FHSA – First home savings account

The newest way to build a down payment for a new home

Housing cost is one of the largest budgeting outlays for the average family. For those looking to make the move from being renters to owners, it can be challenging to both cover current shelter needs and save toward a down payment on a first home.

First proposed in the 2022 Federal Budget and brought into effect in 2023, the First Home Savings Account (FHSA) entitles eligible taxpayers to:

- Tax-deductible contributions,
- Tax-free investment growth, and
- Tax-free withdrawals for a first home purchase.

Eligibility

The FHSA is open to Canadian residents age 18 to 71. To open an account, an individual cannot be living in a home owned by that person (solely or jointly) in the year the account is opened, or in any of the four preceding calendar years. This includes a home owned by a spouse or common law partner (CLP).

No tax will apply on FHSA withdrawals used for the purchase of a new home, but only one property will qualify for this special treatment over an individual’s lifetime.

Contribution treatment and dollar limits

Tax treatment

Like a registered retirement savings plan (RRSP), FHSA contributions are tax-deductible. Alternatively, an individual may choose to transfer existing RRSP funds to a FHSA on a tax-free rollover basis, though such a transfer will not restore RRSP contribution room.

Dollar limits

The lifetime contribution limit is $40,000, subject to a base annual FHSA participation room of $8,000. Both new contributions and existing RRSP transfers count toward both the annual limit and lifetime limit.

A limited carryforward rule allows unused room to be added to a later year’s FHSA participation room. In the year that a person opens their first FHSA, their FHSA participation room that year is $8,000. In following years, the FHSA carryforward is $8,000 less all contributions and transfers made to all FHSAs in the prior year. That means that up to $16,000 could be contributed in a given year (other than the year the first FHSA is opened), though that would be the result of having made no contributions in the immediately preceding year.

An individual is allowed to open as many FHSAs as desired, but the annual and lifetime limits apply to transfers and contributions across all accounts. For someone who begins contributing the maximum $8,000 annual amount as soon as their first FHSA is opened, the lifetime $40,000 limit could be reached in five years.

Timing of deductions

Despite the similarities to RRSPs, there are important distinctions as to when deductions may be claimed:

- Whereas RRSP contributions in the first 60 days of a year may be deducted against the previous year’s income, FHSA contributions are deductible in the calendar year when made.
- Still, like RRSP contributions, if the person does not wish to take the deduction presently, it may be carried forward to use in any future year.
- Once there has been a qualifying withdrawal for a new home purchase, no further FHSA contributions may be made (and accordingly no new deductions allowed), but past deductions may still be used or carried forward.

Tax-sheltering investment income

Like many other registered accounts, including RRSPs and tax-free saving accounts (TFSAs), investment income and growth while within a FHSA are not taxable.

Withdrawals

Withdrawals to assist in the purchase of a first home are non-taxable, as long as you are not living in a home as your principal residence that year or in the preceding four years. Note that, unlike the criteria for opening a FHSA, you may be living in a home owned by a spouse or common law partner and still qualify for the tax-free withdrawal – understanding that the withdrawn amount must then be applied to a new home purchase. As well, both spouse/CLPs may use their FHSAs on the same purchase, if both meet the withdrawal criteria.

Tax will apply on FHSA withdrawals taken for any purpose other than a home purchase. However, this can be deferred by transferring into a RRSP, or to a registered retirement income fund (RRIF). Such transfers will not replenish FHSA room, but also will not require or reduce an individual’s RRSP room. Eventual withdrawals from the RRSP or RRIF will be taxable in the normal course.

Coordination with the RRSP home buyers’ plan

The RRSP home buyers’ plan (HBP) allows individuals to take up to $35,000 from a RRSP without tax applying in the year of withdrawal. Beginning in the second year following the first HBP withdrawal, withdrawn amounts must be returned to a RRSP over the course of up to 15 years. Repayments are not deductible, while any unrepaid amount is taxable in the year it is due.

