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The FHSA offers Canadians a new way to save up for their first home. However, it’s not like opening a standard bank account since you can receive an income tax deduction for your contributions. Let’s take a look at how you can open a FHSA and how they work.
Getting an FHSA
Just like RRSPs and TFSAs, First Home Savings Accounts are registered accounts and are considered to be qualified investments. Because FHSA’s are registered accounts, you can’t just open a new account at any time. There are some stipulations that you need to follow in order to open one.
When it comes to opening a FHSA, you must be a Canadian resident who is at least 18 years of age. Also, you or your spouse can’t live in a home you own in the calendar year you open the account. There must also be at least preceding 4 calendar years that you haven’t live in a home that you or your spouse/common-law partner owned, before the year you open the account.
In order to actually open your account, you need to contact a FHSA issuer. This would be a bank, credit union, trust or some life insurance companies. Since each financial institution offers different investment options, the one you choose will let you know what they offer and help you choose the best one for you. That said, in order to open an FHSA, you’re going to need to provide your SIN number, your birth date and documentation proving that you meet the FHSA requirements.
How They Work
With First Home Savings Accounts, there are three different types offered. These are:
- Depository FHSAs
- Insured FHSAs
- Trusteed FHSAs
That said, if you don’t want one of these types, there are also self-directed FHSAs where you can build and manage your portfolio yourself. Before we go into that, though, let’s look at the different types of FHSAs and how they work.
Depository FHSAs
Depository FHSAs are the type of First Home Savings Accounts that you can get with your bank or credit union. You can choose for your FHSA to hold cash, term deposits or even Guaranteed Investment Certificates (GICs).
Insured FHSAs
Insured FHSAs are different. These types of accounts are annuity contracts held with a licensed annuity provider. To get this type of FHSA, you would go through an insurance company.
Trusteed FHSAs
The other option for an FHSA is a trusteed FHSA. These types of accounts are investments held in trust accounts with a trust company. The types of qualified investments you can hold here are cash, GICs, term deposits, bonds and even mutual funds.
FHSA Contribution Limits
When it comes to First Home Savings Accounts, just like other federal government registered accounts, there are limits on how much you can invest yearly and in total. Currently, the lifetime contribution limit for FHSA contribution room is $40,000, while the yearly limit for FHSA contributions is $8,000. However, if you have any unused contribution room you can carry forward that to the next year. You can carry forward amounts of unused FHSA participation room until you’ve reached the $40,000 max, or reached your maximum participation limit.
It’s important to keep in mind that, when it comes to your contribution room, this not only includes deposits. It also includes transfers from your RRSP. All amounts that are deposited into this account are counted towards your contribution room as FHSA funds. If you’re unsure of exactly how much you’ve used, the best way to check is to go through your notice of assessment.
In order to check your contribution room through your notice of assessment, though, you must file your annual income tax and benefit return the year that you open your FHSA, even if you don’t contribute. This allows your account to be fully registered; you’ll be able to start seeing your contribution room on your notice of assessment.
Opening an Account Online
If you’re looking into opening an FHSA account online, the ability to do so depends on the financial institution you’re using to open your account. Some financial institutions do offer the ability to open investment accounts through your online banking account; however, usually, there aren’t as many options available as there are when you speak to a financial advisor directly.
Banks & Platforms that Offer FHSAs
If you’re looking to open a new FHSA account, there are plenty of different banks and credit unions that offer them. Let’s take a look at those that do as of February 9, 2024.
- National Bank: With National Bank, you can make an appointment with an advisor to open an FHSA. That said, you’re also able to open limited types of FHSAs through online banking as well as through the app.
- EQ Bank: With EQ Bank, you also can open an FHSA. Because EQ is an online institution, you can open your account online.
- Royal Bank of Canada: When it comes to investing in FHSAs through RBC, you can do so online and through a financial advisor. The ability to invest through RBC Direct Investing and RBC Invest Ease is now available.
- CIBC: With CIBC, you can open an account through self-directed investing or with an investor. You can open your FHSA as a savings account, mutual fund, or non-redeemable GIC.
- BMO: BMO offers many different investment options for an FHSA. You can start online or with an investor.
- Desjardins: Desjardins offers FHSAs depending on where you live. While many banks don’t offer FHSAs in Quebec, Desjardins does.
- Fidelity: Fidelity offers FHSAs, but you have to open your account with an advisor.
- Hubert Financial: Hubert Financial offers different investment options for FHSAs. You can contact them directly to open an account.
- Just Wealth: Just Wealth is an online wealth management platform. They offer many different investment options, including FHSAs.
- Meridian: Meridian Credit Union offers a variety of FHSAs as well. In order to open one, though, you need to speak with an advisor.
- Qtrade: Qtrade allows you to open a FHSA account as an investment option.
- Questrade: Questrade offers an FHSA account as part of your investment portfolio.
- Saven Financial: With Saven Financial, you can open an account online. They have a variety of account options, including FHSAs.
- Scotiabank: Scotiabank allows you to open an FHSA as a Savings Accelerator Account or GIC.
- TD: With TD, there are a variety of investment options available for FHSAs.
- Wealthsimple: Wealthsimple allows FHSAs as a type of account to hold investments.
FHSA Accounts After 15 Years
On top of the fact that FHSAs have a contribution limit, they also have a time limit on how long they can remain open. These types of accounts can only be opened up to a maximum of 15 years, or until the end of the year that you turn 71. However, once that time comes, the money doesn’t just disappear. It just can’t stay with your FHSA.
