If you're dreaming of buying your first home and wondering what savings options are out there to help you make this dream a reality, you may want to consider a First Home Savings Account (FHSA).
Since its launch in 2023, nearly half a million Canadians have reported opening and making contributions to an FHSA, according to a recent Statistics Canada report. Incorporating elements of Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), FHSAs are designed to help Canadians save money, tax-free, towards the purchase of their first home.
To help you get started, and help you decide if an FHSA could be a good option for you, we’ve compiled some answers to a few of the most common questions about FHSAs.
What is an FHSA?
"The First Home Savings Account is a registered savings account designed to help Canadians save towards their first home,” said Rox Metcalfe, Product Manager, Registered Plans at TD. “The FHSA functions with some features of an RRSP, and some features of a TFSA."
Just like both RRSPs and TFSAs, you can hold many types of investments within an FHSA, including cash, mutual funds, and Guaranteed Investment Certificates (GICs).
Similar to RRSPs, FHSA contributions are generally tax-deductible, potentially reducing the amount of tax you pay when it's time to file your income taxes. Like a TFSA, when a qualifying withdrawal is made from an FHSA to purchase a qualifying home, the withdrawn sum, including any income or gain, is not taxable[1].
Who can open an FHSA?
To be eligible to open a FHSA, you need to be a Canadian resident, between the ages of 18-71, and a first-time home buyer[2].
In the context of opening an FHSA, an individual is considered to be a first-time homebuyer if at any time in the part of the calendar year before the account is opened, or at any time in the preceding four years, they or their spouse or common-law partner did not live in and own or jointly own a qualifying home. This last point is important as you may actually qualify as a first-time homebuyer if you have not owned a home in the last four years – don't count yourself out until you read the requirements in detail.
What is the FHSA contribution limit?
FHSAs currently have an annual contribution limit of $8,000, with a total lifetime contribution limit of up to $40,000. It's important to remember that you can only carry forward a maximum of $8,000 in unused contribution room to the following year for a maximum yearly contribution of $16,000.
For example, if you contributed $5,000 to your FHSA the year that you opened it (year one), the maximum you could contribute in year two would be $11,000: the $8,000 yearly contribution limit, plus the remaining $3,000 from year one.
"It's important to be mindful of your contribution limit,” said Metcalfe. “If you overcontribute, you will be taxed at 1% per month on the highest excess amount in that month, until the excess FHSA amount is eliminated.”
How long can my FHSA stay open?
It's important to note that an FHSA can only stay open for a maximum of 15 years (with a few conditions) and will need to close by Dec 31 in the year the account reaches its 15th anniversary.
"If you have more than one FHSA, all of the plans can stay open a maximum of 15 years from the date of which the first FHSA was opened. Remember, if you don't use your FHSA for a qualifying withdrawal, you will need to close it by the end of year it turns 15,” Metcalfe said.
“Sometimes the account needs to be closed before the 15th anniversary: the account needs to be closed by the end of the year you turn 71, or by the end of the year following the year in which you make a qualifying withdrawal from the account for your first home purchase, whichever comes first."
How do I open an FHSA?
First, you'll need to choose an FHSA issuer like an insurance company, bank, or credit union. You must provide your Social Insurance Number, date of birth, and all supporting documents required to prove that you are a qualifying individual. When choosing an issuer they will advise you on the type of qualified investment options that they offer for the account, as well as the types of FHSAs they offer (learn more about the types of FHSA here).
At TD, you can book an appointment with a Personal Banker who will discuss your financial goals with you and help you open your FHSA. They'll also help you decide on which investment options you can use to hold your FHSA contributions.
There are many investment options you could use to hold your FHSA contributions such as GICs, mutual funds, bonds, and cash. Each option has its unique benefits and your FHSA issuer can help you find the right investment for you.
"After you decide on the type of FHSA that is best for you and opened your new account, don’t forget to assign beneficiaries to your FHSA," Metcalfe said.
Assigning a beneficiary or successor holder could help simplify the handling of your estate. Talk to your tax professional to learn more.
When is the best time to open an FHSA?
Knowing the right time to open an FHSA is really dependent on your unique financial circumstances and goals. Once your FHSA has been opened you’ll have 15 years to use the money you’ve saved for a qualifying purchase. Thinking about how much you want to save towards your first home and when you want to make that purchase is a great place to start.
Consider this example: If you know if you are going to buy a home in the next year, you could still benefit from opening an FHSA account before year end. That way you can take advantage of this year and next year's $8,000 contribution room. By not waiting until next year to open your FHSA, you would be effectively doubling your total contribution room to $16,000 along with the potential tax deduction benefits.
It all starts with a TD Goal Builder conversation:
To get started, you can arrange to have a conversation with a TD Personal Banker. They can use a tool called TD Goal Builder, which helps to define your financial goals, including saving for your first home. Using TD Goal Builder, a TD Personal Banker can help you map out a path towards reaching those goals. Find a TD Personal Banker near you.
[1] Subject to any restrictions on the investments chosen and eligibility / conditions.
[2] In certain provinces and territories, the legal age at which an individual can enter into a contract including opening a FHSA is 19. You must be at the age of majority in your province of residence and provide a valid Social Insurance Number (SIN).
This article is for informational purposes only, and its information should not be construed as legal, tax, investment, financial, or other professional advice. The information provided is general and does not address the circumstances of any particular individual or entity for which you must obtain your own legal, tax or other professional advice.