A First Home Savings Account (FHSA) is Canada’s newest registered account, designed to help you save for the purchase of your first home. It combines the main tax benefits of a TFSA and an RRSP: contributions are tax-deductible, and any growth in the account is tax-free, as long as the funds are eventually used for purchasing a home. An FHSA can only stay open for 15 years before it needs to be closed.
FHSA contribution room and limits
The FHSA allows you to contribute $8,000 per year, up to a maximum of $40,000. Any contributions made to this account will generate a tax slip you can use to deduct the amount from your total income at the year end, which will either lower the taxes you owe or generate a refund.
What happens if you miss a contribution
If you don't contribute the full $8,000in a given year, you can carry the unused amount forward to the following year. This only applies to the previous year – unused room from two or more years ago cannot be carried forward. It doesn't disappear, though; the lifetime maximum of $40,000 remains intact, and you can still reach it by contributing $8,000 per year going forward.
This carryover only applies if the FHSA was open during the year that was missed. Some people open an FHSA in December for this reason, since it allows them to contribute up to $16,000 once January starts.
How to withdraw from your FHSA to buy a home
When purchasing your first home, all funds in your FHSA (including capital gains) can be withdrawn absolutely tax-free. FHSA withdrawals can also be used in combination with the Home Buyer’s Plan (HBP) from an RRSP. Unlike the HBP, FHSA withdrawals for a home purchase do not need to be repaid.
What happens to your FHSA if you don't buy a home
Plans change. If you decide not to buy a home, any withdrawals from the FHSA will be added to your income and taxed accordingly. Similar to RRSP withdrawals, your FHSA provider will withhold taxes upfront based on how much you withdraw:
| Withdrawal Amount | Withholding Tax | Withholding Tax (Quebec) |
|---|---|---|
| $0 - $5,000 | 10% | 19% |
| $5,001 - $15,000 | 20% | 29% |
| $15,001 or greater | 30% | 34% |
Transferring your FHSA to an RRSP
If you've decided not to buy a home and your FHSA is approaching the 15 year limit, there's an alternative to withdrawing the full amount and paying taxes on it immediately: You can transfer the entire balance to your RRSP. The transferred amount doesn't affect your RRSP contribution room, so there's no risk of an overcontribution.
You'll still eventually pay income tax on the amount when it's withdrawn, whether from the RRSP or when the RRSP is converted into a Registered Retirement Income Fund account. But that can be deferred until retirement.
Summary
An FHSA is worth considering for anyone buying their first home in the next 15 years. Contributions are tax-deductible, and the full amount (contributions plus any growth) can be withdrawn tax-free for a qualifying home purchase. If you end up not buying, the balance can be transferred to your RRSP without affecting your contribution room.
