Tax Free First Home Savings Account Canada (The FHSA Explained)

The First Home Savings Account was introduced April 1, 2023. There is a lot of buzz about the tax free First Home Savings Account (FHSA) and for pretty good reason. It’s another tax shelter to help you get towards your Canadian dream of owning a home. This post will go over what the FHSA is, what the first time home buyer incentive is and who qualifies to open an account.

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What is a First Home Savings Account?

The First Home Savings Account (FHSA) was introduced in 2023 as a means to help Canadians save more (tax free) for their primary residence. It allows you to contribute up to $8000 per calendar year for a total of $40,000.

Once you open a FHSA, you have to use the funds within the first 15 years of account opening or before age 71, whichever comes first.

The benefit of the FHSA is that it combines the best of both worlds, the RRSP and the TFSA. Meaning, the money that you contribute to a FHSA is tax free (so you get a hefty return on your taxes) AND when you withdraw from the FHSA it is tax free.

Normally, for the RRSP you have to pay taxes on your withdrawal. With the TFSA you contribute with after-tax income but when you withdraw it is tax free.

In summary for the FHSA, you have a tax deductible contribution and a tax free withdrawal.

Who Can Open a FHSA?

There are three criteria that you need to fulfill in order to be eligible to open up a First Home Savings Account:

• You have to be at least 18 or 19 years old (depending on your province or territory) and at most 71 years old
  • Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Prince Edward Island is 18 years old
  • British Columbia, New Brunswick, Newfoundland and Labrador, Nova Scotia, Yukon, Nunavut, and Northwest Territories is 19 years old
• You have to be a resident of Canada
• And you have to be a first time home buyer, meaning you have not lived in a home called your principal residence in the last 4 years or in the current calendar year. This includes jointly owned homes too.
• You cannot open a tax free first home savings account as a spousal account.

You can open up a FHSA the year you turn 18 and even if you don’t have $8000 to contribute in the first year, the $8000 will roll over to the next year (until there is $40,000 of contribution room, or in about 5 years time).

Basically every young person should open one of these accounts if they hope to become a home owner- however, I think you would want to time it right since you have 15 years to use it and then it will have to be closed.

According to Canadian Real Estate magazine, the average age of first time home owners in Canada is age 36 (this has increased from 33 in recent years).

Therefore, if you open a First Home Savings Account at age 18, it will have to be closed at age 33. It might be prudent to open one up at age 20-22 instead of age 18 just to give yourself more time.

What Can You Hold in a FHSA?

Similar to an RRSP or a TFSA, you can hold a variety of investments within a FHSA. The whole point of the FHSA is for you to save money and grow that money so that you can increase your down payment for your first home.

Therefore you an hold things like:

• GIC’s or guaranteed investment certificates (some institutions have 1 year GIC’s issuing over 5%)
• Cash in a high interest savings account
• Equities
• Mutual Funds
• Bonds

What you should hold in your FHSA depends on your purchasing timeline. If you are 18 and you have $8000 to invest each year, you are PROBABLY not going to be buying a first home at age 23 (especially since the average age of a first time home owner in Canada is around 36).

If you plan to buy a home in your late 20’s or early 30’s or you have at least a 10 year horizon, equities might be a better option if you want to see the money you have for your down payment grow.

However investing in equities or even mutual funds comes with risk (and high fees typically for mutual funds that will eat away at your returns), if you’re stuck in a bear market for a while it will be disheartening to see the pile of money you’ve saved up for your home shrink.

It all depends on your own risk tolerance.

Who Are the Issuers for a FHSA?

Initially there were not that many issuers for the First Home Savings Account when it was first introduced, but now some of the big banks and others have started offering FHSA accounts.

There wasn’t much notice and accounts like these takes a long time to set up from banks and brokerages, I’m sure. They need to train their staff, have the proper forms, etc.

