Home ownership is a huge goal, but you have a number of tools at your disposal, including the recently introduced first home savings account (FHSA), which enables Canadians to save up to $8,000 per year, to a lifetime maximum of $40,000, with tax-free growth and withdrawal.
Using an FHSA for your down payment
If you’re a prospective home owner, you may be interested in learning more about FHSAs. A powerful savings tool for first-time home buyers in Canada, an FHSA is a registered account that was launched by the federal government on April 1, 2023.
Who can open an FHSA?
To be eligible for this type of account, you must be a resident of Canada who is at least 18 years of age and not turning 72 or older in the same calendar year. You also must be a first-time home buyer, which is defined as someone who did not own a qualifying home that was used as a principal residence for any part of the five calendar years before the account is opened. If you are married or in a common-law partnership, your spouse must meet the same criteria.
How much can you contribute to an FHSA?
Account holders can contribute up to $8,000 to their FHSA per annum and carry forward up to $8,000 of their unused contribution allowance each year after the account is opened. There is a lifetime contribution limit of $40,000 on a FHSA, and while you can open multiple FHSA accounts, the total contributions cannot exceed that amount.
FHSAs have some similarities to registered retirement savings plans (RRSPs). For example, as with an RRSP, your FHSA contributions can be claimed as a deduction against all sources of taxable income—meaning the more you contribute to your FHSA, the less income tax you may have to pay. Also similar to an RRSP, if you overcontribute to your FHSA, you’ll incur a penalty, so pay close attention to your contribution limit.
Here’s a key difference between FHSAs and RRSPs to keep in mind: FHSA contributions for a certain year must be made within that calendar year, while RRSPs let you keep contributing toward a certain tax year in the first 60 days of the next year. So be sure to set up regular deposits throughout the year. The months of November and December are expensive times of the year already.
Can you combine the FHSA with the Home Buyers’ Plan?
The FHSA can be combined with other government programs including the Home Buyers’ Plan, First Time Home Buyer Incentive and the Home Buyers’ Tax Credit. Think of them as a collection of home-buying tools you can use together to optimize your savings and get you into your first home sooner. The FHSA is a relatively new financial product, so it is currently available from a limited selection of providers, including Fidelity.
How far will those savings go for you? It depends on your price range for purchasing a home and where you want to live. To give you a better idea of how much you’ll need to save to buy your first home, let’s look at the size of the down payment you would need in five capital cities across Canada.