As originally proposed in 2022, an individual was not permitted to use both the HBP and FHSA for the purchase of the same qualifying home. This restriction was removed by the time the rules came into force in 2023.

Plan closure

All FHSAs must be closed by December 31 of the earliest of:

- the year following the first qualifying withdrawal for a first home purchase,
- the 15^th anniversary of the first FHSA opening, and
- the year the individual turns age 71.

Amounts remaining in any FHSAs at the end of the defined period will be treated as income for that year.

Treatment at death

A detailed discussion of FHSAs at death is beyond the scope of this summary article, as there are many variables that can come into play. In general, any remaining account value will be treated as income of the estate, unless directed otherwise in the FHSA contract or in the deceased’s Will:

- If a spouse or common law partner is named as either successor holder or beneficiary, options may include receiving the amount as a taxable distribution, or transferring tax-deferred to the survivor’s own FHSA (if the survivor meets the qualifying criteria at that time), RRSP or RRIF.
- For any other named beneficiary, any amount received will be taxable income to the beneficiary in the year received. Not that this distinguishes FHSAs from RRSP/RRIF where the named beneficiary is entitled to the gross proceeds, but the amount is treated as taxable income in the deceased’s final year.

Why women might choose to save and invest differently from men

Money matters among men and women

There are innumerable differences between women and men, including when it comes to money matters. That’s both in terms of how we think about money, and how we manage it.

Though the economic makeup of today’s population has evolved over recent generations, there remain important and relevant distinctions. As well, historical rules of thumb and so-called common wisdom may no longer apply in today’s economy, especially if they were premised or skewed toward male characteristics.

For women, this necessitates taking a principled approach to financial matters generally – and investing in particular – reflecting our current society and their own individual characteristics.

Ability to earn, capacity to save

On average, women face greater challenges in being able to save effectively toward their later years. According to Statistics Canada, women as a group earn about 87 cents for every dollar earned by men. While the reasons are complex and the situation has improved over recent decades, this is a systemic hurdle to be aware of, though it may apply to a greater or lesser extent for a given individual.

Being part of a couple may relieve this concern to some extent. Two can usually live cheaper than one, and therefore save more, both in working and retirement years. However, if there is a breakdown, women tend to fare worse economically post-relationship. That’s in addition to any depletion of mutual savings if the parting is contentious.

Women may leave the workforce to raise children, reducing their income during the time they are away, and possibly affecting their career prospects. Again, statistics show that women spend more time than men in child-rearing, even when both continue to work. As well, women tend more often to be family caregivers to older generations, requiring periodic time away from work, and possibly indeterminate leave in some cases.

Whether these commitments are by choice, due to social pressures or driven by a particular family’s economic demands, they affect both current income and the ability to build savings.

Saving for a longer life expectancy

Typically, women live almost five years longer than men. While it is a positive to be able to share extended time with family and friends, it comes with financial baggage. The prospect of a longer life has the built-in need to fund a longer retirement. And it’s not only the length of time that must be considered, but also how that time is spent.

Take the traditional male-female relationship. A married woman will generally live through the waning health and end-of-life care of her husband. On top of the financial, physical and emotional demands, on average she then has another half decade ahead of her. It could even be longer if, as was perhaps more common in past generations, she married someone older than her. Of course, a new relationship may blossom, but she has to be prepared for the likelihood of eventually being entirely on her own.

Thus, her financial planning must anticipate being part of two end-of-life processes, with all their related costs. Even with the benefit of a helpful adult child or other family member when she is in decline, it is likely that she will require more assisted living services and professional support (and accordingly more associated cost) than was required in the care of her husband when she herself may have carried much of the load on a daily basis.

In a same-sex relationship, you have two women each with longer life expectancy than men. While it may be a guess which partner may be the survivor, there will be more expected years of declining health to fund, possibly both happening at the same time. That is in addition to the income and savings challenges that now both sides of the couple may have experienced in their working years, as mentioned above.

