Q&A: The new tax-free First Home Savings Account (FHSA)

Can you contribute to your child’s FHSA?

You cannot contribute directly to your child’s FHSA, as individuals cannot claim a deduction for contributions made to another individual’s FHSA. However, your child is allowed to contribute to their own FHSA using funds provided by you.

How do you make a withdrawal from an FHSA?

While individuals can make a withdrawal from their FHSA for any purpose, only qualifying withdrawals meeting the following conditions will be considered non-taxable:

• The withdrawal must be made using a prescribed form that sets out the location of the qualifying home that the individual intends to occupy as a principal residence within one year of acquisition of the qualifying home.
• The individual be resident in Canada from the time of the withdrawal to the acquisition of the qualifying home (or the individual's death, if earlier) and that the individual be a first-time home buyer. An individual counts as a first-time home buyer for this purpose if during the four calendar years preceding the year in which the withdrawal was made, and in the period in the year ending 31 days before the withdrawal was made, the individual did not live in a home that they owned.
• The individual entered into a written agreement (before the withdrawal) to buy or build a qualifying home before October 1 of the year following the year of withdrawal.
• The individual did not acquire the qualifying home more than 30 days before the withdrawal is made.

Is an FHSA similar to an RRSP or a TFSA?

FHSAs share some features with Registered Retirement Savings Plan (RRSPs), but not all. For instance, similar to RRSPs, individuals with FHSA can claim an income tax deduction for contributions made in a particular taxation year and can carry forward any undeducted contributions and deduct them in a later taxation year. However, unlike RRSPs, individuals cannot attribute contributions made within the first 60 days of a calendar year to the previous calendar year, nor can they claim a deduction for contributions made to their spouse or common-law partner's FHSA.

FHSAs can hold the same type of investments as Tax Free Savings Account (TFSAs) including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates. As well, the same prohibited investment rules and non-qualified investment rules applicable to TFSAs also apply to FHSAs. Similar to TFSAs, an individual who makes a contribution to an FHSA that exceeds their contribution limit is subject to a penalty of 1% per month tax on the excess.

Can I make both an FHSA withdrawal and a Home Buyers' Plan withdrawal?

Yes, you can make both an FHSA withdrawal and a Home Buyers' Plan (HBP) withdrawal in respect of the same qualifying home purchase. The HBP allows first-time home buyers to withdraw up to $35,000 from their RRSP as a loan, with no immediate tax consequences, to buy or build a qualifying home. This means that you may have a total of $75,000 (plus accumulated investment income from an FHSA) of tax-free money that can be used toward the purchase of a new qualifying home, if you have contributed the maximum lifetime amount of $40,000 to your FHSA and that you have adequate funds in your RRSP. Remember that while no repayment is required with respect to the funds withdrawn from your FHSA, amounts withdrawn under the Home Buyers' Plan must be repaid to an RRSP over a period not exceeding 15 years, beginning the second year after the year of withdrawal.

Final thoughts

If you are a first-time home buyer, an FHSA is a great way to help you save for a down payment and reach your goal of home ownership. Keep in mind that in order to open an FHSA, you are required to confirm your eligibility to an eligible issuer.