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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 transfer
Transfers 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”.
Conclusion
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.
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Hi. Great article. In regard to the FHSA->RRSP route, if one is already in a relatively high tax bracket even without wages, it would seem to make sense to do this to avoid taxation now. Am I missing something? Are there limits on the FHSA->RRSP route?
So you suggest only buying a bond etf inside the FHSA?
Interesting ideas but Better be careful with the FHSA!
If you’re already retired and withdrawing from RRSP then you won’t be making any contribution room for RRSP as you have little or no salary. RRSP room is only created by getting a salary. If you then have a FHSA with no intention of buying a house then how do you get the money out? As the FHSA rules state you must buy a house or transfer to a RRSP after 15 years. But if you are retired and have no new RRSP room then you can’t put it back into a RRSP, you have to withdraw it and it’s fully taxed and considered income .
Also you have to be a resident of Canada for a FHSA . If you live or travel overseas for more than 180 days you’re not a resident of Canada and can’t contribute or keep a FHSA
The only time a direct transfer from the FHSA to an RRSP affects RRSP contribution room is if you overcontributed to the FHSA. The fair market value of the FHSA at the time of direct transfer to the RRSP is effectively its own RRSP contribution room. See the link I posted below.
Money inside a FHSA that is not used to purchase a house can simply be rolled into an RRSP or RRIF with no other tax implications. One does not need to have employment income to accrue contribution room inside a FHSA. Contribution room accrues from the opening date of the account at a rate of $8 000 per year up to a maximum of $40 000. The FHSA account itself can remain open for 15 years. By the end of that period the money inside the account must either be used to buy a house or be rolled into a RRSP/RRIF.
Why not a GIC at 5% interest or a dividend ETF like xei.To for example inside an FHSA?
One thing I can’t find in the fine print. If you were to later transfer to an RRSP but your RRSP is already maxed out. Anyone know any more details on this. Can you only transfer if you have unused room in your RRSP.
If your RRSP is maxed out and you didn’t overcontribute to the FHSA (the CRA defines the overcontributed amount as “excess FHSA amount”) and you directly transfer to your RRSP, then there are no tax consequences. It essentially creates additional RRSP room on top of your regular contribution limits, in the amount of the fair market value of the FHSA at the time of the transfer.
See “Example – Transfer from an FHSA to an RRSP – Amounts transferred directly” on this page:
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account/transferring-funds-between-fhsas-other-registered-plans.html#h_5
No that’s wrong. If you don’t have any contribution room in an RRSP then you can’t transfer the FHSA amount. FHSA funds can be transferred yes but you have to have RRSP room to transfer to.
The intention of the FHSA is to buy a house. The intention of the FHSA is not to add to your RRSP.
The money in the FHSA needs to be taken out for the house buying.
Be careful, the CRA will come down hard if you play around with them and their intentions
Are you saying that the CRA page is wrong? Do you have a CRA reference or source that says you have to have existing RRSP contribution room to transfer into?
Of course he doesn’t. Typical Dad MD retort that isn’t backed up by any fact. Why does anyone take him seriously?
I agree with Dad MD. The CRA page just isn’t clear enough about all cases. If you have already maxed your RRSP room you cannot transfer into RRSP. CRA page does similarly note that if you transfer from RRSP to FHSA you DO NOT get RRSP contribution room back.
From the page Brenda directed us to: “Generally, an amount that is transferred directly from your FHSAs to your RRSPs or RRIFs will not impact your unused RRSP deduction room”.
It seems pretty clear to me. Subject to you not having over contributed to your FHSA, the amount of room you have before the transfer is the amount of room you will have after the transfer, whether it’s $100K of room or $0. The amount of room is irrelevant.
Yes It does sound like that. I guess I am just wary of the “too good to be true”. Assuming you and Brenda are correct its effectively a $40K extension to the RRSP for which you do not need to accrue space like the rest of the RRSP by working a salary position. Either way, I’m sure I will be taking advantage of this.
Such a great idea, if only we had this in the U.S! That and stealing the Canadian idea of excise taxes on foreign buyers. There are too many Airbnb and empty homes in this country. nc
If I am buying a home let’s say in two year. Can I withdraw from the FHSA account and also from my RRSP account for the Home buyer plan? Will both of these withdrawal will be tax-free?
Here’s another twist on this. My reading is that the eligibility criteria exclusively build on whether or not you live or have lived in your home. I.e. assuming you are a renter but own real estate that you rent out elsewhere, you are eligible for a FSHA because you do not live in your property.
Was wondering if anyone knows of any specific provisions of any kind with respect to utilizing RESP account —> FHSA transfers?!?
