marginal tax rate of 14.16 per cent.
- A person who is making $80,000 per year and puts $8,000 into a FHSA will have tax savings of approximately $2,256 and will benefit from not having investment income taxed at a marginal tax rate of 28.20 per cent.
- A person who is making $120,000 per year and puts $8,000 into a FHSA will have tax savings of approximately $3,063 and will benefit from not having investment income taxed at a marginal tax rate of 38.29 per cent.
- A person who is making $160,000 per year and puts $8,000 into a FHSA will have tax savings of approximately $3,388 and will benefit from not having investment income taxed at a marginal tax rate of 40.70 per cent.
- A person who is making $200,000 per year and puts $8,000 into a FHSA will have tax savings of approximately $3,694 and will benefit from not having investment income taxed at a marginal tax rate of 45.80 per cent.
- A person who is making $240,000 per year and puts $8,000 into a FHSA will have tax savings of approximately $4,280 and will benefit from not having investment income taxed at a marginal tax rate of 53.50 per cent.
Essentially, the higher your taxable income, the greater the benefits a FHSA will be.
Impact of time
Many are of the opinion that the sooner you can get into real estate the better. Others may feel strategically picking your time may result in a better purchase price. Below we have put two illustrations that excludes the tax savings from putting the funds in and deals solely with the time factor.
To illustrate the earliest schedule where the $40,000 contributions are maximized, along with a six per cent rate of return, and then pulled out of the FHSA (with qualifying purchase) at the end of the fifth year:
Note 1: The first year (2023) has the rate of return for six months.
To illustrate the longest schedule where the $40,000 contributions are maximized, along with a six per cent rate of return, and then pull out the funds at the end of the 15th year:
Note 1: The first year (2023) has the rate of return for six months.
Although the end-of-year balance is greater in the second illustration, the timeline is based on each person’s individual circumstances.
By starting a FHSA at age 19, you are putting a timeline of having to purchase a home by age 34 for sooner. Many people have not purchased a home until after the age of 34.
A FHSA must be wound up by Dec. 31 of the year an individual turns 71. Working backward, a person who is 56 years old could start a FHSA and get the full 15 years deferral provided they purchased a qualifying home at age 71. If a FHSA is opened after the age of 56, then the maximum time frame the account can be opened is limited to age 71.
Definition of first-time homeowner
There are many situations where a person may have owned a home previously but currently does not. We have had clients who went through a separation, decided to travel for a couple of years, or for other reasons no longer own a house.
The good news is that they may still qualify to open a FHSA provided they have not owned a house in the current year, or the previous four years. For the current year, this means if you did not own a house in 2025, or the previous four years (2024, 2023, 2022, and 2021) then you would qualify.
RRSP Home Buyers’ Plan (RRSP-HBP)
The Home Buyers’ Plan (HBP) in sa国际传媒 allows a maximum withdrawal of $60,000. The minimum annual repayment amount is calculated by dividing the amount withdrawn by the length of the repayment period, which is 15 years. For example, if the entire $60,000 is withdrawn, the minimum annual repayment would be $4,000.
The FHSA has advantages over the RRSP-HBP because you get to make a deductible contribution and funds can come out tax-free without any future repayments.
If one can only afford to contribute to either the FHSA or RRSP, the FHSA would be the first choice. All RRSP contributions should be done in the context of your overall taxable income, and other savings account contributions, especially if purchasing a principal residence is a financial goal.
Tax Free Savings Account (TFSA)
Individuals who were born in 1991 or earlier could have contributed up to $102,000 into a TFSA. All growth within a TFSA is tax free when these funds are pulled out. The liquidity of the TFSA is great in the sense that if funds are pulled out ,you can replenish the account in the future.
Above we have talked about how some people should consider a TFSA over the FHSA if income is nil/low and the time horizon for purchasing a home is beyond five years. If taxable income is high, and cash flow permits, doing all programs (FHSA, TFSA, and RRSP-HPB) is the best option.
If you have not reached the $60,000 RRSP-HPB limit, then contributing to both the FHSA and RRSP can provide two contributions that will result in tax savings.
Once the annual $8,000 FHSA contribution has been done and the $60,000 overall level is saved up within the RRSP, then higher income individuals should begin contributing to a TFSA. The TFSA enables income to be tax sheltered and has the ease of liquidity, without tax consequences, to pull the funds out when a house is purchased.
Non-Registered Account
Once the FHSA, TFSA, and RRSP-HBP have been maximized, we recommend contributing additional funds into a non-registered account. Time horizon with respect to the type of investments will be an important discussion. As you get within one year of the projected purchase date you will want to ensure capital preservation is the main investment objective to ensure the funds are kept safe for the desire purpose.
Taking advantage of all
If you have the financial resources, or assistance from parents, you can take advantage of all the programs — for many this is the ideal situation. A couple may each take advantage of the above programs towards the purchase of the same house. This is a key planning component as it essentially enables couples to double all the amounts noted above.
A couple of addition points regarding the above chart. After making a withdrawal from a FHSA to purchase a home, an individual will be required to close the account within one year and will not be permitted to open another FHSA. This is a one-time opportunity. If funds are removed from the FHSA for any reason other than for a qualifying home purchase, taxes will be owed. Ensure any contributions can be committed to the desired goal of purchasing a home.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email [email protected], or visit .
