- Reader Case: Future Empty Nesters - September 25, 2023
- Full Circle - September 11, 2023
- Yield To Maturity Might Be Indicating a Bottom in the Bond Market - August 21, 2023
In 2022, Canada’s federal government introduced a new tax-free savings vehicle known as the Tax-Free First Home Savings Account, or FHSA, and as of this month, it’s actually here! Well, technically April 1st is when the law creating the FHSA comes into effect. Most of the big banks aren’t ready to start opening accounts yet, but at least one that I’m aware of has their act together (which we’ll reveal at the end), so it’s now possibly to actually start using this thing as of today.
But what is it? How does it work? And does it only help people who want to buy a house, or is it useful for us FIRE people as well?
Let’s dig in, shall we?
How it works
Let’s go over the basics.
The FHSA has elements of the RRSP and the TFSA rolled into one. Contributions are tax deductible, and if you use the account to buy a house, then the withdrawals are tax-free as well, so the best of both worlds.
In order to open an account, you have to be a 18+, a resident of Canada, and a first-time home buyer, which is defined as someone who doesn’t currently own a home (or in the preceding 4 years), so if you’re already a home-owner, you can’t play.
You can contribute $8000 per year, up to a maximum of $40,000, so if you open one today and start maxing it out, it will take 5 years to hit the lifetime contribution limit.
That’s the FHSA in a nutshell. You can go over the CRA’s guide on the FHSA here to get all the details, but it’s not too complicated to understand.
If you’re planning on buying a home in the near future, it’s pretty straightforward. Open an account, put $8k in each year, use it to buy a house, then begin your life of indentured mortgage servitude. Easy peasy, lemon squeezy.
Where the FHSA gets interesting is when we dive into the details and quirks of how they built this thing, and then we start realizing that this thing is useful in all sorts of weird and unexpected ways, some of which have nothing to do with buying a home.
Contribution Limits Aren’t Tied to Income
The first big interesting quirk is that everyone who can open an account gets $8000 of contribution room per year, period. By contrast, RRSP contribution room is a calculated as 18% of your income, up to a maximum cap.
The fact that the FHSA contribution room is a flat $8000 means that having a lower salary doesn’t prevent you from participating. It also means that unlike an RRSP where you have to wait a year after you start your first job for RRSP contribution room to accumulate, you can contribute and deduct it from your salary right away.
Contribution Limits Aren’t Affected By a Pension
Another interesting quirk of the FHSA is that it looks like contribution limits aren’t affected by the presence of a pension.
When FIRECracker worked at a company that provided a pension, the fact that she was eligible for her workplace’s defined benefit pension plan meant that her RRSP contribution room got reduced every year by something called the Pension Adjustment. This meant that she couldn’t really build up an RRSP of her own and I had to make contributions from my RRSP room into her Spousal RRSP.
The FHSA contribution room, on the other hand, doesn’t appear to be reduced by the Pension Adjustment at all.
That means that if you work for a company that provides a pension, like a bank, airline, or government agency, you can use this to make tax deductible contributions just like an RRSP!
And speaking of RRSPs…
You Can Transfer To & From Your RRSP
One of the most interesting things about the FHSA is that you don’t actually need to use it to buy a house.
That’s because they designed this thing to allow transfers to and from your RRSP.
From the CRA website:
You will be allowed to transfer property from your FHSAs to your RRSPs or RRIFs without any immediate tax consequences, as long as it is a direct transferTransfers Between FHSAs and other Registered Plans, CRA
That means that even if you don’t intend to ever buy a house, the FHSA is still useful because it can be used as an extension of your RRSP, and therefore can be used to save towards your early retirement!
Investing inside an FHSA is pretty much the same as investing in an RRSP. Income and capital gains aren’t taxed, and if you don’t plan on buying a house, you should apply the same tax optimization strategies as you would to an RRSP.
One subtle caveat is that you shouldn’t put US-denominated funds in an FHSA like you would with an RRSP. That’s because while the US recognizes the RRSP as a retirement account and waives withholding tax on dividends, there’s no way they’ll recognize the FHSA as a retirement account, since it’s objectively not. That means that if you were to hold US-denominated ETFs in an FHSA, you’d get withholding tax on dividends and yet not be able to recover any of it as a foreign tax credit, similar to the TFSA.
