The First Home Savings Account (FHSA): What Newcomers Need to Know

Piggy bank savings

Buying your first home in Canada is an exciting milestone in life.

For some, however, it may be challenging to save up for a down payment. You will be pleased to know that help is at hand through a new registered savings plan called First Home Savings Account (FHSA) introduced by the federal government.

With the First Home Savings Account (FHSA), qualifying individuals^[1] now have a valuable new tool at their disposal as they strive towards their homeownership goals.

In this article, we'll clearly explain what you need to know about the FHSA.

What is an FHSA?
How does it work?
Three reasons to open an FHSA with TD.
How FHSA compares to other savings plans.
How to open an FHSA and understanding the different options available.
Am I eligible?

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1. What is an FHSA?

The First Home Savings Account or FHSA is a new registered plan that can help you save towards the purchase of your first home. It offers unique benefits, including tax advantages, that make it an attractive option for those looking to purchase their first home in Canada.

Launched by the federal government in April 2023, qualifying individuals [1] can now open an FHSA account and begin saving for a first home tax free, up to $8,000 per year with a lifetime amount of 40,000.

2. How does it work?

An FHSA combines some of the features of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). Like an RRSP, contributions made to an FHSA are tax-deductible. And like a TFSA, money from your FHSA, including any investment earnings, can be withdrawn tax-free if it is a qualifying withdrawal.^[2]

FHSAs have an annual contribution limit of $8,000 and a lifetime contribution limit of $40,000. When used properly, FHSAs can be an important part of a first-time homebuyer’s down payment savings strategy.

3. Three reasons to open an FHSA with TD

a. Plan your mortgage:
When coupled with a TD Mortgage Affordability Calculator, an FHSA with TD can make it easier for you to calculate your mortgage affordability and the down payment that will be most comfortable for you based on your financial situation.

b. Personalized advice:
At TD, our aim is to assist newcomers like yourself in achieving financial success. Your TD advisor is there to help define your own personal investing goals and recommend plans, like the FHSA, to help you move towards your dream of home ownership with confidence.

c. Flexible investment options:
Unlike a traditional savings account, a TD Multi-Holding First Home Savings Account allows you to place your contributions in various investment alternatives, including cash, GICs, and mutual funds. These investments will be conveniently housed in one FHSA account, potentially providing you with the option to diversify and earn better returns over time.

4. How the FHSA compares to other savings plans

Understanding how FHSAs compare to other common savings plans is crucial for making the right financial decisions. Here's a brief overview of how the FHSA compares to other plans:

Tax Free Savings Account (TFSA) Vs. FHSA

Unlike the FHSA, a TFSA allows you to invest contributions for various purposes, including home purchases. In a TFSA, however, withdrawals create additional contribution room in the following year. You can also carry forward unused room from the year before to contribute more next year - and there's no lifetime limit.

In contrast, the FHSA has an $8,000 annual limit with a $40,000 lifetime cap. Additionally, any unused FHSA contribution room in the previous year of up to $8,000 can be carry forward to next year.

Registered Retirement Savings Plan (RRSP) Vs. FHSA

RRSPs are primarily for retirement savings, but they can also be used for a home purchase through the Home Buyer's Plan (HBP) subject to eligibility and conditions. They offer flexibility, allowing you to withdraw up to $35,000 in tax-deferred withdrawals, repayable in 15 years. RRSP contributions are tax-deductible, but withdrawals are taxed when they are taken out, typically during retirement. There’s no lifetime limit, and an RRSP deduction limit is based on your unused RRSP deduction room at the end of the preceding year plus 18% of your earned income in the previous year ^[3].

One significant tax advantage of an FHSA is that the interest earned on the savings is not subject to taxation, making it a tax-free growth option provided the withdrawal is used for a qualifying home.

5. How to open an FHSA and understanding different types.

To open an FHSA, contact your bank for an appointment. You will need to gather all required documentation as advised by the advisor at the bank. Once open, you can start making contributions towards your first home purchase. ^[4]

6. Am I eligible?

To be eligible for an FHSA, you must meet certain criteria outlined by the Canada Revenue Agency (CRA). To be eligible, you must be a Canadian resident aged 18 to 71 and a first-time home buyer. This means that you don’t already live in a home you purchased and have not lived in a home that you owned in the last four years.

The home you plan to buy should be your primary residence and not intended for rental purposes.

The First Home Savings Account is an excellent option for newcomers entering the world of homeownership. It provides a tax-advantaged way to save specifically for your first home, with the flexibility to invest your contributions. When you're ready, opening an FHSA can be a straightforward process that sets you on the path to achieving your dream of homeownership in Canada.

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TD has a proud history of delivering financial solutions to Canadians for more than 150 years. TD also brings a century of experience helping newcomers navigate the unique challenges of the Canadian banking system.

With over a thousand branches, a reputation for excellence in financial services, and the ability to also serve you in more than 60 different languages, TD has become one of the largest and most trusted banks in Canada, now serving 16 million Canadians.

TD offers online support and resources of interest to newcomers on topics such as banking, basics, moving to Canada, credit score essentials, and more. TD is open longer hours for your convenience and has thousands of ATMs across Canada to help you take care of your everyday banking needs quickly and easily.

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[1]A qualifying individual is an individual who has attained at least 18 years of age, is a Canadian resident, and did not, at any time prior in the calendar year or in the preceding four calendar years, inhabit as a principal place of residence a qualifying home, as such term is defined in subsection 146.6(1) of the Income Tax Act (or what would be a qualifying home if it were located in Canada) that was owned, whether jointly with another person or otherwise, by the individual or by a person who was at the relevant time, the individual's Spouse.

[2]For a qualifying FHSA withdrawal, you must be a first-time home buyer; you must have a written agreement to buy or build a qualifying home with the acquisition or construction completion date of the qualifying home before October 1 of the year following the date of the withdrawal; you must not have acquired the qualifying home more than 30 days before making the withdrawal; you must be a resident of Canada from the time that you make your first qualifying withdrawal from one of your FHSAs until the earlier of the acquisition of the qualifying home, or the date of your death; you must occupy or intend to occupy the qualifying home as your principal place of residence within one year after buying or building it.

[3] https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/contributing-a-rrsp-prpp/contributions-affect-your-rrsp-prpp-deduction-limit.html#whtddctnlmt

^[4] https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account/opening-closing-and-fhsa.html