The Tax Free First Home Savings Account (TFFHSA) Explained

There is a new tax advantaged account in Canada, the First Home Savings Account! Along with the TFSA and RRSP, the new First Home Savings Account (FHSA) is another great way to reach your financial goals in a very tax efficient way. The account provides a significant advantage to those planning to purchase their first home and creates a new option for parents who are thinking about helping their children with a future home purchase.

The new First Home Savings Account (FHSA) does add a little bit of complexity to an already complex landscape of tax planning options, however like the TFSA and RRSP, if used properly it can help accelerate progress towards financial goals like purchasing a home and planning for retirement.

When saving and investing for future goals you can now choose between TFSA, RRSP, and the new FHSA, and for families with small children, there is the RESP too.

The new First Home Savings Account is very new, so in this post we’re going to explore how this account works, the eligibility criteria, the contribution and withdrawal rules, some things to possibly watch out for, and some strategic options when using it within your financial plan.

What Is The First Home Savings Account (FHSA)?

The First Home Savings Account (FHSA) was first introduced as part of the 2021 Federal election platform and then confirmed in the 2022 Federal budget. The account is meant to help first-time home buyers purchase their first home and has eligibility criteria to help ensure this is the case. It is available for use as of April 1st, 2023.

The FHSA is the first new tax advantaged account that has been introduced since the TFSA in 2009.

At a high level, FHSA provides a tax deduction on contributions, like an RRSP, but provides tax-free withdrawals when purchasing a first home, like a TFSA. It provides a very strategic financial planning opportunity for first-time home buyers, but only if they plan ahead.

The account is truly intended for a first home purchase and has similar eligibility criteria as the old RRSP Home Buyer Plan. The account also has time limits, annual contribution limits, and lifetime contribution limits, so it’s important to plan ahead to take full advantage of this new account.

Eligibility Criteria For The First Home Savings Account

The eligibility criteria for the First Home Savings Account (FHSA) is similar to the existing RRSP Home Buyer Program (HBP)…

The FHSA Eligibility Criteria Are…

• Must be a citizen or resident of Canada
• Must be over the age of 18
• Must not have lived in a home they owned in the year the account is opened
• Must not have lived in a home they owned during the preceding four calendar years
• Must not have used the FHSA in the past
• Must close the account within 15-years

Based on the criteria there are a few interesting things to point out.

One, meeting the eligibility criteria is required when opening an account.

Two, owning a rental property that is not a principal residence seems to be ok, as long as it’s not lived in.

Three, the FHSA is only intended to be used once, you cannot use the FHSA, sell your home, wait four years, and then repeat.

Four, it’s likely NOT a good idea to open a TFFHSA at age 18 or even in your early 20’s. The 15-year rule means that if an account was opened at age 18 then it would have to be used for a first home purchase by age 33. This puts a lot of pressure to purchase a home in a certain time frame. What makes more sense is to use a TFSA first. A TFSA provides the same tax-free growth, but a TFSA is much more flexible. Unless the TFSA is full, it makes more sense to start with a TFSA and wait to use the FHSA until income is higher (and the tax deduction is more valuable) and also when the first home purchase timeline is a bit more certain. Starting the FHSA at age 25 would allow the account to be maximized by age 30 and the deadline for purchasing a first home extended to age 40.

Five, although the initial proposal for the FHSA had an age limit of 40, that has been removed. The account can now be used at any age, as long as all the other criteria are met. This makes it an interesting account for those approaching retirement who have never owned a home.

First Home Savings Account Contribution And Withdrawal Rules

Like any tax advantaged account there are certain contribution and withdrawal rules that must be followed. Unlike the RRSP and TFSA, one unique aspect of the FHSA is that contribution room carries forward but catch-up contributions are capped at the maximum annual contribution limit of $8,000, so the maximum contribution, including catch-up, is $16,000 in one year.

The FHSA Contribution And Withdrawal Rules Are…

• Lifetime contribution limit of $40,000
• Annual contribution limit of $8,000 (Starting in 2023)
• Annual contribution limit does NOT carry forward
• Contributions are a tax deduction and will lower taxable income
• Withdrawals for a first-time home purchase are tax free
• Account must be closed within 15-years of opening
• Transfers can be made from an RRSP to a FHSA but are subject to the annual contribution limit of $8,000
• Transfers can be made from the FHSA to an RRSP if not purchasing a home and will not affect RRSP contribution room
• FHSA can be combined with the RRSP HBP of $35,000, providing as much as $75,000 for a first home purchase
• Withdrawals from the FHSA that are not used for a first-time home purchase are considered taxable income, just like RRSP withdrawals

Because the annual contribution limit is $8,000, and because carried forward contribution room can only be used $8,000 per year, the FHSA does require some pre-planning. It won’t be possible to fully use the account right before a first-time home purchase. Instead, a first-time home buyer will need to think at least 5-years ahead to take full advantage of the $40,000 lifetime contribution limit. This is different than the RRSP HBP which could be fully used in one year if a $35,000 contribution was made at least 90+ days before the withdrawal.

