FHSA! Another account with an acronym that doesn’t quite tell the whole story. In 2021 the Liberal government introduced the FHSA as part of their election campaign. It was designed to make housing more affordable for young Canadians. 

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Today, the account looks much dit than it did when it was just a concept in 2021. Here are a few things that were present in the original draft, yet not when the account came into effect in April 2023. 

1. Originally, you couldn’t hold an FHSA if you were 40 years of age or older
2. Originally, you couldn’t combine the FHSA with the RRSP home buyers plan
3. Originally, you could carry forward unused contribution room indefinitely

So, what does the plan look like now?

Here are the basics:

1. Tax deductible contribution limit of $8k per year per qualifying 
2. Carry forward a maximum 1-year contribution room
3. $ 40,000-lifetime contribution limit
4. Age limit to 71
5. Transfer unused amounts tax-deferred into your RRSP
6. Withdraw tax free to buy a qualifying home
7. No repayment requirement
8. Can be combined with the RRSP home buyers plan
9. Must be a qualifying first time home buyer to open the account
10. Must be a qualifying first time home buyer to withdraw funds from the account

There are more, but those are the basics of the First home savings accounts. 

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So, how does this work in real life?

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If you make $100k in Ontario, your combined federal and provincial marginal tax rate is 33.89%. By contributing $8k to your FHSA, you will get tax savings of approximately $2,852. 

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Calculated as: Contribution x Marginal tax rate = tax savings

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Combined with the RRSP, the FHSA can be a powerful tool to help Canadians save money in taxes, and incentivize them to use the FHSA to buy their first home. 

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Here is an example of how someone can use the RRSP and the FHSA to buy their first home. 

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Sam and Aleesha are professionals in Toronto making $100k each and looking to save for their first property. They have about $2,500 per month that they can commit to the goal, and decide to allocate it as follows:

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$666 per month into Sam’s FHSA ($8k for the year)

$666 per month into Aleesha’s FHSA ($8k for the year)

$583 per month into Sam’s RRSP ($7k per year)

$583 per month into Aleesha’s RRSP ($7k per year)

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By doing this, Sam and Aleesha will contribute $7k per year to their RRSP and $8k per year to their FHSA, for a total of $15k per year.

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Assuming they earn $100k per year, they will get tax savings in the form of a refund, of approximately $4,727 each per year. 

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As you can see in the table below, here is what the situation would look like when we combine the totals for them both. 

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*Always check with CRA to ensure your contribution limits to accounts before acting on any information you see online. 

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To summarize, they contribute $150k over 5 years to ensure they have $35k each in their RRSPs, $40k each in their FHSA plans. This generates a combined tax refund of $9,450 per year which they save in their respective TFSA plans. 

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They can then use the RRSP home buyers plan, and the FHSA in combination with each other to withdraw all funds tax free. 

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In the case of the RRSP home buyers plan, they will have to repay their $35k contribution over the next 15 years. 

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In total, they will have approximately $197,270 if they save their tax refunds. Its a pretty powerfual combination.

All else being equal the best accounts to save for your home in order are:

1. FHSA
2. RRSP
3. TFSA
4. Non-Registered Account. 

Remember, even though you can invest in stocks, bonds, ETFs, and mutual funds inside your FHSA, you should always know the risk level of the fund you are investing in, and make sure you are not likely to lose money when you need it. If its short term funds, we recommend not putting it anything risky. 

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At Millen Wealth Advisors, we help millennials plan to buy their first home, rental properties and invest for their future.