John Natale, LL.B., BComm, EPC, CFP
Head of Tax, Retirement & Estate Planning Services.
John is the Head of the Tax, Retirement & Estate Planning Services, Wealth team at Manulife.
He and his team provide case-level support on tax, retirement, and estate planning matters to advisors across the country.
A new option to help Canadian residents buy their first home.
More than half of Canadian households contribute to either a tax-free savings account (TFSA) or registered retirement savings plan (RRSP). With the introduction of the tax-free First Home Savings Account (FHSA), potential first-time homebuyers have another option. The good news is this option has features that are similar to both TFSAs and RRSPs, which should help make it feel familiar. There are also some features unique to the FHSA that are meant to encourage savings and an ultimate withdrawal for a future home purchase. The following is an overview of the FHSA.
To open an FHSA account, an individual must be a resident of Canada, at least 18 years of age, and a first-time home buyer. To be considered a first-time home buyer, you or your spouse1 cannot have owned or occupied a home as a principal residence in the current calendar year or the four previous calendar years.
Individuals can hold more than one FHSA, but the total amount they can contribute to all their FHSAs cannot exceed their annual and lifetime contribution limits. Like TFSAs, a 1 per cent tax on overcontributions applies on the highest amount for each month (or part month) an individual exceeds the limits. An FHSA must be closed at the earliest of:
- the year after a withdrawal to purchase a home;
- 15 years after it was opened; or,
- December 31 of the year the account holder turns 71.
This is known as the maximum participation period.
FHSAs can hold the same qualified investments currently allowed for TFSAs. This includes mutual funds, segregated fund contracts, publicly traded securities, government and corporate bonds, and guaranteed investment certificates. The prohibited investment and non-qualified investment rules that apply to other registered plans are applicable to FHSAs.
Contributions to an FHSA
The lifetime contribution limit for an FHSA is $40,000. The annual contribution limit is $8,000 beginning in 2023 (the first year the plan is available). Individuals can claim an income tax deduction for contributions made in a particular calendar year. This is different from RRSPs where contributions made during the first 60 days of a calendar year can be attributed to the previous tax year. Also, like RRSPs, contributions made to an FHSA can be carried forward and deducted in future years.
An individual may carry forward the unused portions of the annual contribution limit up to a maximum of $8,000, subject to the lifetime contribution limit. This allows an individual contributing less than $8,000 in a given year to contribute the unused amount in a subsequent year, in addition to their annual contribution limit. For example, if you contribute $6,000 to an FHSA in 2023, you could contribute $10,000 in 2024 ($8,000 plus the $2,000 remaining from 2023). Note that contribution limits and carry forward amounts would not start accumulating until an individual opens an FHSA for the first time.
Unlike RRSPs, there are no spousal First Home Savings Accounts. However, an individual can give funds to their spouse who can contribute to their own FHSA. In these cases, the attribution rules will not apply on any income earned in the FHSA from those contributions. Further, the attribution rules will not apply if cash is given to an adult child to contribute to their FHSA. Only the FHSA account holder can claim the deduction for the contribution on their tax return.
Withdrawals from an FHSA
There are two types of withdrawals you can make from a FHSA: qualifying and taxable.
As a first-time home buyer and resident of Canada, you must have a written agreement to buy or build a home you intend to occupy as your principal residence before October 1 of the year following the year of the withdrawal. The withdrawal cannot be later than 30 days after acquiring a home. These withdrawals are tax free.
If a withdrawal is not a qualifying withdrawal, it’s generally fully taxable income in the year it’s made. This excludes certain withdrawals such as removing an over-contribution.
Transfers to and from an FHSA
Individuals can transfer funds from an FHSA to another FHSA, or to an RRSP or registered retirement income fund (RRIF) on a tax-free basis. Funds transferred to an RRSP or RRIF would be taxable on the eventual withdrawal from these accounts. However, the transfer would not reduce an individual’s available RRSP contribution room or reinstate their FHSA lifetime contribution limit.
Individuals can also transfer funds from an RRSP to an FHSA tax free, subject to the FHSA annual and lifetime contribution limits. Funds transferred to an FHSA would not be deductible and would not reinstate an individual’s RRSP contribution room. However, the eventual qualifying withdrawal from the FHSA would be tax free, effectively making it a tax-free RRSP withdrawal.
Although not a direct transfer, an individual can also contribute funds from a TFSA to an FHSA. This would be a tax-free TFSA withdrawal and subsequent tax-deductible FHSA contribution. As the TFSA contribution room from the withdrawal is reinstated the next year, this may be preferrable to using RRSP funds where the contribution room is never reinstated.
Taxation on death
Like TFSAs, an FHSA could maintain its tax-exempt status at death by designating a spouse as the successor account holder. The surviving spouse will become the new holder immediately on the original holder’s death if they meet the FHSA eligibility criteria. Inheriting the FHSA does not impact the surviving spouse’s contribution limits and would be subject to the spouse’s maximum participation period.
