FHSA: Canada’s Tax-Free First Home Savings Account
Last week the Canadian government announced their promise of a Tax Free First Home Savings Account (FHSA) was going to become a reality in 2023.
The idea is to make it easier for Canadians to buy their first home. While I’m on the record on saying young Canadians shouldn’t be in a hurry to buy a house in Canada, there is no doubt that if you want to get into a house sooner rather than later, the First Home Savers Account is a far superior option to the old RRSP Homebuyer’s Plan + TFSA combination.
What is the First Home Saver Account or FHSA?
The Tax Free First Home Savings Account is a super tax-friendly way to save a downpayment for your first house in Canada. It’s like the TFSA and RRSP got together and house-obsessed child.
And what could be more Canadian than that?
The personal finance community has yet to decide whether we’re going to go with the longer, more accurate title of TFFHSA, or the more succinct FHSA. Since, “What is the FHSA?” rolls off the tongue a bit easier, we’re guessing that’s going to be the final draft.
Here’s the gist of what the new First Home Saver Account offers Canadians:
- Ability to shelter up to $40,000 (lifetime max) from the tax man.
- You can combine your limit with a partner’s limit to save up to $80,000 when buying a home in Canada for the first time.
- Best of both worlds: You get the RRSP tax refund, plus the TFSA “no taxes on the way out” combination!
- Your money can be invested within the account – earning money for you as you add to it and progress on the house-buying journey.
- You can’t use the old RRSP Home Buyer’s Plan and the new FHSA at the same time – and there is really no reason to use the HBP at all any more.
- The First Home Savers Account won’t come into being until 2023.
- You get 15 years from when you first open your FHSA to when you have to use it – or else it gets rolled into your RRSP.
Best Investments for the FSHA
It appears that owning pretty much the full range of investments will be available to Canadians within their First Home Savers Account. Here’s the decision-making route that I would go:
1) If I need this money in the next one-to-three years, I’m looking at a place like EQ Bank’s FHSA (assuming they will have one in 2023) and invest in GICs or a high-interest savings account.
2) If I want to keep things simple and stick to my preferred online broker account, you could look at one of Canada’s best ETFs, and compare to a short-term bond ETF like XSB (less bond rate risk with a short-term bond ETF).
3) If you have a 5+ year timeline on buying a house, there is an argument to be made for having exposure to blue chip equities. Looking at our best dividend stocks in Canada list is a great place to start if you want super safe stocks with dependable dividend yields. That said, “safe stocks” are really only safe over the longer term, because in the short term their value can still fluctuate substantially.
Our FHSA Now – TFSA Later Top Up Plan ©
After checking with several Canadian personal finance experts, it looks probable that the best way to save quickly for the First Home Savers Account (assuming you can’t save $8,000 per year starting in 2023) is to creatively use your TFSA. Using these steps should maximize your ability to both save and get into a home as quickly as possible.
1) You get $8,000 per year in contribution room for your FHSA.
2) If you can’t save the full $8,000 per year – and you have cash/investments in your TFSA, save what you can, and then take the rest out of your TFSA.
3) Do this in consecutive years until you are ready to purchase your first home.
4) Bank the contribution room in your TFSA to be used another day. Remember, you will only get this contribution room back at the end of the calendar year, so don’t try to put money back in before that point.
Eligibility Rules for the First Home Savers Account
To pass the eligibility rules for the FHSA, you need to be:
- A resident of Canada
- At least 18-years of age
- You cannot have owned a home in the four years preceding when you use the FHSA
- You can only use the FHSA once
- There may be more FHSA eligibility rules to come before 2023
How Much Can I Contribute to the FHSA?
The contribution rules for the First Home Savings Account are as follows:
- A total lifetime limit of $40,000
- $8,000 maximum per year
- You can combine contributions with a partner to purchase your first home together
- You most use your FHSA within 15 years of opening it, or the money will be transferred to your RRSP
Tax Free Home Savings Account FAQ
Final Verdict – Is the FHSA the Best Way to Buy a House in Canada?
The Tax Free First Home Savings account is the best way to buy your first home in Canada as of 2023. It’s better than the old RRSP homebuyer’s plan because it has $5,000 more room, and it is more simple to use as the money you withdraw won’t have to be paid back.
It allows you build a $40,000 downpayment nest egg as quickly as possible, as you won’t ever owe taxes on that money – which is pretty cool.
The downside here is that the FHSA will not make buying a house more affordable. If anything, I’d argue this will just increase the incentives to purchase a home in Canada.
That said, perhaps the foreign buyer ban (I’m dubious as to how much this will matter) and the interest rate rise (this one could matter a lot more) will finally bring Canada’s housing market back to Earth.
The First Home Savers Account (FHSA) will also only help the people that can already afford to save $8,000 per year in Canada – so look for that fact to get criticized in the months to come.
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This is a much needed program for young Canadians. So many are priced out of the housing market right now. For those who can compound and be patient, maybe a correction will happen in major markets allowing for a combined increased savings for a down payment and a better overall price.
Sounds almost too good to be true…
Initial deduction + no tax at withdrawal!
Could I start investing $8k/year for five years (starting next year), perhaps in a FHSA that let me hold XEQT… let that $40k in deposits grow over the following 10 years… then when the FHSA account was 15 years old roll the entire balance into my RRSP? And by keeping those funds separate from my RRSP for those 15 years I retain the ability to buy a home (even if I don’t want one now), and the funds are easier to withdraw?
It’s effectively $40k more in RRSP room, without requiring the extra employment income to earn it?
This thought had occured to me as well Mike. I’m waiting for the final draft of the FHSA rules before I confirm this.