Exploring investment and savings options in Canada
First Home Savings Accounts (FHSA)
Rapidly rising home prices and higher interest rates have made it increasingly difficult for Canadians to save for a down payment on their first home. In April of last year the government of Canada officially approved the First Home Savings Account (FHSA) to help alleviate some of these difficulties, and we now have these accounts available to open.
Am I eligible for an FHSA?
| Citizen | Permanent Resident | Non-resident | Student Visa | |
| FHSA (First Home Savings Account) | Yes – anyone 18 years of age of older who is a resident of Canada for tax purposes, has a valid Social Insurance Number (SIN), and has not owned a home that they or their spouse/common-law partner lived in during the current calendar year or any of the previous four calendar years, can open an FHSA. | Yes – anyone 18 years of age of older who is a resident of Canada for tax purposes, has a valid Social Insurance Number (SIN), and has not owned a home that they or their spouse/common-law partner lived in during the current calendar year or any of the previous four calendar years, can open an FHSA. | No, you cannot open an FHSA if you are a non-resident of Canada | Yes – anyone 18 years of age of older who is a resident of Canada for tax purposes, has a valid Social Insurance Number (SIN), and has not owned a home that they or their spouse/common-law partner lived in during the current calendar year or any of the previous four calendar years, can open an FHSA. |
First Home Savings Accounts (FHSAs) are pivotal for saving towards your first home in Canada. Contributions to an FHSA are tax-deductible, and investment growth and withdrawals used to purchase your first home are tax-free, making them highly advantageous for saving towards this specific goal.
Key Considerations for First-Time Home Buyers:
- Combining FHSA with RRSP: You can use funds from both your FHSA and RRSP under the Home Buyers’ Plan (HBP) to maximize your down payment.
- Contribution Room Begins Only After Opening the Account: If you are confident you will buy a home within the next 10 to 12 years, opening an FHSA with a minimal initial contribution makes strategic sense. This approach starts the clock on your contribution room, which only begins to accumulate once the account is opened. The ability to carry forward unused contribution room for one year can be very advantageous in the future, but FHSAs can only remain open for a maximum of 15 years so it’s important to be certain that you will purchase a property within that timeframe.
Common Questions:
- How much can I contribute? The annual FHSA contribution limit is $8,000, with a lifetime limit of $40,000. You can carry forward up to $8,000 of unused contribution room per year. For example, if you contribute $5,000 in one year, you can carry forward the remaining $3,000, allowing you to contribute up to $11,000 the next year. The maximum contribution that can be done in a given year is $16,000, which assumes that the account was open but $0 was contributed in the prior year.
- What are my investment options? FHSAs offer a range of investment choices including stocks, bonds, mutual funds, ETFs, GICs, and more.
- Checking Contribution Limit: Your online CRA account or the most recent notice of assessment from CRA is the best place to verify your FHSA contribution limit. Please note this will not include any contributions or withdrawals made during the current year.
Common Pitfalls to Avoid:
- Over-Contribution: Contributing more than your available FHSA contribution room can result in a penalty tax of 1% per month on the excess amount.
- Withdrawal Restrictions: Withdrawals must be used for the purchase of your first home. Non-qualified withdrawals are subject to taxes and penalties.
- Being Overly Aggressive with a Short Timeline: A disciplined, diversified portfolio with higher equity exposure can maximize long-term growth. However, most people saving for a home within 10 years should adopt a different strategy for their FHSA compared to RRSPs and TFSAs, as you have a shorter timeline and FHSAs will be withdrawn all at once.
First Home Savings Accounts offer a flexible, tax-efficient way to save specifically for the purchase of your first home. Understanding the benefits and rules of FHSAs can help you make the most of this valuable savings tool.
In our final article of the series, we will dive into how to use Registered Education Savings Plans to your advantage. If you are ready to start planning your financial future reach out to us HERE for more information.