Although the FHSA allows transfers to be made from the RRSP to the FHSA, this option is not very attractive in my opinion, and is likely only advantageous in certain circumstances. When money is transferred from an RRSP to a FHSA there is no adjustment to the available RRSP contribution room. For example, if $5,000 is transferred from an RRSP to a FHSA this reduces FHSA contribution room by $5,000 but RRSP contribution room doesn’t go up by $5,000. The original $5,000 contribution to the RRSP used $5,000 in RRSP contribution room and then the transfer used another $5,000 in FHSA contribution room. The original $5,000 contributed destroyed $10,000 in contribution room, not great. This option should be avoided unless in specific circumstances like the one low-income situation outlined below.

Tax Planning Opportunities With The First Home Savings Account (FHSA)

There are a few scenarios in which the FHSA will become extremely valuable…

Situation 1: Traditional First Time Home Buyers

The most obvious scenario is the typical first-time home buyer. They could open the account at age 25, make five annual contributions of $8,000, then withdraw $40,000 + growth at age 30+ for a first-time home purchase. The tax deduction on the $8,000 contribution per year would provide a tax advantage of between $1,600 and $4,280 per year depending on their marginal tax rate (in Ontario as an example). Over 5-years that is a tax savings of $8,000 to $21,400. For example, if they’re in the 30% tax bracket then an annual $8,000 contribution provides a tax reduction of $2,400 per year or $12,000 over 5-years. This is then doubled for couples who each have a lifetime contribution limit of $40,000. The FHSA can then be fully withdrawn tax free when purchasing a first home.

Situation 2: First Time Home Buyers With Help From Parents

The second scenario may involve a gift from parents to help purchase a home. Approximately one in four first-time home buyers have help to purchase their first home. With some advanced planning this gift could be used to maximize the FHSA. There are likely income attribution rules for the FHSA, so like other tax-advantaged accounts, to keep things on-side with the CRA a parent should never contribute directly to an adult child’s FHSA. Instead, parent should gift $8,000 per year to the child which the child can then use for day-to-day living expenses. This frees up $8,000 from the child’s income to maximize the FHSA. It may seem like semantics, but this keeps the gift separate from the FHSA contribution.

Situation 3: Buying A First Home Later In Life

Because there is no age limit on the FHSA, the account can be used later in life to purchase a first home. This allows home buyers to maximize the tax advantage of the FHSA as long as they foresee a home purchase in the next 15-years. Using the FHSA later in life also could potentially increase the tax benefit of the tax deduction if taxable income is higher at that point.

Situation 4: Buying A First Home On A Low Income

The last situation where the FHSA could be extremely valuable is for a lower income household purchasing a first home, and specifically when there are already funds inside an RRSP. RRSPs are terrible for lower income retirement plans, the TFSA is much better, but sometimes RRSP contributions have already been made and the RRSP needs to be unwound before age 65 when GIS clawbacks begin. The FHSA creates an opportunity to unwind the RRSP tax free! The RRSP can be transferred to the FHSA at $8,000 per year and up to the $40,000 lifetime contribution limit. Then when a first home is purchased the entire FHSA can be withdrawn tax free. This reduces the tax burden of unwinding the RRSP and helps avoid 50-75% GIS clawbacks in the future.

Situation 5: Lifetime Renters With A High Income

Even if there is never an intention to purchase a home in the future, the FHSA can still be used strategically to create more tax-free growth. The account has a $40,000 lifetime contribution limit and grows tax free. After 15-years the account can then be rolled into the RRSP without affecting RRSP contribution room. This effectively gives every person an additional $40,000 in RRSP contribution room. For high income earners, who intend to be lifelong renters (perhaps those with goals to FIRE and travel the world?) then the strategic use of the FHSA adds $40,000 in contribution room and income deductions. This is especially great for high income earners who get more value from income deductions than lower income earners.

The First Home Savings Account (FHSA)

The First Home Savings Account is a fantastic addition and provides a number of strategic opportunities to save for a future home purchase (or just do some advanced tax planning). The annual contribution limit requires some foresight and pre-planning however, as it will take at least 5-years to maximize the lifetime contribution limit.

The tax deduction on contributions and the tax-free withdrawal for a first-time home purchase makes the account extremely valuable. And unlike the RRSP Home Buyers Plan (HBP), there is no need to repay the withdrawal.

The account could provide between $12,000 and $20,000+ in tax savings per person (in Ontario as an example). For a couple that could add between $24,000 and $40,000+ to a down payment goal.

The new First Home Savings Account (FHSA) does add a bit of complexity to the tax planning opportunities available, but it can provide a significant boost towards financial goals, if used properly.