Scenario 1 – Child’s RESP, elects to delay (or forego) schooling, transfers FMV of RESP to max out FHSA annual room allowable
Scenario 2 – Child’s RESP, utilizes RESP to complete schooling purposes, transfers residual FMV amount of an RESP to FHSA account
I did not see any in the CRA website so any feedback of info would be helpful.
ImmigrantOnFIRE
The case I am most interested in and think is still a benefit is: RRSP room is maxed, TFSA is maxed. You can use FHSA to contribute in your earning years, getting the tax paid back on that amount invested like an RRSP, which effectively gives you more to invest next year when you get your return. You fill the FHSA to max capacity of $40K eventually in your high earning years. Then when you have low earnings or retire you start withdrawing first from the FHSA, taking the normal tax hit but at the lower income level associated with retirement. Next you would go into your RRSP which would be taxed similarly, and lastly you use your TFSAs (you can actually contribute to those forever if you wanted). So while it isn’t really more RRSP room it is pretty much the same as it.
Please correct me if this is wrong.
That’s an interesting idea Mark and a potentially logical sequence of withdrawals for those who have reached FIRE, or don’t want to utilize the RRSP transfer / withdraw from RRSP route. According to RBC Direct Investing, I think your take is correct:
“What happens if I don’t use my FHSA funds?
The funds in your First Home Savings Account (FHSA) have to be used by December 31 of the 15th year after opening your first FHSA account or the year you turn 71, whichever comes first. If you have not used the funds in your FHSA by that time, they can be transferred tax-free to your Registered Retirement Savings Plan (RRSP) without impacting your RRSP contribution room, or to your Registered Retirement Income Fund (RRIF); otherwise, your withdrawal will be taxed.”
“What happens if I don’t use all of my FHSA funds for a home?
If you withdraw only a portion of the funds from your First Home Savings Account (FHSA) to purchase your first home, you can transfer any remaining funds to your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) on a tax-free basis on or before December 31 of the year following the initial withdrawal. Otherwise, you can withdraw the remaining balance, but it will be taxed.”
https://www.rbcdirectinvesting.com/account-types/fhsa.html
Re: the FHSA to RRSP transfer debate, and whether it impacts or require the sufficient RRSP contribution room in the year the direct transfer occurs, the answer is “No.” So Dad MD is wrong, and Brenda is right.
It’s based my own interpretation of the CRA Rules if you scroll down to the section labelled “Example – Transfer from an FHSA to an RRSP – Amounts transferred directly:”
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account/transferring-funds-between-fhsas-other-registered-plans.html#h_5
“Anthony opened his FHSA in 2023. Over the years, he contributed the maximum amount to his FHSA, reaching his lifetime FHSA limit of $40,000 in 2027. It is now 2038, and Anthony must close his account by December 31, 2038, since it will reach the maximum participation period of fifteen years on that date. Anthony does not have an excess FHSA amount.
Anthony fills out the transfer form and asks his financial institution to do a direct transfer of all the property in his FHSA to his RRSP and to close his FHSA once the property has been transferred.
Since it is direct transfer and Anthony has no excess FHSA amount, there are no tax consequences and there will be no impact on his unused RRSP deduction room.”
Secondly, Canadian in a Tshirt also responded to a commenter question on one of his FHSA YT videos on the subject:
https://www.youtube.com/watch?v=l-vFR14I12k
“Hun Sern Tan
2 weeks ago:
Great video! Would contributing to the FHSA affect my RRSP contribution limit or would it be it’s own separate entity? Thanks and keep up the good work!
Canadian in a T-Shirt
2 weeks ago:
It’s a totally separate entity! It doesn’t affect your RRSP contribution room at all! In fact, as a worst case scenario if you NEVER buy a house and you close the FHSA account and transfer that money into your RRSP, you can essentially think of the FHSA as a “gift” of an extra $40K worth of RRSP room. But if you use the FHSA as intended and actually buy a house, then it will be even MORE powerful than extra RRSP room since you reduce your taxes and you don’t have to pay them back when you withdraw! =) ”
So that’s good enough for me. I’ll be taking full advantage of the FHSA to RRSP direct transfer option towards FIRE instead of buying RE. Good luck to all and DYODD 🙂
Gary
Hey Wanderer and Firecracker!
Quick question: are there things that you can’t do as easily in Canada now that you are retired (as opposed to when you were employed)?
Like getting a credit card at a bank for example (since you have no Employment Income anymore).
Or renting a place (where landlords might ask for a proof of Employment Income).
Thanks!