First Home Savings Account Strategies

Launched in April 2023, the First Home Savings Account (FHSA) offers some interesting financial planning opportunities to Canadians who aren’t homeowners.

The Basics

For those who aren’t familiar with FHSAs, here’s a quick summary of the rules:

• You can open an FHSA if you’re age 18+ and a Canadian resident and qualify as a first-time homebuyer (CRA’s rules are here)
• Contribute up to $8,000 a year
• $40,000 lifetime contribution limit
• Contributions are tax-deductible and they don’t reduce your RRSP contribution room
• Investment returns are tax-sheltered
• Withdrawals are tax-free if you purchase a qualifying property
• Otherwise, withdrawals are taxed as income
• FHSA accounts can remain open for 15 years or to age 71, whichever is shorter.
• If you don’t buy a home, you can transfer your FHSA balance tax-sheltered to an RRSP/RRIF.

FHSA Strategies

Beyond the basics of saving for a home purchase, FHSAs offer various tax planning opportunities. Some of these options aren’t intuitive at first glance.

Contribute even if you aren’t planning to buy a home

By contributing to a FHSA, you’ll create up to $40,000 in extra tax-deductible contribution room. This is above and beyond your RRSP contribution room.

Once you’ve reached your FHSA contribution limit, prior to the 15-year withdrawal deadline, simply transfer your balance to an RRSP to keep it tax-sheltered. When you’re in a lower tax bracket, you can start drawing on these savings.

Even if you have unused RRSP contribution room, prioritizing FHSA contributions lets you save your RRSP contribution room for future years.

For incorporated business owners, contributing to an FHSA has definite appeal. Some business owners and incorporated professionals receive dividends as their sole form of compensation, which is a form of earnings that doesn’t generate RRSP contribution room. Making up to $40K in tax-deductible FHSA contributions is a great way for this group to strategically reduce their tax bill.

Carry forward FHSA contributions on your tax return

Some basic tax planning goes a long way here. If you expect to be in a substantially higher tax bracket in the future, you’ll get a much better bang for your buck by contributing today but waiting to deduct the contribution until you’re in a higher income earning year.

If you don’t have an accountant, you can use this Ontario website to compare the various marginal tax brackets and assess if it’s worth carrying your contribution forward. EY’s website also has some great Canada-wide resources and calculators. Of course, we’re happy to help too.

Transfer money from your RRSP to your FHSA

This strategy is appealing to those who can’t afford to max out their FHSA from other sources of funds and who are planning to buy a home and who don’t want to use the Home Buyer’s Plan (HBP) for RRSPs.

Why would you use the FHSA over the HBP if you can’t do both? The main reason is that with the HBP, you must repay your withdrawal annually, over 15 years, if you don’t want this sum to become taxable income. With the FHSA, you can withdraw tax-free with no repayment needed.

When using this strategy, it’s worth keeping in mind that a transfer from an RRSP to a FHSA, while tax-sheltered, is not tax-deductible.

Buying a home & have lots of surplus cashflow or savings? Maximize the HBP and the FHSA

That’s right, you can take advantage of both programs; it’s not an either/or requirement. Due to the similarities between these programs, it will be interesting to see if the government winds down the HBP in favour of the FHSA down the road. Hopefully not, given the rising cost of real estate since the Home Buyers plan limit was increased to $35K per person in 2019.

For the foreseeable future, by taking full advantage of both programs, you can accumulate up to $75,000 per person or $150K for a couple (plus any FHSA investment growth) towards a downpayment.

Gift money to adult children to fund their FHSA

If you’re in a position to gift money to your children, have them use this cash to contribute to a FHSA if they’re eligible. This strategy is appealing even if they aren’t planning to buy a home as noted above.

If your child is a student or has a low taxable income, they’re likely best to carry these tax-deductible contributions forward on their tax return to use in a future year, when they’re in a higher tax bracket.

If your child would benefit from a tax deduction now, suggest that they prioritize FHSA contributions over RRSP contributions while they’re not homeowners and are still eligible for a FHSA. This tactic lets them save their RRSP contribution room for use in later years. Keep in mind that if they don’t buy a home, they can always do a tax-sheltered transfer of their FHSA to an RRSP.

Income split with your spouse

Because of income attribution rules, there are limited opportunities for spouses to split income for tax savings.

Fortunately, FHSAs provide some income splitting opportunities. These strategies are particularly appealing in situations where one spouse is in a high tax bracket and the other is in a lower tax bracket.

As long as the lower income earning spouse or common-law partner is eligible for a FHSA, the higher income earner can fund their spouse’s FSHA account.

When contributing to a spouse’s FHSA, contributions are tax-deductible to the account owner (in this case, the lower income earning spouse). Withdrawals are taxable as income at the account owner’s marginal tax rate. However, if funds are withdrawals for a qualifying home purchase, they’re tax-free. These rules hold true even if your spouse doesn’t use the withdrawn funds towards your home.

Our final FHSA strategy is best for senior couples who rent and have one higher income earner.

In this strategy, even if you have no intention of buying a home, you can use a FHSA to generate tax savings and split income with your spouse or common law partner.

The higher income earner (ideally age 60+) makes $8,000 per year in tax-deductible contributions to a FHSA. Keep in mind that these contributions don’t impact your RRSP room (or lack thereof).

After 5 years, once you’ve contributed your $40,000 lifetime limit, you’d set up a tax-sheltered transfer from your FHSA to a RRIF.

Starting at age 65, RRIF withdrawals can be used for spousal income splitting. This holds true even if the non-account holder is still under 65. As a result, you can elect to have up to 50% of these withdrawals taxed at your spouse’s lower marginal tax rate.

So long as each spouse is at least age 65, each spouse can also claim a $2K pension tax credit, resulting in additional tax savings. 

Any questions about these FHSA strategies? Please reach out to our team; we’d be happy to elaborate and help you assess if any of these strategies make sense for you.