What’s a woman to do?

Be intimately informed

As a woman, you must be informed about financial matters from the very beginning, as you are more likely to face the brunt of it at the very end. This is self-evidently true for singles, and more likely than not in either type of couple relationship as outlined above.

Start saving early, for flexibility later

Individual earning capabilities and family circumstances will vary, but having savings both in-hand and in-mind from the earliest point provides the best grounding to respond to circumstances as life unfolds.

Invest with balanced intention

Those savings have to be invested while delicately balancing two competing priorities: you need to participate in market advances to build savings in your accumulating years, and protect against market retreats in your decumulating years so funds are there when you need them.

Be emotionally aware to be financially prepared

There is an old myth that men invest logically and women invest emotionally. While that stark distinction has been debunked, it is true that both logic and emotion influence money matters for all of us. Accept and listen to the emotions that can affect your behaviour, so that you can make informed decisions that best serve your lifelong needs.

Speak to a financial advisor about how these points about women generally may apply to you specifically. Together, you can then review your savings routine and investment portfolio to ensure that they align with your long-term personal and financial goals.

RRSP-TFSA concepts & coordination

Your decision depends on many factors

Since its introduction in 2009, the TFSA has proven to be a powerful tool that opens up countless possibilities for improving our finances. However, when it comes to retirement savings, the RRSP should be the default choice for most of us.

Here are some important considerations to help you decide what’s best for you.

Tax treatment IN – Tax treatment OUT

The key difference between these plans is what happens on front and back end:

- RRSP deposits are pre-tax, income within is sheltered, and withdrawals are taxable
- TFSA deposits are after-tax, income within is sheltered, but withdrawals are not taxed

If you’re depositing to an individual RRSP, any associated refund must also go into your RRSP to keep it intact as ‘pre-tax’. For workplace group RRSPs, your employer does this for you through withholding tax.

Base comparison

If your income is taxed at the same rate when contributing to and withdrawing from the investment, your spendable cash will be the same either way.

Using $100 at a 40% tax rate and a 10% return (to allow for simple arithmetic):

However, if the withdrawal tax rate is reduced to 30%, the tax on the $110 in the RRSP will be reduced from $44 to $33, netting $77. On the other hand, if the withdrawal tax rate is 50%, the tax will be $55, netting to $55.

So, if you expect your tax rate to be lower when you will be taking withdrawals from this investment, choose RRSP. But if you expect a higher rate later on, choose TFSA.

‘Same rate’ – Marginal or average?

To assist in comparing rates, keep in mind we have a progressive tax system. That means higher income is taxed at a higher rate. An RRSP contribution gives you a tax deduction at your top marginal tax rate.

On withdrawal in your later years, the appropriate comparison is average rate, which is total tax divided by income. As average rate is mathematically lower than marginal rate, RRSP is usually the default choice.

What’s your own expected average rate?

In truth, your RRSP (in the form of a RRIF or annuity draw) will not be your only retirement income. You will have Canada Pension Plan and Old Age Security, and may have a pension, all together forming your foundation income. Thus, the average rate on your RRIF/annuity will be higher than your overall average.

And if you expect your retirement income to exceed the OAS clawback level, that will raise your effective marginal tax rate – that’s when it’s time to run the numbers through a financial planning spreadsheet!

Default choice, but with flexibility

To repeat, the point here is that RRSP is the default choice, but it could be displaced. Think of it in terms of proportionally allocating savings between them, not an either-or decision. Consider these factors:

Favouring RRSP

Most people live on a lower income in retirement. Spousal pension income splitting can reduce seniors’ household tax rate. The pension credit can reduce tax on $2,000 of RRIF/annuity income.

Favouring TFSA

Savings timeframe is shorter term, not retirement. Contributor is at low bracket at saving age. There are already significant RRSP assets. A large inheritance/winfall is confidently expected