So if you’re going to invest the FHSA like an RRSP, stick your bond allocation in here.
You Can Carry Forward Unused Contribution Room
One final quirk of the FHSA is that if you don’t make the full $8,000 contribution in a particular year, the unused contribution room gets carried forward to next year. So if you have an FHSA and don’t contribute anything to it, next year you can contribute $16,000.
Note that the carry forward amount tops out at $8000, so if you open an FHSA, your first year you can contribute $8000. If you don’t, next year you can contribute $16,000. But if you still don’t use it, then the year after that you contribute room doesn’t grow to $24,000, it stays at $16,000. At that point, if you want more contribute room, you’ll have to use up the room you already have to generate more.
Another important piece of this is that contribution room only starts accumulating once you open your account. This isn’t like the RRSP where your room accumulates regardless of whether you have an account or not.
That means that unlike an RRSP, where even if you forget to open an account the unused contribution room is sitting there waiting for you, you have to actually do something to get the contribution room accruing.
Namely, you have to open an account, even if you don’t plan on contributing this year. Just open the account, leave it empty, and you will start accruing contribution room.
Should I Get One?
To answer the big question that everyone’s probably thinking: Should you open up an FHSA?
Short Answer: Yes.
Long Answer: Based on my understanding of how the FHSA works, there’s no scenario in which you don’t get at least some benefit from opening up an account.
Say you’re thinking about buying a house in the next few years. Then obviously, an FHSA will work out great for you, because you’re the target audience of this account! Put money in, get a nice tax deduction, then withdraw the money tax-free and put it towards the house!
But what if you’re a committed renter with no intention of buying a house and trying to get to FIRE? Then open the account, max it out until you hit your lifetime contribution limit of $40,000 while investing it into a bond index ETF, then transfer it into your RRSP. Boom! The government just gave you an extra $40k room of tax-deductible investing!
What if you’re already retired like us and are withdrawing from your RRSP’s instead of contributing into them? It still makes sense to open the accounts, because then I start accruing FHSA contribution room. That’s what FIRECracker and I are planning on doing.
If we open 2 accounts and leave them empty, then starting next year we will have $8000 x 2 (carry-forward limit) x 2 (since there are 2 of us) = $32,000 of extra FHSA contribution room, juuuust in case we decide to write another book in the future and have a year of inordinately high income. Why not? It literally costs us nothing except 5 minutes of filling out forms.
There are lots of other scenarios where the FHSA helps you, but I can’t think of one in which it hurts you. What if you contribute towards a home purchase, but then change your mind? Then whatever, you just got extra RRSP contribution room. What if you don’t currently want a home, but then change your mind later? Then you should open up an FHSA, max it out pretending it’s an RRSP, and then if you change your mind, yay! You have $40k of tax-free money to put towards your stupid house purchase.
There appears to be no down-side to at least opening an FHSA, which is why you should do it now, using…Questrade!
I alluded to this at the beginning of the article, but as of right now, the only major Canadian financial institution ready to open an FHSA account happens to be the very broker we use and recommend to our users. You can open a Questrade FHSA right now by clicking here, clicking “Open Account,” then selected “First Home Savings Account”.
Now, I have to re-emphasize that I am not a certified financial advisor and none of this is tax advice. All of this is based on my interpretation of Canada Revenue Agency’s Guide to the FHSA. As always, you should read the guide yourself and come to your own conclusions.
But from where I’m sitting, opening an FHSA is a no-lose proposition. It always helps you, no matter what your stance is on owning a home, so for that reason, everyone reading this that’s a Canadian resident, 18+ years old, and not currently a home owner should open one of these today.
Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we're trying to do here, consider supporting us by clicking! Thx ;)
Build a Portfolio Like Ours: Check out our FREE Investment Workshop!
Travel the World: Get covid-19 coverage for only $45.08 USD/month with SafetyWing Nomad Insurance