Introducing the Tax-Free First Home Savings Account (FSHA)

In the 2022 Budget, a new initiative named the Tax-Free First Home Savings Account (FHSA) was unveiled. This program, set to kick off in 2023, is designed to assist potential first-time homebuyers. Here’s a breakdown of its features:

Contribution Limits: Individuals can contribute up to $40,000 over their lifetime to the FHSA. There’s an annual cap of $8,000 for contributions.

Tax Benefits: Contributions to the FHSA are tax-deductible. Moreover, when you withdraw funds (including any investment income) to buy your first home, you won’t be taxed.

Unused Contributions: If you don’t max out your contributions in a given year, you can carry forward the unused amount. For instance, if you contribute $5,000 in 2023, you can contribute $11,000 in 2024 (the regular $8,000 plus the unused $3,000 from the previous year).

Important Considerations:
Carry-forward amounts start accumulating only after you open an FHSA account.
It’s advantageous for individuals aged 18 or older, planning to buy a home within 15 years of opening the FHSA, to start their account early to benefit from the carry-forward amounts.
Both the FHSA and the Home Buyers’ Plan (HBP) can be accessed for the same qualifying home. Initially, there was a restriction against using both for the same home purchase, but this was later lifted.
To open an FHSA, you must be at least 18 and a first-time homebuyer. This means neither you nor your spouse/common-law partner should have owned a home that was your primary residence in the year before opening the account or in the four preceding years.
The government anticipates that Canadians will be able to start their FHSAs sometime after March 31, 2023. Regardless of the exact date, the full $8,000 annual limit can be contributed in 2023.

FHSA vs. HBP:
It’s generally advisable to contribute to the FHSA before the HBP. While withdrawals from both are tax-free, only the HBP requires repayments.
If you’ve maxed out your FHSA contributions and still have savings, consider contributing to an RRSP, especially if you don’t have enough for a full HBP withdrawal.

HBP Overview:

The HBP allows eligible individuals to withdraw up to $35,000 tax-free from their RRSP to buy their first home.
Funds withdrawn must be repaid within 15 years, starting from the second year after enrolling in the HBP. These repayments don’t qualify for tax deductions.

FHSA Overview:
There’s no cap on withdrawal amounts, which vary based on returns.
Withdrawn funds don’t need to be repaid.
With a lifetime contribution limit of $40,000 and an annual cap of $8,000, it takes a minimum of 5 years to reach the full contribution limit. This positions the FHSA as a more long-term savings tool.