An In-Depth Guide to the First-Time Home Buyers Account in Canada

Buying your first home in Canada is a major milestone in many Canadians' lives. You’re investing in your community, your future and in the stability of your family.

However, for many Canadians, down payment requirements make it challenging to get into the market. 

The good news is, the tax-sheltered First-Time Home Buyers Account (FHSA) makes saving for a down payment much more accessible.  

To help you make the most of your FHSA, we’ll walk you through:

• how it works 
• how to to make it work best for you
• how it compares to other possible savings vehicles 

What is the FHSA? 

A FHSA is an investment vehicle focused on helping you save towards a down payment on your first home in Canada A combination of an RRSP and a TFSA, the FHSA shelters your money from taxes, including your investment, any growth and withdrawals (based on a qualifying withdrawal).

The FHSA by numbers

• Annual contribution limit – $8,000/year
• Lifetime contribution limit – $40,000
• Maximum holding period – 15 years (or until you turn 71)

FHSA eligibility

To be eligible for opening a FHSA, you must fulfill the following criteria: 

• be a Canadian resident 
• be at least 18 years of age 
• not be turning 72 or older in the current year. 
• be a first-time home buyer* 

*A first-time home buyer is defined as someone who hasn’t owned a home, and whose spouse or common-law partner hasn’t owned a home in Canada that’s served as a principal residence at any point during the current or the preceding four calendar years.

How does a FHSA work as an investment? 

Let's comb through the finer details to help you make the most of your FHSA.

Carry-forwards

After opening a FHSA, up to $8,000 of unused annual contributions can be carried forward for use in subsequent years. That means you can skip a year of investment and still make up for it in the following year. 

A word of caution about over contribution

Like other tax-sheltered accounts, there are penalties for over-contributing to a FHSA. Penalties come in the form of a 1% tax on any excess money in the account for each month, or part-month, that exceeds the limit.

Deductions

Just like an RRSP, your contributions can be claimed as a deduction against all taxable income sources, reducing your taxable income for the year and, consequently, your tax liabilities.

Also similar to RRSP deductions, you can carry forward undeducted contributions indefinitely to claim them as deductions in future years.

Income and gains

One of the greatest advantages of the FHSA is that income and capital gains (as well as capital losses) earned within the account are excluded from your annual income for tax purposes. Consequently, income and capital gains continue to grow and compound within the FHSA on a tax-free basis.

Qualifying investments

Qualifying investments for the FHSA are similar to other tax-sheltered savings accounts. They include:

• mutual funds
• exchange-traded funds (ETFs)
• publicly traded securities
• government and corporate bonds
• guaranteed investment certificates (GICs)

Withdrawing FHSAs 

Qualifying withdrawals from the FHSA for the purpose of buying a home are tax-free. To be considered ‘qualifying’, a withdrawal must meet specific conditions, including:

• You must be a resident in Canada from the time of the withdrawal until the acquisition of the qualifying home, and you must be a first-time home buyer when making the withdrawal.
• A written agreement to buy or build a qualifying home must be in place before October 1 of the year following the year of withdrawal, and you must intend to occupy the home as your principal place of residence within one year after purchase or construction.
• The qualifying home must be a housing unit located in Canada.

Transferring your FHSA to a tax-sheltered account

Funds left over after making a qualifying withdrawal can be transferred, tax-free, to another FHSA, an RRSP or a registered retirement income fund (RRIF) before the end of the year after the year of the qualifying withdrawal. Once transferred, the funds will be subject to the rules of the applicable accounts, including taxation upon withdrawal.

Keep in mind that withdrawals or transfers to an RRSP do not add room back to your FHSA contribution limits. However, transferring funds from a FHSA to an RRSP does not reduce your available RRSP contribution room. This effectively allows you to create more RRSP room by contributing to your FHSA.

Non-residents and FHSAs

Even after moving away from Canada, you can continue to make contributions to your existing FHSA. However, as a non-resident, you will not be eligible to make a qualifying withdrawal. 

FHSAs and spousal/family investments

You cannot claim deductions for contributions made to your spouse’s or family members’ FHSA. However, you can give your spouse or family member funds to contribute to their own FHSA, which they can claim a deduction for. 

Typically, this would trigger attribution rules, resulting in any income or capital gains getting taxed in your name. However, attribution rules do not apply to income and capital gains generated in a FHSA.

Closing your FHSA

Whether or not you purchase a home, you must close your FHSA by:

• December 31 of the year you turn age 71, or 
• December 31 of the 15th anniversary of first opening the account, or 
• December 31 of the year following the year of the qualifying withdrawal

Any unused funds at the time of closing can be transferred to an RRSP or RRIF.

Beneficiaries and successors of FHSAs

You can designate your spouse as a successor account holder as long as they meet the eligibility criteria for opening a FHSA. Inheriting a FHSA will not impact your contribution limits, though the inheritor will assume your closure deadlines. 

If, however, your surviving spouse is not eligible for opening a FHSA, they must transfer the funds in the account to their own RRSP/RRIF, which will maintain their tax-deferred basis. Your spouse may also withdraw FHSA funds entirely on a taxable basis.

In the case of a non-spousal beneficiary, all funds will need to be withdrawn immediately and paid directly to the beneficiary. These funds will be included in the beneficiary’s income and are subject to withholding tax.

Difference between RRSP Home Buyers’ Plan (HBP), FHSA, and TFSA

Key takeaways when considering a FHSA

• The clock on the FHSA starts ticking as soon as you open an account. Consider your goals and whether you’ll be in a position to buy a home within the 15-year time frame.

• Take advantage of compound growth by contributing early to your FHSA.

• The FHSA is one of several accounts you can use to save toward the purchase of a first home in Canada. Consider combining the savings from your FHSA and any funds you can access through the TFSA and RRSP Home Buyers’ Plan to maximize your down payment.