The First Home Savings Account (FHSA), a registered savings vehicle introduced by the Liberal government to help Canadians struggling to enter the housing market save toward a downpayment, is now available at some financial institutions.
Institutions including RBC, National Bank and Questrade are among those who have since launched the offering this month. Others, including TD Bank and Desjardins, have targeted a summer launch for their FHSAs.
So what is the FHSA, and how can you use it alongside other registered savings accounts to reduce your taxable income and save towards your first home?
Here’s what you need to know.
What is the First Home Savings Account?
The FHSA allows individuals to save up to $8,000 per year in a tax-free account, with a maximum contribution room of $40,000. Unused contribution room will roll over to the next year as well, but the amount you can carry over from previous years is capped at $8,000.
Your money is tax-free on the way in and on the way out, which means that any contributions you make will be deducted from your income for tax purposes that year, and anything you take out will also be tax exempt.
This money in this account must be put towards a downpayment for a home. However, if you start saving and decide not to buy a home with the money in the account, it can be transferred tax-free to a Registered Retirement Savings Plan (RRSP) without counting against your contribution limits for that account.
All the money inside your FHSA also can grow and be invested tax-free, offering a sheltered account where you can keep building your savings towards that first home purchase.
If you’re saving as part of a family, you and your partner can also pool the money in your FHSAs towards the purchase of the same home.
Jason Heath, managing director of Objective Financial Partners, tells Global News the FHSA is a “great tool for someone saving for their first home.”
He says the new account could improve accessibility to Canada’s housing market as, despite a housing correction bringing home prices down in many markets over the past year, the bar to buy a home remains out of reach as higher interest rates make it harder to qualify for a mortgage.
“In a lot of parts of Canada, real estate prices have come down significantly along with interest rates going up. So hopefully (improving) affordability, in terms of purchase price and tools to save, will help people who want to get into the market,” Heath says.
There’s a caveat to the whole “first-time” label that should be noted: You qualify to open an FHSA as long as you haven’t lived in a home as your principal residence that you or your spouse or common-law partner owned in the past five years, meaning there are ways for existing or previous homeowners to make use of the FHSA as well.
What separates the FHSA from the TFSA or RRSP?
The FHSA joins a list of existing registered savings accounts that, depending on how you use them, will have different implications for your taxes and what you’re saving towards.
The FHSA is similar to the RRSP in that both mean your contributions are deducted from your taxable income, so when you file your taxes at the end of the year, you’ll be more likely to see a return.
Where the RRSP differs is that it’s not tax-free on the way out, meaning when you make a withdrawal, that amount will be added to your income for the year — potentially driving up what you owe in taxes.
The RRSP also has a feature that lets you save towards real estate called the Home Buyers’ Plan (HBP). In this scenario, you can withdraw up to $35,000 from your RRSP towards the purchase of a home, but you’ll have to repay that amount over the next 15 years, or else that withdrawal could be added to your taxable income.
“This Home Buyers’ Plan nuance is kind of nice for a young person or someone who is just saving for a home. But I think the FHSA just takes it a step further,” Heath says. “It’s an enhancement, frankly, of the existing Home Buyers’ Plan saving regime.”
Like the FHSA, the tax-free savings account (TFSA) also allows Canadians to grow their savings and investments without paying tax on returns made inside the account.
But your savings goals with a TFSA can be a bit more fluid than with an FHSA — you can save towards a downpayment if you like, but you can also keep those investments a bit more flexible if you’re not sure homebuying is in your future.
TFSAs, like RRSPs and FHSAs, are also subject to yearly contribution allowances.
But unlike the FHSA or RRSP, the TFSA does not see your taxable income reduced when you make a contribution.
Zainab Williams, a certified financial planner with Elleverity Wealth Management, tells Global News that the TFSA is often preferred by early-career Canadians who might not make a lot of money yet.
This is because income deductions are more impactful when you’re in a higher tax bracket and are therefore paying higher rates on your money — shifting or avoiding tax payments from this point of your career can typically result in higher savings, she says.
These accounts can be used together, experts say
If you’re wondering whether your funds are best kept in an FHSA, TFSA or RRSP, Williams notes there are ways to use these accounts in tandem to achieve your savings goals.
Money in a TFSA can be put towards any savings goal, as mentioned, while the RRSP and FHSA can specifically be used in tandem to fund a home purchase.
The $35,000 from the HBP can be added to funds from an FHSA towards a downpayment, Williams notes, and these funds can essentially be doubled if there’s a second person contributing to the purchase.
Assuming maximum withdrawals from two RRSPs, and if both buyers contributed the full $40,000 to their individual FHSAs, that could mean a total downpayment of up to $150,000 — and that’s before any gains earned on funds invested within the FHSA over those five years.
“You’re pulling your money together to be able to do this,” Williams says.
For anyone already heavily invested in an RRSP who would prefer to use the new account, there are mechanisms in place to allow you to transfer funds from your RRSP tax-free into an FHSA.
Heath notes that there’s no income tax reduction when you make the FHSA contribution this way, but it does avoid you having to pay taxes on the withdrawal or to pay back money used via the HBP. You also won’t get back any contribution room for your RRSP when you transfer to the FHSA.
While he’s overall supportive of the FHSA as a tool to help Canadians save for their home, Heath does say he’s worried the new account will perpetuate existing attitudes that real estate is the “best way to build wealth in Canada.”
While the FHSA and homeownership could be one part of your financial planning strategy, he says young Canadians ought not to forget the importance of saving for retirement, their kids’ education and other long-term goals.
“I worry that it creates the perception that real estate is the only thing that matters,” he says of the FHSA.
“I just hope it doesn’t cloud people’s judgment too much about their overall financial planning.”
To learn more about how you can break into Canada’s housing market, check out Global News’ Home School series here.