What is First Home Savings Account and who should use one?

First Home Savings Account (FHSA) was introduced on April 1 for people aged 18+. Right now, we can see many banks offering this product.

FHSA’s lifetime contribution limit is only $40,000 and the annual maximum is $8,000, so FHSAs are definitely not enough for today’s high real estate prices in large cities. However, they’re too good to miss the opportunity to save for your down payment.

FHSAs combine the best features of tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs). You receive a tax deduction on your contributions, like with the RRSP, and you also get the TFSA’s tax-free withdrawals when you use the funds for a home purchase. Like with RRSPs and TFSAs, the investment gains earned are tax-sheltered.

Before the FHSA was launched, Canadians who wanted to save for a first home could use the federal Home Buyers’ Plan, where you borrow money from your RRSP, or TFSAs. “Now, the decision is quite easy,” – noted Natasha Knox, a certified financial planner (CFP) at Alaphia Financial Wellness. “You can use the FHSA instead.”

FHSAs are available for those who did not own a home in the calendar year before an account is opened or during the previous four years. You can not apply for this account if your spouse or common-law partner owned a home over these periods.

You are obliged to close the FHSA after 15 years, or by the end of the year you turn 71 years old. In case you don’t make a home purchase by that time, you can transfer the funds to your RRSP or registered retirement income fund with no tax implications and no influence on your normal RRSP contribution limit. If you withdraw from an FHSA not for the purpose of buying a house, the money is added to your income and taxed.

Before you open the FHSA, it’s reasonable to plan your contributions. For instance, an 18-year-old will hardly benefit much from FHSA’s tax deduction, and it will probably take more than 15 years for an 18-year-old to save for a home in such expensive cities as Vancouver and Toronto.

Amid skyrocketing inflation, finding money to contribute to an FHSA can be extremely difficult for young adults. Parents and grandparents, you can help them by gifting money without tax consequences for you or the beneficiary. 

FHSAs have the same eligible investment options as TFSAs and RRSPs, e.g. stocks, bonds, exchange-traded funds, mutual funds, and guaranteed investment certificates.

In other words, FHSAs will not be enough for you to save for a home in Toronto or Vancouver, as the average resale housing price there exceeds $ 1 million and requires a minimum down payment of 20%. Still, you can take the tax deduction from an FHSA contribution and add it to your RRSP or TFSA, thus increasing your saving for a down payment.