Key takeaways:
- The First Home Savings Account (FSHA) was launched in 2023 to help first-time buyers with affordability.
- First-time homeowners can contribute up to $8,000 per year to their FHSA and this amount is sheltered from income taxes.
- To make the most of FHSA savings efforts lower-volatility private investments can accelerate growth within these accounts.
Even with high prices and limited supply, homeownership is still the dream for most Canadians. In a recent survey of 18-38 year-olds by Royal LePage, 74% said homeownership is a priority and 75% indicated that they plan to purchase a home in their lifetime. Making that dream a reality, however, takes hard work, discipline—and a smart way to save.
The First Home Savings Account (FHSA) is the latest registered account offering from the federal government as it seeks to address the affordability crisis. FHSAs offer Canadian residents a way to save for their first home—whether they are buying or building—by putting their funds in a dedicated, tax-free savings account. According to a recent announcement by Chrystia Freeland, then Deputy Prime Minister and Minister of Finance, nearly one million Canadians have already opened an account since the program was launched in 2023. Wondering if an FHSA is right for you and how it compares to other registered accounts? Read on to learn more about this tool—and how you can leverage the First Home Saving Accounts to accelerate your savings and make your homeownership dreams a reality.
Who can open an FHSA?
Unlike Tax-Free Savings Accounts (TFSAs) Registered Education Savings Plans (RESPs) and Registered Retirement Savings Plans (RRSPs), FHSA accounts are exclusively available to first-time homebuyers residing in Canada. To qualify as a first-time homebuyer and open an FHSA, you—and, if applicable, your spouse or common-law partner—must meet the requirement of not having owned or co-owned a home anywhere in the world in the four years leading up to opening the account. It’s important to note that you must be a resident of Canada between the ages of 18-71 both at the time of application and when you decide to withdraw the funds to purchase or build your home. FHSAs may remain open for a maximum of 15 years.
How do FHSAs work?
Aspiring first-time homeowners can contribute up to $8,000 per year to their FHSA, which shelters that amount of their income from taxes. For example, if you make $100,000 per year and contribute the annual maximum, your taxable income drops to $92,000. The lifetime FHSA contribution limit is $40,000, but as with RRSPs, contribution limits can be carried over to the following year. If you only save $5,000 in the first year, for example, you’re eligible to save $11,000 the following year. The accounts can hold cash savings or qualified investments, including Real Estate Investment Trusts (REITs). The advantage of including investments in your account vs cash is that these investments have the potential to generate income within your FHSA, accelerating how quickly you may be able to save.
Can more than one person in a household open an FHSA?
Any qualifying individual—whether single, married, or common-law, is eligible to open their own FHSA. While any party can contribute to the account, the FHSA tax deduction is limited to a maximum of $8,000 per year, per person. For example, if you invest $8,000 in your own account and gift $2,000 to your partner for their account, you are still only able to claim $8,000 on your own tax return.
FHSA vs TFSA
In contrast to a Tax-Free Savings Account (TFSA), funds saved in an FHSA are strictly designated for purchasing or building a new home. While this requirement may be beneficial by keeping savings focused on a specific goal, it also limits flexibility, as funds can’t be accessed tax-free for other uses. Careful monitoring of your account balance is essential: if it exceeds the annual $8,000 limit (e.g., due to investment growth) or the lifetime maximum of $40,000, a 1% monthly tax will apply until the balance returns to these limits. Any extra funds initially transferred from an RRSP must also be moved back. Ultimately, diligent management of your FHSA balance allows you to maximize tax-sheltered savings without incurring penalties.
FHSA vs RRSP
Since the early 1990s, RRSPs have also been a way for Canadian residents to access their existing savings for down payments, tax-free. Unlike the FHSA, there are no limits on who can open an RRSP in Canada, provided you are a resident of Canada between the ages of 18 and 71. Anyone buying a home in Canada—whether it’s your first or your last—is eligible to borrow up to $60,000 from their RRSP through the Home Buyers Plan. These funds need to be replaced within 15 years, however, or they will be counted as income. With an FHSA there is no need for repayment. Another important difference is that while there is a minimum holding period of 90 days before you can borrow from your RRSP, there is no holding period for FHSAs.
Tax implications of early FHSA withdrawals
If you decide to make a withdrawal for any reason outside of purchasing or building a home or removing excess funds from the account to avoid the 1% tax penalty, you will be subject to an FHSA withholding tax. Like RRSP withdrawals, the amount is taxed both at the time of withdrawal and upon income tax filing.
When you are withdrawing funds for your first home, timing is key. Account holders must demonstrate that neither they, nor their partner, have acquired the home more than 30 days immediately before or after the withdrawal. The account can remain open for up to 15 years (or until the age of 71) and if the account holder does not buy a home during this time, the unused savings can either be transferred into an RRSP tax-free or withdrawn as taxable income.
Can FHSAs, RRSPs and TFSAs be used at the same time?
Provided you meet the criteria for opening these accounts, there is no barrier to using all three as savings vehicles for your first home. For example, if you are a first-time buyer, you could combine funds borrowed from your RRSP, withdrawn from your TFSA, and released from your FHSA to contribute to your down payment.
Optimizing your portfolio growth through private alternative investments
When deciding how to grow your FHSA, it’s wise to think beyond minimal-interest savings and aim for steady, reliable growth. Investing in alternatives like private real estate investment trusts (REITs) can be an ideal strategy, especially given the shorter-term horizon of FHSAs. Unlike stocks, which fluctuate with market highs and lows, private REITs can offer a stable foundation by directly tying returns to the market value and rental income of tangible properties.
Private REITs not only diversify your portfolio but also help manage volatility and can help foster long-term financial stability, which can help your FHSA is work harder for you. And if you’re looking for even more ways to diversify, consider private funds in areas like clean energy infrastructure—an exciting and sustainable addition to your investment strategy.
While we are seeing some downward pressure on the cost of home ownership with the Bank of Canada continuing to cut interest rates, affordability will remain challenging for many Canadians for generations to come. Saving is hard work, but registered accounts, such as the FHSA, are a great place to hold investments to get you one step closer to your dream home.
Skyline offers many private alternative investments that may help you reach your FHSA savings goals faster. These investments, which specialize in real estate and clean energy, have a proven track record of resilience amid market uncertainty, and have provided a historical annualized return of 9-14%. Investing with Skyline may help you accelerate savings not only in your FHSA, but also in your Registered Retirement Savings Plan (RRSP), Registered Education Savings Account (RESP), or Tax-Free Savings Account (TFSA).
About Skyline Group of Companies
Skyline Group of Companies (“Skyline”) is a fully integrated asset acquisition, management, development, and investment entity. It is comprised of companies that provide services in real estate management and development, as well as clean energy management and development. Skyline currently manages more than $8.95 billion* across its real estate and clean energy platforms.
With approximately 1,000 employees across Canada, Skyline works to provide safe, clean, and comfortable places for tenants to call home, great places to do business, sustainable solutions for a greener future, and an engaging experience for its investors.
View Skyline’s 20th Anniversary celebration video to see how Skyline is grounded in real estate, powered by people, and growing for the future.
For more information about Skyline Group of Companies, please visit SkylineGroupOfCompanies.ca.
*As at September 30, 2024