• Royal Bank FHSA
• TD Bank FHSA
  • There’s a TD FHSA Welcome Offer: if You open up a TD FHSA before October 31, 2023 you can get $100 if you deposit over $3000 and keep it until January 31, 2024
  • Qualifying Investments are in a FHSA mutual fund or a 1 year or longer GIC
• Scotiabank FHSA
  • With the Savings Accelorator FHSA Account, you can earn 5.00% on new FHSA deposits.
• Questrade FHSA (they were the first to get it up and running on April 1, you can open one up in minutes online, you need at least to have $250 invested within Questrade but there is no minimum deposit)
• Qtrade FHSA (Qtrade is voted Canada’s best online brokerage in Canada for a few years in a row)
• National Bank FHSA (you have to make an appointment with an advisor)

I’m a bit surprised why the marketing for the FHSA seems to be learning more to investment related accounts (e.g. equities, ETFs) rather than high interest savings accounts. You would think that with a down payment for a home you would have people who might have a shorter timeline and would want to keep the money more ‘guaranteed’ in something like a GIC or a high interest savings account.

First Home Savings Account Withdrawal

How and when can you withdraw money from your First Home Savings Account?

You can withdraw your money from the First Home Savings Account tax free.

In order to have a qualified withdrawal of the FHSA you have to meet he following criteria:

• Be at least 18 years of age
• Be a resident of Canada
• Have a written agreement to buy or build a home in Canada before October 1 in the following year that you take your money out from the FHSA
• You have have the intention to live in the home as your principal residence after buying or building it for one year (I’m sure this really won’t stop speculators though)

Once you withdraw the money from your FHSA, you don’t have to pay it back. It’s tax free in and tax free out.

What If You Don’t Use the FHSA?

If you don’t use the tax free first home savings account and it has been 15 years since you opened one or if you are 71 years of age, you have to transfer it into your RRSP or an RRIF.

You lose your FHSA contribution room and the money you have saved will be put into an RRSP which means you will have to pay tax when you withdraw the money. It doesn’t affect your RRSP contribution room though.

If you don’t transfer it to your RRSP, and you withdraw the money, that amount is taxable and must be included as income in your tax return.

If you intend to be a renter for life and you move your FHSA money into your RRSP, you just gave yourself an additional $40,000 of tax sheltered investments for your retirement.

This will grow nicely to $325,000 in 30 years time thanks to compounding. Compounding calculation courtesy of my favourite compounding website, The Calculator Site.

Tax Free First Home Savings Account Recap

In summary, the First Home Savings Account is another nice tax free incentive to help young Canadians fulfill their Canadian dream of owning a home. It’s also a vote grab and will cause more headache come tax time to make our taxation system even more complicated.

There are a number of incentives to help young Canadians with their real estate purchase in addition to the new Tax Free First Home Savings Account. These are:

• First Time Home Buyer’s Property Transfer Tax Exemption (in BC)
• There are other grants and incentives from other provinces and territories for first time home buyers
• First Time Home Buyer’s Incentive from the CMHC (which is an interest free loan from the government of Canada, there is also an income cap to be eligible for this)
• Home Buyer’s Plan which is a tax free withdrawal from your RRSP (up to $35,000) and you have to repay it within 15 years interest free.
• Home Buyer’s Amount tax credit (it’s a measly $750 but better than nothing)

So with the FHSA and the Home Buyer’s Plan you have $75,000 up your sleeve in tax free savings towards the downpayment for your home. It’s not much given the average price of a home in Canada in April 2023 is now $716,000, but again, it’s better than nothing.

If your intent to use the FHSA is for retirement (e.g. if you plan to rent or are not decided about buying a home), this is another tool to use in your retirement planning arsenal.

I still think that investing for your retirement in the TFSA is the best way to go- here’s how to open up a Questrade TFSA to do so.

You may also be interested in:

• Should you rent out or sell your condo?
• Single female home buyer tips for your first condo
• 7 Tips for building a house on a budget
• Closing costs when selling a home in BC

What do you think of the tax free First Home Savings Account in Canada?