Canada - Canada introduces tax-free first home savings accounts

Canada’s new first home savings account (FHSA), a registered plan that entered into force on April 1, 2023, gives prospective first-time home buyers the ability to save funds for the purchase of a home on a tax-free basis. FHSAs can be a useful tool for prospective first-time home buyers and parents looking to help their kids get into the competitive Canadian housing market.

To help you determine if an FHSA makes sense for you, we have answered some common questions.

What is an FHSA?

The FHSA is a registered plan that allows some individuals to save funds for the purchase of a home on a tax-free basis. The lifetime limit on contributions to an FHSA is CAD 40,000, and the annual contribution limit is CAD 8,000. While contributions to an FHSA are tax-deductible, withdrawals to purchase a first home are not taxable. Moreover, any income, losses, and gains on investments held within an FHSA are not included (or deducted) in computing income for tax purposes.

Can anyone open an FHSA?

The short answer is no. To be eligible to open an FHSA, an individual must be:

  • A resident of Canada;
  • At least 18 years old; and
  • A first-time home buyer. This means that the homebuyer, their spouse, or a common-law partner did not own a qualifying home they lived in as a principal place of residence at any time in the year the account is opened or the preceding four calendar years.

Can you contribute to a child’s FHSA?

You cannot contribute directly to your child’s FHSA, because individuals cannot claim a deduction for contributions made to another individual’s FHSA. However, your child is allowed to contribute to their own FHSA using funds provided by you.

How do you make a withdrawal from an FHSA?

While individuals can make a withdrawal from their FHSA for any purpose, only qualifying withdrawals meeting the following conditions will be considered non-taxable:

  • The withdrawal must be made using a prescribed form that sets out the location of the qualifying home the individual intends to occupy as a principal residence within one year of acquisition of the qualifying home.
  • The individual must be resident in Canada from the time of the withdrawal to the time of acquisition of the qualifying home (or the individual's death, if earlier) and the individual must be a first-time home buyer.
  • The individual must enter into a written agreement (before the withdrawal) to buy or build a qualifying home before October 1 of the year following the year of withdrawal.
  • The individual did not acquire the qualifying home more than 30 days before the withdrawal is made.

Can I make both an FHSA withdrawal and a Home Buyers' Plan withdrawal?

Yes, you can make both an FHSA withdrawal and a Home Buyers' Plan (HBP) withdrawal for the same qualifying home purchase. The HBP allows first-time home buyers to withdraw up to $35,000 from their registered retirement savings plan (RRSP) as a loan, with no immediate tax consequences, to buy or build a qualifying home. This means that you may have a total of $75,000 (plus accumulated investment income from an FHSA) of tax-free money that can be used toward the purchase of a new qualifying home, if you have contributed the maximum lifetime amount of $40,000 to your FHSA and you have adequate funds in your RRSP.

Remember that while no repayment is required on the funds withdrawn from an FHSA, amounts withdrawn under the Home Buyers' Plan must be repaid to an RRSP over a period not exceeding 15 years, beginning the second year after the year of withdrawal.

Final thoughts

If you are a first-time home buyer, an FHSA is a great way to help save for a down payment and reach the goal of home ownership. Keep in mind that to open an FHSA, you are required to confirm your eligibility.

Debra Moses
Christopher Ng
BDO in Canada