Once you’re no longer able to keep your funds in your FHSA, what do you do with them? Well, at this point, they’ll need to be transferred to either a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Investment Fund (RRIF). However, amounts transferred do count towards an individuals RRSP contribution room. If you don’t want to transfer funds or don’t have enough RRSP contribution room, then another option is to withdraw it altogether. That said, though, you will have to pay withholding taxes on any amounts you withdraw. It’s only when you transfer to an account that also accepts tax deducible contributions, then no withholding tax is required.
Opening an FHSA Account for Someone Else
When it comes to opening an FHSA, you can have more than one FHSA for yourself. However, this is where FHSAs differ from RRSPs. You’re unable to open an FHSA in someone else's name. Unfortunately, the person to whom the FHSA belongs must open the account. You also can’t add money to someone’s FHSA either, and they must do it themselves.
Transferring Funds from your FHSA
If you have an FHSA and are looking to transfer your funds, it’s actually pretty simple. It won’t affect your contributions, and there won’t be any tax consequences. That said, this only applies if the money you’re transferring out of your FHSA is transferred to another FHSA, an RRSP or an RRIF.
In order to make the transfer, all you need to do is complete the form RC721. Once this form is complete, you then need to submit it to your financial institution. However, because your FHSA is a registered account and does offer tax savings, transferring to a non-registered account will cost money. There will be a withholding tax you need to pay, which is determined based on how much you’re withdrawing.
Withdrawing From Your FHSA
When it comes to withdrawing money from your FHSA, you may or may not have to pay taxes, depending on the circumstances. In order to qualify for tax-free withdrawals, the amount must either be considered a qualified withdrawal, a designated withdrawal, or an amount otherwise included in your income.
That said, if you do have to withdraw from your FHSA and it isn’t a qualified withdrawal, then the amount withdrawn is considered to be taxable income. You will have to pay withholding taxes on this amount and, for tax purposes, you can use the withholding tax paid as tax credits towards your upcoming tax bill.
Qualified Withdrawal
In order for an amount to be considered a qualifying withdrawal, you must meet the following conditions:
- You must be a first-time homebuyer
- You must have a written agreement to buy or build a qualifying home
- The buy or build must be completed by October 1 of the following year
- You must be a Canadian resident
- You must fill out form RC725 and submit it to your issuer
- The home must be your prncipal residence within one year of purchasing or building
- You must not acquire the home more than 30 days before making the withdrawal
When it comes to making a qualified withdrawal, though, all of the money doesn’t have to be taken out at once. It can be taken out in small amounts, as long as it’s for the same qualifying home purchase.
Once you make your first qualifying withdrawal, your FHSA also begins to acquire an expiration date. This is because the funds are tax-free in order to purchase your first home; once you’ve done that, the account is no longer needed, and your maximum participation period ends. You have until December 31 of the year following the home purchase in order to close all of your FHSA accounts.
Designated Withdrawal
A designated withdrawal also exempts you from paying tax on your withdrawal, but what exactly is it? Well, a designated withdrawal consists of withdrawing any funds that are over and above your annual contribution limit.
When you're over your contribution limit for your FHSA, there is a tax of 1% per month on the amount you’re over. You’ll continue to pay this tax until you’re no longer over your contribution limit. The easiest way to remedy this is with a designated withdrawal. You can withdraw the full amount you’re over on a tax-free basis, and you don’t have to claim the withdrawal on your annual Income Tax and Benefit Return.
Spouses and FHSAs
With FHSAs, both spouses/common-law partners are allowed to open them and withdraw to purchase their first home as long as they qualify. Just like RRSPs, it's a registered account, so anyone who qualifies can have one. You just can’t contribute to your spouse's FHSA; any funds that are to be deposited will have to be done so by them.
FHSAs for a Second Home
First Home Savings Accounts are intended to be used for the purchase of your first home. Once you have purchased the home, any remaining funds need to be transferred to an RRSP or an RRIF or can be withdrawn from your account. Keep in mind that withdrawals will be subject to a withholding tax.
FHSAs Vs TFSAs
While First Home Savings Accounts and Tax-Free Savings Accounts are both registered plans, there are some differences. For starters, you don’t pay any tax on the funds in an FHSA unless you withdraw funds for anything other than purchasing your first home. With TFSAs, you have to pay tax on the funds that are put into the account, but you don’t pay any taxes on the amount you earn.
Another difference between FHSAs and TFSAs is that you can withdraw your funds from your TFSA at any time, unlike with FHSAs. With FHSAs, there is a penalty for withdrawals that aren’t qualified.
Since both of these accounts are registered, they both have an allotted amount of annual contribution room. With either account, once you exceed the contribution room, there is a penalty. However, the investment income you earn in your TFSA isn’t considered part of your contribution room.
The thing with both of these different types of registered accounts is that there are positives and negatives to each. Which account you choose depends on your purpose for saving your money. If you’re looking to buy a home, the FHSA saves you a bit more money. If you’re just trying to build your savings in general, then a TFSA is a good idea.
Are FHSA’s Worth It?
If you’re looking to save money specifically for the purchase of your first home, there are many benefits to an FHSA. You can save the funds tax-free, and as long as the funds are used for what they’re intended for, then you can also avoid paying taxes on the money when you withdraw.
If, for any reason, you need to close the account with an FHSA, you can do so anytime. Also, you don’t have to pay a penalty; you can just transfer the funds. While you’re unable to transfer the funds to a TFSA, you can transfer the money to an RRSP or RRIF and continue to save that money for retirement.
