Why You Should Open a FHSA

Date Posted: January 17, 2024

The First Home Savings Account (FHSA) was introduced in Canada in 2023 and there are a few reasons why you should open one as soon as possible; regardless if you plan on using it. The FHSA is a unique savings vehicle that combines features of a registered retirement savings plan (RRSP) and a tax-free savings account (TFSA). Here is why you should open one if you are a prospective first time home buyer:

1. Benefits of FHSA:

   • Contributions are tax-deductible for the year they are made, similar to an RRSP.
   • Income, capital gains, and dividends earned in the account are tax-free, similar to a TFSA.
   • No tax consequences when withdrawing money for the purpose of purchasing an eligible home.

2. Contribution Limits and Carryover:

   • First-time homebuyers can contribute up to $8,000 per year, with a lifetime limit of $40,000.
   • Unused contribution room in a calendar year can be carried over to the following year.

3. Strategic Opening of FHSA:

   • Financial advisors recommend opening an FHSA to accumulate contribution room, even for those undecided about buying a home.
   • Opening the account this year allows for additional contribution room accrual.

4. Transfer Options:

   • If a home purchase decision is uncertain, individuals can initially focus on accumulating contribution room in the FHSA and later transfer the money to it when ready to buy.
   • Unused funds in the FHSA can be transferred tax-free to an RRSP if a home is not purchased.

5. Comparison with Other Options:

   • The TFSA offers more financial flexibility but lacks the income tax deductions of an FHSA.
   • Unlike the HBP, the FHSA does not require repayments, and the $40,000 lifetime contribution limit can be combined with the HBP limit for a total of $75,000.

6. FHSA Uptake and Government Intent:

   • Since its launch, over 250,000 Canadians have opened an FHSA at various financial institutions.
   • The FHSA was created by the federal government to help first-time homebuyers afford a property.

In summary, if you are a prospective first time home buyer but are also uncertain of when you are going to buy; a great strategic option is to open the account now and take advantage of the contribution room accrual. $8,000 per year is the contribution limit, however, since it accumulates year over year, you can maximize the use of the total contribution limit of $40,000 over 5 years. This means you could keep your FHSA open for 5 years and if you suddenly decide to make a down payment on a home, you could transfer any of your existing savings into this account to take advantage of the tax benefits.