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Nov 1, 2023

Why You May Not Want To Miss The First Year Of The First Home Savings Account (FHSA)

by Julie Petrera

In the Federal Budget, 2022, The Government of Canada announced the introduction of the First Home Savings Account (FHSA). While the initial announcement was missing some of the details, the government has since provided clarity on who qualifies and how the account works – and the details may require you to act - before the end of this calendar year. 

High Level, you may qualify for an FHSA if you: 

  • Are a Canadian resident, 
  • Are over the age of majority, 
  • Are under age 71 and 
  • Have not occupied a home that you or your spouse or common-law partner owns/ has owned in the past four calendar years. 

If you qualify for an FHSA, you can: 

  • Contribute a maximum of $8,000 per calendar year, up to a lifetime maximum of $40,000 within 15 years; 
  • Carry up to $8,000 of unused contributions forward to future years, as long as an FHSA account is open; 
  • Have multiple FHSA accounts, as long as the annual and lifetime limits are not exceeded; 
  • Deduct contributions against income tax in the year they are made, or in future years; 
  • Withdraw funds tax-free when they are used to purchase a qualifying home; 
  • Combine the withdrawals with a spouse or partner if you are buying a home together; meaning if you both contributed the maximum, you could withdraw a combined $80,000 plus investment growth tax-free; 
  • Transfer unused contributions to an RRSP or RRIF if the funds are not used to buy a qualifying home within 15 years from when you open the account, or before December 31 of the year you turn 71; and/or 
  • Withdraw the unused contributions, as taxable income. 

2023 is the first year the FHSA is available, and it could be a significant year for you if you wish to contribute or if you don’t wish to contribute but you do wish to begin accumulating carry-forward room. 

Carry-forward room permits you to accumulate unused contribution room that you can contribute in future years. Room begins to accumulate for a RRSP as soon as you file taxes, and room begins to accumulate for a Tax-free Savings Account (TFSA) as soon as you turn 18 (or from the time the TFSA was introduced). No further action is required by you to begin to accumulate unused room. However, to accumulate contribution room for an FHSA, you must open an account. If you open an account and do not contribute, the room is carried forward. However, the account can only remain open for 15 years, and contributions don’t have to be deducted in the year they are made. Therefore, you will want to do some planning to determine when you want to open this account. 

Consider these scenarios: 

1.  Irene opens an FHSA in 2023 and does not contribute until 2025. In 2025, Irene can contribute up to $16,000.1 Irene can deduct the $16,000 from her income to reduce her taxable income that year, or she can carry that deduction forward to year when she is in a higher marginal tax bracket.

2. Raquel opens an FHSA in 2023 and contributes $5,000 but does not deduct it from her income. In 2024, Raquel contributes the maximum of $11,000.2 In 2024, Raquel deducts the whole $16,000 from her taxable income. She carried the deduction forward since she knew she would make more money in 2024, and wanted to reduce her income that was subject to a higher marginal tax rate. This enabled Irene to save more tax. 

3. Silvio opens an FHSA in 2025. In 2025, Silvio can only contribute a maximum of $8,000 as he did not accumulate carry-forward room in 2023 and 2024.

4. Elena opens an FHSA in 2023 and contributes $4,000. She opens a new FHSA at a different institution in 2024. She can contribute up to $12,000 total in 2024.3 It is up to Elena to ensure she does not exceed her annual and lifetime maximum limits.

5. Ross opens an FHSA in 2023 and contributes $5,000. He does nothing else with his FHSA for 15 years, and never buys a home. At the end of 15 years the $5,000 is worth $6,000. Ross must close his FHSA. He can either transfer the $6,000 to an RRSP4, or he can withdraw the $6,000 and add $6,000 to his taxable income that year.

The scenarios above demonstrate some of the flexibility and nuances of this new type of account. While the FHSA has many benefits and advantages, the best way to ensure you leverage the FHSA to help meet YOUR unique home-buying, tax-planning, and retirement-planning goals is to ensure you plan how to best use this within your personal comprehensive financial strategy.

Julie Petrera, MBA, CFP, CIM is a certified financial planner. X (formerly Twitter): @petrerajulie. 

1. $8,000 x 2 = $16,000 (Irene can carry forward a maximum of 8,000 plus contribute for the current year) 

2. $8,000 room - $5,000 used = $3,000 carried forward for 2023 + $8,000 room for 2024 = $11,000 room in 2024

3. 8,000 room for 2023 - $4,000 used. $4,000 remaining for 2023 + $8,000 for 2024 = $12,000

4. Assume Irene is under 71 years old.