As part of the 2022 Federal Budget, the Department of Finance announced its intention to establish a new tax free First Home Savings Account (FHSA) as a means to allow prospective first-time home buyers to save up to $40,000 tax-free towards the purchase of their first home. Similar to with an RRSP, eligible contributions (subject to annual contribution limits) are tax-deductible, however, qualifying withdrawals to purchase a first home are non-taxable. As of April 1, 2023 you can now apply with your bank to open a new FHSA account.
The following are some key points on how to access and benefit from this new registered savings account:
How to Apply
To open an FHSA, you must be a qualifying individual. You are a qualifying individual if you meet all of the following requirements at the time the account is opened:
You are an individual who is a resident of Canada for tax purposes
You are between the ages of 18 and 70 as of December 31 of the year the account is opened
You are a first-time home buyer (you or your spouse or common law partner have not previously owned or co-owned a qualifying home)
Qualifying individuals can open an FHSA through an FHSA issuer such as a bank, credit union, or a trust or insurance company. Your issuer will advise you on the types of FHSAs and the qualified investments they can contain.
You can have more than one FHSA at any given time, but in order to avoid unintended tax consequences, the total amount you can contribute to all of your FHSAs and transfer from your RRSPs to all your FHSAs in a calendar year cannot be more than your FHSA participation room for that year.
How to Contribute to Your FHSA
Your FHSA participation room for the year is the maximum amount that you can contribute to your FHSAs or transfer from your registered retirement savings plans (RRSPs) to your FHSAs in the year without creating an excess FHSA amount.
The lifetime limit for contributions made to all FHSA accounts for the same individual is a maximum of $40,000. The limit for FHSA contributions in the year that you open your first FHSA account is a maximum of $8,000 (future annual limits to be announced at a later date).
You can carry forward your unused FHSA participation room at the end of the year, up to a maximum of $8,000, to use in the following year. This amount is referred to as your FHSA carryforward. Any FHSA carryforward will be included in the calculation of your FHSA participation room for the year.
Unlike RRSPs, contributions that you make to your FHSAs during the first 60 days of the year are not deductible on your previous year’s income tax and benefit return. You also cannot claim a tax deduction for any FHSA contributions that you make after your first qualifying withdrawal.
Transfers Between a FHSA and Other Registered Accounts
Generally, you can transfer property from your RRSPs to your FHSAs without any immediate tax consequences, as long as it is a direct transfer and does not exceed your unused FHSA participation room at the time of the transfer.
Similarly, you will be allowed to transfer property from one of your FHSAs to another FHSA, or to your RRSPs or RRIFs without any immediate tax consequences, as long as it is a direct transfer and you do not have an excess FHSA amount.
To complete a direct transfer between your FHSA and other registered accounts you must fill out a transfer form and give it to your financial institution.
Tax on Excess FHSA Contributions
You will have an excess FHSA amount if the total of your contributions to your FHSAs and transfers from your registered retirement savings plans (RRSPs) to your FHSAs in a year are more than your FHSA participation room for that year.
Generally, you have to pay a tax of 1% per month on the highest excess FHSA amount in that month. You will continue to pay the monthly 1% tax until the excess FHSA amount is eliminated. Your excess FHSA amount will be reduced or eliminated by your new FHSA participation room (on January 1 of the following year), or by removing amounts from your FHSAs.
Tax Deductions for FHSA Contributions
The contributions that you make to your FHSAs may be deductible on your income tax and benefit return for the year of the contribution or a future year, similar to RRSP contributions. If you cannot or you decide not to claim some or all of your available contributions as an FHSA deduction in the year, you can carry forward that amount and may be able to claim your unused FHSA contributions as an FHSA deduction in a future year.
Transfers from your RRSPs to your FHSAs cannot be claimed as a deduction on your income tax and benefit return.
After you open your first FHSA, the total of your unused FHSA contributions available to be deducted in a future year will be provided to you on your notice of assessment or reassessment.
Withdrawing Funds from Your FHSA
If you meet the qualifying withdrawal conditions, you can withdraw all of the property from your FHSAs tax-free. You can do this either in a single withdrawal or a series of withdrawals. A qualifying withdrawal is a withdrawal from your FHSA where all of the following conditions are met:
you must fill out Form RC725, Request to Make a Qualifying Withdrawal from your FHSA and give it to your FHSA issuer
you must be a first-time home buyer
you must have a written agreement to buy or build a qualifying home with the acquisition or construction completion date of the qualifying home before October 1 of the year following the date of the withdrawal
you must not have acquired the qualifying home more than 30 days before making the withdrawal
you must be a resident of Canada from the time that you make your first qualifying withdrawal from one of your FHSAs until the earlier of the acquisition of the qualifying home, or the date of your death
you must occupy or intend to occupy the qualifying home as your principal place of residence within one year after buying or building it.
If a withdrawal of funds from your FHSA is not a qualifying withdrawal it will be taxable in the year of withdrawal. i.e. if you put it in and then later need to access the funds for something other than the purchase of a qualifying home, you have to pay tax on the withdrawal.
There is no minimum number of days that contributions or transfers to your FHSAs must stay in your FHSAs before you can use them for a qualifying withdrawal. You can withdraw amounts from your RRSP under the Home Buyers’ Plan (HBP) and make a qualifying withdrawal from your FHSA for the same qualifying home, as long as you meet all of the conditions at the time of each withdrawal.
For assistance in opening a FHSA account or questions regarding the application process, contact your financial institution directly.
The information in this publication is current as of July 26, 2023
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Gregory, Harriman & Associates LLP to discuss these matters in the context of your particular circumstances. Gregory, Harriman & Associates LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.