The First Home Savings Account (FHSA)
FHSA is a recently introduced savings plan by the Canadian federal government. It was announced in the 2022 budget and became available starting April 1, 2023. The purpose of the FHSA is to assist prospective first-time home buyers, including new permanent residents, in saving money specifically for their initial home purchase.
Similar to other registered savings plans, the FHSA provides tax incentives on contributions and the returns earned on savings within the account. However, there are limitations on the amount of money that can be contributed annually and cumulatively.
The FHSA allows first-time home buyers to save money and watch it grow tax-free, solely for the purpose of purchasing a home in Canada. Funds from the account can be used for a down payment, construction or renovation expenses for a new home, or installment payments for a pre-construction residential property.
Once an individual opens an FHSA, they can make tax-deductible contributions up to the maximum annual and lifetime limits. This means that contributions made to the FHSA can be deducted from their taxable income, similar to how it works with a Registered Retirement Savings Plan (RRSP).
Furthermore, when the account holder is ready to buy their first home, withdrawals from the FHSA will also be tax-free, as long as the funds are used for a qualifying home purchase. This includes the initial investment and any earnings (interest, capital gains, dividends, etc.) generated within the account.
The FHSA allows various types of investments, such as cash, Guaranteed Investment Certificates (GICs), stocks, options, bonds, Exchange-Traded Funds (ETFs), or mutual funds, similar to an RRSP or Tax-Free Savings Account (TFSA). However, the specific investment options may vary depending on the issuer.
To be eligible for opening an FHSA, an individual (and their spouse or common-law partner) must qualify as a first-time home buyer. This means that neither the account holder nor their spouse/partner should have lived in a qualifying home as their primary residence during the calendar year they open the FHSA or in the four calendar years prior to it. A qualifying home refers to an existing or under-construction housing unit in Canada, including various types of properties such as single-family homes, townhouses, condominiums, apartments, or mobile homes. However, a rented unit does not qualify as a qualifying home.
To maintain eligibility for the FHSA's tax incentives, the individual must continue to meet the definition of a first-time home buyer until they withdraw funds from the account. However, they can reside in their new home up to 30 days before withdrawing funds from the FHSA if they intend to use the funds for further construction, renovations, or similar purposes.
You can only open a First Home Savings Account if you meet all of the following conditions:
You are a Canadian resident: This includes citizens, permanent residents, and certain temporary residents who meet the residency requirements for income tax purposes. Typically, temporary residents, including work permit holders and international students, must reside in Canada for at least 183 days in a tax year to qualify as Canadian residents.
You are 18 years of age or older: In some provinces and territories where the age of majority is 19, you must be at least 19 years old to open an FHSA account.
You are a first-time home buyer in Canada: You, your spouse or your partner have not individually or jointly owned your principal residence in the last four to five years.
Once you’ve decided to save towards your goal of purchasing a home in Canada, you can make contributions of up to $8,000 per calendar year. The lifetime maximum contribution for the First Home Savings Account is $40,000. You can have multiple FHSA accounts, but the annual and lifetime limits apply to you as an individual and are the total combined contribution limits for all your FHSA accounts.
Unlike with the Registered Retirement Savings Plan (RRSP), you don’t need to file an income tax return before opening and contributing to an FHSA. So, as a newcomer, you can open an FHSA and begin making small contributions (there is no minimum annual contribution) soon after you arrive, even before you find a job in Canada. Any unused contribution room will carry over to the next year, up to a maximum of $8,000.