If the spouse is designated as beneficiary, or the FHSA is paid to the estate and the spouse is an estate beneficiary, the funds can be transferred to a FHSA, RRSP or RRIF, or the spouse can make a fully taxable withdrawal. When the FHSA is paid to the estate and the spouse is an estate beneficiary, a joint designation must be made by the estate’s legal representative and the surviving spouse, in order to make one of the three transfers or have the FHSA taxed as their income.
If the beneficiary of an FHSA is not the deceased account holder’s spouse, the funds would be withdrawn and paid to the beneficiary. However, unlike RRSPs or RRIFs, where the value of the plan is generally taxable on the deceased’s final return, the payment will instead be taxable to the beneficiary and subject to withholding tax.
FHSA vs HBP
The Home Buyer’s Plan (HBP) allows an individual to withdraw up to $35,000 from their RRSP towards the purchase of a home. The individual must be a first-time home buyer, meaning they or their spouse did not own and occupy a home as a principal residence 30 days before the HBP withdrawal and any of the prior four calendar years. Contributions can be made up to the individual’s RRSP limit.
Both plans can be used together to purchase a home. The biggest difference is that an FHSA requires multiple years of contributions to reach the $40,000 lifetime limit. This is offset by the fact that the withdrawals are tax free and not repayable. The HBP can be fully funded at least 90 days before an eligible withdrawal if the individual has the available RRSP room. Otherwise, the contribution to the RRSP is not tax deductible. However, the trade-off is that HBP withdrawals must be repaid over 15 years, starting two years after the year of the withdrawal.
Food for thought: what is the best option to save for a home?
With three registered plans and non-registered savings as options to choose from, first-time home buyers may be wondering, “Which account should I use”? Here are some thoughts on where to start:
- If your cash flow permits, contribute to both an FHSA and an RRSP. If not, and you have RRSP assets, consider transferring to an FHSA. While these transfers are not tax deductible and count as FHSA contributions, your total future withdrawals could be higher than withdrawing from just one account. For example, if your RRSP balance is $50,000, you could open an FHSA and transfer $8,000. If you bought a home, you could withdraw $43,000 ($35,000 from your RRSP and $8,000 from your FHSA) instead of only $35,000 from your RRSP under the HBP.
- If you have a shorter time horizon (less than five years) consider using both the FHSA and RRSP. Contribute to the FHSA in each calendar year, including when you plan to buy a home, and delay your RRSP contribution until at least 90 days before you intend to withdraw your funds. This can allow you to maximize your tax-deductible contributions and your withdrawal for a home purchase while minimizing any repayment required under the HBP.
- If you have a longer time horizon (five or more years) before an expected home purchase, consider the FHSA. Be sure to contribute the maximum $8,000 annually and hit the lifetime maximum contribution limit of $40,000. The contributions are tax deductible- and the longer time horizon allows your contributions to benefit from compounded growth, withdrawals for a home purchase are tax free, and no repayment is required.
- The tax savings from an FHSA or RRSP contribution can be used to contribute to the other plan or even to a TFSA. This can help increase your contributions without impacting your cash flow.
- If you think you may need to use your savings for something other than a first-time home purchase, consider the TFSA. Your TFSA contribution limit begins to accrue as soon as you are 18 years old and carries forward. If you use a TFSA to fund future FHSA or RRSP contributions, those contributions will be tax deductible and the withdrawals will be added to your TFSA contribution limit the following year.
Compare features of registered savings plans
Is there an annual contribution limit?
$8,000 annual limit and a $40,000 lifetime limit
Yes, based on previous year’s earned income
Yes, an annual limit but no earning requirements
Can I carry forward unused contribution room?
Yes, up to a maximum of $8,000
Is there a monthly penalty on excess contributions?
Yes, calculated on the highest excess during the month
Yes, calculated at month end
Yes, calculated on the highest excess during the month
Are my contributions tax deductible?
Is my investment growth tax deferred or tax free?
Tax free if a qualifying withdrawal is made, tax deferred if transferred to an RRSP or RRIF
Are taxes payable on withdrawals?
Withdrawals are fully taxable except for qualifying withdrawals
Withdrawals are fully taxable
Withdrawals are tax free except for growth after death if no successor holder
Are withdrawals added to my contribution room?
Yes, but not until the following year
Can withdrawals have an impact on income-tested benefits/credits?
Yes, for the taxable withdrawals
No, for qualifying withdrawals
What is the minimum age to contribute?
What is the maximum age to contribute?
The earliest of the end of the year after a qualifying withdrawal is made,2 the 15th year since opening, or the end of your 71st year
At the end of the 71st year, or 71st year of spouse in case of spousal plan
If I borrow to invest in this account, can I deduct the interest?
Can I use assets in this account as collateral for a loan?
1 Includes a spouse or common-law partner as defined by the Income Tax Act (Canada)
2 Contributions made after a qualifying withdrawal are not deductible.