FidelityConnects: FHSAs – Why your clients should consider them

Peter Bowen, VP, Tax and Retirement Research

Michelle Munro, Director, Tax and Retirement Research
Tuesday, April 11, 2023

Peter Bowen, VP, Tax and Retirement Research, and Michelle Munro, Director, Tax and Retirement
Research, cover a comprehensive discussion of the Tax-Free First Home Savings Account (FHSA).

Overview of the FHSA:

Peter

• It has the best of both worlds. Contributions are deductible like an RRSP and withdrawals,
provided they are used for the right reasons, are tax-free like a TFSA.
• It is a great tool for people looking to buy their first home.
• To open an account:
o Must be a Canadian resident between the ages of 18 and 71.
o Cannot own the home you live in now or in the four preceding calendar years.
• There are a few other requirements and loopholes that will be discussed later.

How do contributions work?

Michelle

• Annual contribution limit is $8,000 per year. This contribution room starts from when the
account is opened.
• The lifetime contribution limit is $40,000.
• The maximum cumulative carry forward is $8,000.
• Can get a deduction for the contributions to the FHSA.
o Can make the deduction for the current year contribution or can carry forward the
contribution indefinitely.
• There is an option to transfer from an RRSP to a FHSA.
o There is no deduction for making this transfer because the account holder would have
already received the RRSP deduction.

How can the money be used?

Peter

• Once the account is opened, you have 15 years to use it or until the planholder reaches age 71.
• There are three options when withdrawing:
o No tax on withdrawals for qualified homes.
o Other withdrawals are taxable.
o Option to transfer to RRSP/RRIF.
▪ If desired, this account can make up another $40,000 worth of RRSP
contribution room.
If someone wants to contribute to their child’s FHSA and get the deduction, can they do that?

Michelle

• No, but they could gift their child the contribution amount for the FHSA and the child would
take the deduction against their own income.
• For clarity, one cannot open an account for their child or grandchild as well.

“I own a rental property, but I rent the house I live in from someone else.” Can they open an FHSA?

Peter

• Yes, they can since they do not own the home they live in nor have they in the four preceding
calendar years.
o They are still qualified.

Can U.S. citizens living in Canada open an account?

Peter

• Yes, but this account would be taxable and they would not get the deduction as they would be
filing U.S. taxes.
• That said, given the tax benefits on the Canadian side and that tax rates are lower in the U.S., it
could still be beneficial.
o There would be more complexity in reporting and investments.

Can Permanent Residents of Canada open an account?

Peter

• Yes, if they are a resident of Canada they qualify.

o If they have owned a home outside of Canada they would not qualify.

If someone wants to use an FHSA to create more contribution room for their RRSP, can they do that?

Michelle

• If you buy a home after opening an FHSA, you are not required to withdraw from the FHSA
immediately, but you will have to close the account within a year of buying a new home.
• There is a planning opportunity for the individual to continue contributing to the account until
they have to close it so they can roll the contributions into their RRSP.
o Gained $40,000 of RRSP contribution room.

Can an individual use the FHSA with the Home Buyers’ Plan?

Peter

• Yes, they can be used together.

o The FHSA is more powerful as it is tax-free, but they can be used together.

From an investing perspective, where should one be investing their funds? Depending on the account
type do Michelle and Peter recommend a different strategy?
Peter

• The TFSA, FHSA, and RRSP can all be used together. He believes individuals should always start
with the FHSA and then the use of the TFSA and RRSP is up to the individual’s long-term
strategies.
• From an investing perspective, if the intent is to buy a home, Peter does not expect it to be any
different. The time horizon might need to be taken in to account.

What if the planholder has a shorter time horizon (12 to 24 months)?

Michelle

• Someone who does have a shorter time horizon would still get the full $8,000 contribution room
for 2023.
o They could withdraw their contribution even the day after opening the account.
• This would also have a tax benefit.

When does the contribution limit start in 2024?

Michelle

• It would be on the calendar year. So, January 1, 2024.

What happens to the account if you do not use it during its 15-year lifetime?

Peter

• It would become taxable. Otherwise, you would add it to the planholder’s RRSP account.
o This does not take up any RRSP room.

If one partner owns a home and the other does not, can the couple use the FHSA to purchase a home
together?

Peter

• No, if one spouse owns a home and the other does not, they cannot use the FHSA to purchase a
home.
• If the partner without the home opens the account before they get married, they can continue
contributing to the account for its lifetime but cannot use the money to buy a house.

If you put in $8,000 per year and your investments grow in the account, when you want to make the
withdrawal, can you only take out $40,000? What happens to the excess growth?

Michelle

• You can withdraw the entire amount, so contributions and growth, and this entire withdrawal is
tax-free.

Can you withdraw from the FHSA for purposes aside from buying a home? What is the penalty?

Peter
 • If you take it out for a non-qualifying purchase it is taxable.

Is there any other way to use the FHSA in tax planning or overall investment planning?

Peter

• When you look at financial advisors, the reality is most clients of financial advisors will own their
own home.
• There is a big planning strategy for those clients who have adult children who do not own their
own home.
o The child would get the deduction, but it is still powerful.
o The same works for grandparents with their grandchildren.
• Good opportunity to be having intergenerational conversations with clients.

Is there any chance that the $8,000 contribution limit will increase?

Peter

• As of now, there is nothing outlined in the FHSA alluding to that.

Is there a time limit to contributing to the FHSA prior to being withdrawn?

Michelle

• It can be withdrawn at anytime after contributing.