Canadians’ Saving(s) Grace – Introducing the FHSA

The First Home Savings Account (“FHSA”) was introduced in the federal budget of 2022. The proposed FHSA would permit eligible Canadians to contribute up to $40,000 in a tax-free savings account for the purposes of purchasing a home.

In so doing, the federal government has created a unique and new form of savings account.

The FHSA is the only entirely tax-free savings account to which Canadians have access. The other savings plans each impose taxes at some point along the process. The Registered Retirement Savings Plan (“RRSP”) treats withdrawn amounts as taxable income. While the Tax Free Savings Account (“TFSA”) does not tax withdrawals, contributions are not tax-deductible, meaning contributors must first pay income tax on the amount before contributing to a TFSA.

The FHSA is the best of both the RRSP and TFSA: contributions to the account are tax-deductible, and withdrawals tax exempt. Accordingly, the FHSA is tagged as Canada’s first “tax-free in, tax-free out” savings plan.

This article will explain what we know so far about the FHSA and explore some ways Canadians can take advantage.

Timeline: The FHSA is scheduled to become available to Canadians in 2023. While the federal government is working with banks on facilitating its rollout, certain elements of the savings plan may be subject to change. The first draft legislation is expected by the end of July, followed by a 60-day period reserved for input from industry experts. The second draft will be tabled in the fall, and may receive royal assent at the end of the year.

Eligibility: Those eligible to open a FHSA are Canadian residents above the age of 17 who have not lived in a home they owned in the year, or preceding 4 years, that the FHSA was opened.

Lifespan: The FHSA must be closed or used within 15 years from the date of opening. On expiry of the 15 years, any unused funds may be transferred into an RRSP without impacting that year’s RRSP contribution limit.

Contribution Limits: The annual contribution limit is $8,000, up to a lifetime total of $40,000 for an individual. On the purchase of a home by a couple, each can use their respective FHSA, combining for up to $80,000 plus investment income. Unlike an RRSP, whose contribution limit is tied to a taxpayer’s earned income for the preceding tax year, contributions to a FHSA can be made regardless of a taxpayer’s income.

Withdrawals: FHSA withdrawals are only tax exempt if such withdrawal is for the purchase of a qualifying home. To use it, the account holder would present the purchase agreement of a house to the bank holding the FHSA, then the bank would release the amount of funds requested by the account holder, tax-free. Withdrawals from the FHSA for any non-qualifying purpose will be taxable as income.

Relationship to the Home Buyer’s Plan: RRSP account holders are able to use the Home Buyer’s Plan (“HBP”) to withdraw funds from their RRSP account for the purpose of a home purchase, subject to repaying the amount back into the RRSP over 15 years. The FHSA is an alternative to the HBP – only one may be used on a home purchase at a time.

Rollover: If the FHSA is not used for the purchase of a qualifying home within the 15 years of its inception, the total value of the FHSA can be transferred to an RRSP without impacting the contribution limits of the RRSP. For example, if a Canadian has $45,000 in a FHSA at the end of 15 years, and an RRSP contribution limit of $27,000 for that year, the entire $45,000 may be transferred into the RRSP without effecting the RRSP’s contribution limit. Once a transfer has been made to the RRSP any withdrawals will be taxed as if the FHSA contributions were made originally to the RRSP. In other words, those withdrawals are treated the same way as withdrawals of any funds originally contributed directly to the RRSP.

Investment: Contributions to a FHSA can be invested in securities, the income from which receives the same tax treatment as the principal contribution upon the withdrawal of funds or rollover to the RRSP.

Summary: Canadians should be thrilled at the prospect of saving more of their hard-earned dollars. The FHSA alone will not solve the issue of housing affordability, but it is an invaluable savings tool nonetheless. Eligible Canadians should strongly consider opening a FHSA when able, and prioritize maximizing their annual contributions. Whether maximizing the FHSA should take priority over maximizing your TFSA depends upon the individual. While some may value the flexibility of withdrawing from a TFSA for access to cash in a pinch, the FHSA offers multiple advantages in its own right.

Unlike the TFSA, contributing to the FHSA lowers taxable income, which makes it arguably a better investment than the TFSA – even if such investments are not readily accessible. Since any unused funds may be transferred into an RRSP upon the expiry of the FHSA’s lifespan, the account holder can accelerate savings goals by more than $40,000, completely tax-free, up to the point of withdrawal from the RRSP.

No matter how one uses it, and regardless of the final shape it takes, the FHSA is a welcomed savings alternative to Canadians – the first truly “tax-free in, tax-free out” account of its kind.