The FHSA: What It Is, How It Works, & Your End Of Year Deadline
I don’t know about you, but this time of year my brain starts turning to mush under the onslaught of holiday to-dos, year-end admin, and trying to see more friends and family than there are actual days left in the month.
And I know I’m not alone. Most of us crawl through December feeling a few sandwiches short of a picnic. Which is exactly why it feels unfair that someone decided to schedule an important personal finance deadline right at the end of December. But alas… The CRA did not consult me.
So, I’m tapping you on the shoulder today with a very un-festive reminder: If you’re eligible, make sure you contribute to your First Home Savings Account (FHSA) before the end of the year.
If you already own a home (or if you’re not a Canadian resident), then you get to tap out early today. Read no further, save those last remaining brain cells for the next holiday party. For everyone else though, if you’re still a little foggy on how the FHSA works — here’s your refresher.
What is the First Home Savings Account?
The FHSA is a registered investing account (similar to an RRSP or TFSA) designed to help Canadians save for their first home. You can contribute up to $40,000.00 total and invest the money tax-efficiently. Meaning more of your hard-earned cash goes toward your future home instead of toward taxes.
It was created because the government realized home ownership was slipping out of reach for many young Canadians. They responded by creating a new tax-break hybrid of the RRSP and TFSA. Critics argue that they didn’t quite understand the problem before coming up with this solution… but hey, we’ll take what we can get, and the account itself is genuinely very useful. Think of it as the love child of your two favourite tax shelters: RRSP style tax deductions + TFSA style tax-free withdrawals.
Who should have an FHSA?
Any Canadian resident aged 18-71 who qualifies as a first-time home buyer and plans (or hopes) to buy a home within the next 15 years.
You qualify as a first time home buyer if you’ve:
Never owned a home, or
Not lived in a home owned by you or your spouse in the last 4 years.
You can still qualify if you own real estate, it just has to be an investment property, not your primary residence.
One caveat: although 18 year olds can open an FHSA, the account must be closed after 15 years. That means they’d need to buy a home by age 33 to use the tax-free withdrawal, which might be unrealistic depending on their situation, and could be a waste of a good tax break if they’re not working and earning a salary yet.
How much can you contribute to your FHSA?
The FHSA has 3 contribution limits:
A lifetime limit of $40,000.00
An annual limit of $8,000.00
1 year of carry-forward room from the previous year up to $8,000.
For example: if you opened your FHSA last year and only contributed $4,000, you now have the remaining $4,000 from last year plus this year’s $8,000.00 limit. Meaning you can contribute up to $12,000 this year.
And remember: you’re not limited to $40,000 in the account, only in contributions. Your investments can grow far beyond that.
What are the tax advantages
The FHSA gives you three separate tax perks. One when you put money in, one while your money grows in the account, and one when you take it out. Let’s take a closer look at each of these.
1. Tax deduction on contributions
Just like your RRSP contributions, any money you add to your FHSA will reduce your taxable income for the year. Did you earn $100,000 this year, and contribute the $12,000 from the example above into your FHSA? Then you’ll only pay income tax on $88,000.
2. Tax free growth
Any money you earn through your investments in the FHSA is tax free. Whether you’re in stocks, index funds, GICs… whatever your money earns, you keep all of it.
3. Tax free withdrawals - if used for your first home
Like your TFSA, any money you withdraw from the account it tax free, as long as the money goes toward buying your first home in Canada.
Withdrawing the money to buy a car instead? That entire withdrawal gets taxed as income that year.
The TL;DR on tax advantages
A dollar contributed, grown, and properly withdrawn from an FHSA avoids tax at every stage. You won’t find another account in Canada that does that.
Why this reminder matters now
If you want to claim the FHSA tax deduction on this year’s tax return, you must contribute before December 31st. Unlike RRSPs, there is no grace period that extends into the new year.
How to withdraw your money tax-free
To withdraw the money tax free you must:
Fill out a specific government form (called an RC725)
Use the finds towards the purchase of your first home
Close on the property by October 1st the following year
Make that property your primary residence within 1 year of closing.
Miss these requirements and your withdrawal becomes taxable, which can get expensive fast. Make sure you’re organized. Crossing your T’s and dotting your I’s is important here.
What if you never buy a home?
No problem. The FHSA is flexible. If you don’t buy a home within 15 years of opening the account (or before your 72nd birthday), you can transfer the full balance directly into your RRSP without using up RRSP contribution room and without paying tax. This makes it an incredible account for anyone, as it essentially tops up your RRSP with an additional $40,000 in contribution room.
Can you combine this with the RRSP Home Buyer’s Plan?
Yes, these two accounts work seamlessly together. You can use your FHSA, RRSP Home Buyer’s Plan, and TFSA all together for your down payment.
If you’re currently saving in your RRSP and plan to use the Home Buyer’s Plan, it may be worth directing new savings to your FHSA first, since the FHSA withdrawals never need to be repaid, giving you much more flexibility with your money compared to the Home Buyer’s Plan.
To wrap up
Saving for a home can feel impossible right now, but remember: while prices are high, we also have more wealth building tools at our fingertips than any generation before us. Understanding how these accounts work is one of the fastest ways to get ahead.
As always, email me with any questions you want to clarify. I’ll be checking my inbox between batches of holiday cookies.
See you next week!
- Cory