What education members need to know about the new First Home Savings Account

Thinking about buying your first home? Good news.

The Tax-Free First Home Savings Account (FHSA), introduced by the federal government in their 2022 budget, is now available at Educators Financial Group… and is a real plus in a real estate market that remains challenged by high prices and higher interest rates.

So, how exactly does this new account work and how can education members leverage it to save for their first home? Here’s what you need to know.

What is the FHSA in a nutshell?

• A new registered account designed to help qualifying first-time home buyers save for their home
• Contribute up to $8,000 per year, up to a lifetime maximum of $40,000
• Combines the tax benefits of a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP), where your contributions are tax-deductible and any qualifying withdrawals from the account are tax-free

Who can open an FHSA?

To open an FHSA, you must be a Canadian resident between the ages of 18 and 71 years old and a “first-time homebuyer” – meaning you or your spouse or common-law partner did not own a qualifying home that you lived in as your principal residence in the year the account is opened or in any of the four preceding calendar years.

What is the FHSA contribution limit?

You can contribute up to $8,000 per year, up to a maximum of $40,000 during the lifetime of the account, which is 15 years from the date it was opened, or by December 31 of the year you turn 71 (whichever comes first).

Any unused contribution room can also be carried forward to the following year, up to a maximum of $8,000 per year on top of the contribution limit of $8,000. In other words, you can’t contribute more than $16,000 in any one year.

Educators Certified Financial Planner professional Kody Fanara explains, “Let’s assume Isabel opens an FHSA in 2023 and contributes a total of $3,000. In 2024, Isabel will be allowed to contribute up to $13,000 to her FHSA ($8,000 plus the $5,000 from the previous year) without incurring any penalties.”

Tip: Your contribution room starts the year you open your FHSA, so consider opening one even if you’re only thinking about a future home and have limited cashflow.

Like TFSAs or RRSPs, over-contributions will be taxed 1% for each month excess amounts stay in your FHSA.

How does an FHSA help you save?

Contributions to an FHSA are tax-deductible, like an RRSP. That means that if you contribute $8,000 to an FHSA, you can deduct $8,000 from your taxable earnings in the year you contribute or be carried forward to a later year. Plus, any withdrawals from a FHSA are not taxed, like a TFSA, as long as the money is used towards the cost of your first home. Though, unlike RRSPs, contributions made in the first 60 days of a subsequent year can’t be deducted in the current tax year.

Tip: If you’re just starting out and lower on the pay grid, you may want to consider deferring the tax deduction to a later year when your income (and tax rate) is higher.

Another benefit is that, although spousal contributions (with their deduction claims) are not allowed, you can lend a spouse or partner money for an FHSA without paying taxes on any income earned in the account.

What investments can be held in an FHSA?

Essentially, any investment that can be held in an RRSP or a TFSA can be held in your FHSA, including mutual funds, publicly traded securities, bonds, and GICs.

How do withdrawals work?

When you’re ready to buy your first home, you can make a qualifying, tax-free withdrawal from your FHSA if the following conditions are met:

• You must be a first-time homebuyer at the time you make the withdrawal, as discussed above
• You must have a written agreement to buy or build a qualifying home in Canada before October 1 of the year following the year of withdrawal
• You intend to live in the qualifying home as your principal residence within one year after purchasing or building it

Once these conditions are met, the funds can be withdrawn tax-free in a single withdrawal or a series of withdrawals. The FHSA must be closed by the end of the year following the first qualifying withdrawal and you are not permitted to have another FHSA in your lifetime.

What happens to your FHSA if you don’t buy a home?

“The good news is that amounts saved in an FHSA can be transferred to a Registered Retirement Savings Plan or Registered Retirement Income Fund (RRIF) if you decide not to buy a home,” says Kody. “This is the equivalent of gaining an extra $8,000 a year up to $40,000 in RRSP contribution room.”

Tip: As an education member, it can be challenging to save for retirement, because your pension contributions limit how much you can contribute to your RRSP. If you’re not sure if you will ever buy a home, you may still want to consider contributing to an FHSA anyway since funds can eventually be transferred tax-free to your RRSP or RRIF, thus extending your RRSP contribution room.

Once transferred, the funds are subject to RRSP and RRIF rules, including that the funds will be taxable when you withdraw them from the account.

At a glance: an FHSA compared to a RRSP Homebuyers’ Plan or TFSA

The FHSA can be used in combination with an RRSP Homebuyers’ Plan and your TFSA. Here’s how they compare:

Interested in opening an FHSA? Fill out the form below to schedule a meeting with one of our financial advisors.