What’s the difference between an FHSA, a TFSA and an RRSP?

What is an FHSA?

The new First Home Savings Account is a registered plan that could be seen as a hybrid version of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) for the purpose of buying a first home. For example, like a TFSA, the FHSA allows your savings to grow tax-free without having to pay tax when making a qualified withdrawal to purchase a qualifying home.¹ At the same time, like an RRSP, funds contributed to an FHSA are generally tax-deductible — meaning that you can claim an income tax deduction for your eligible contributions each taxation year. Unlike RRSPs, contributions that you make to your FHSAs during the first 60 days of the year are not deductible on your previous year’s income tax and benefit return. You also cannot claim a tax deduction for any FHSA contributions that you make after your first qualifying withdrawal.

What are the rules?

To be eligible to open an FHSA, you must be 18 years or older (but no more than 71 years on December 31 of the year you open an FHSA), a resident of Canada and be considered a “first-time home buyer.”² For the purposes of opening an FHSA, you may be considered a first-time home buyer if you have not lived in, as your principal place of residence, a home that you own or co-own in the year you plan to open the FHSA or at any point in the preceding four years.³

If your spouse or partner owns a home (for instance, through an inheritance or through a previous marriage) but you are not the co-owner and you do not live in the home, and have not lived in it at any point in the preceding four years, you may be considered a “first-time home buyer" for the purpose of opening an FHSA to purchase a (separate) home. But if you are not the co-owner with your spouse or partner but live in their home, you will be considered ineligible to open an FHSA.

Additionally, if you lived in a home owned by your spouse or common law partner during the relevant time, but the individual is no longer your spouse at the time the account is opened, you may be considered a "first-time home buyer."

An FHSA account holder can contribute up to $8,000 to their FHSA each year, up to $40,000 during the Maximum Participation Period (defined below). This contribution room begins accumulating once an account is opened, even if you don’t begin making contributions right away. Note, you can only carry forward a maximum of $8,000 in unused contribution room to the following year for a maximum yearly contribution of $16,000.⁵

Contributions may be made with cash or with funds transferred from your RRSP. However, if you transfer funds from your RRSP, these amounts are not tax-deductible and will affect your FHSA contribution room. Unlike some types of registered accounts, an FHSA can only be held until December 31^st of the year in which the earliest of the following occurs: the 15^th anniversary of opening your first FHSA, the year you turn 71 or the year following your first qualifying withdrawal ("Maximum Participation Period"). If you do not purchase a home within that period, you must close your FHSA and the fair market value in the plan will be taxable income. Alternatively, you may directly transfer your savings to your RRSP or Registered Retirement Income Fund (RRIF) before you close your FHSA: Your tax consequences will depend on your personal circumstances.⁶

If you are a couple looking to purchase a home, it’s important to note that both you and your partner must open your own FHSA, provided you each qualify individually. As a couple, you can both use your qualifying FHSAs withdrawals for the same qualifying home purchase.¹

What’s the difference between an FHSA, a TFSA and an RRSP?

FHSA account holders enjoy many of the same perks offered by a TFSA or an RRSP.

For example, TFSA holders generally enjoy tax-free withdrawals at any time, but don’t receive a tax deduction for their contributions. Conversely, RRSP holders can claim their contributions against their income, but must pay tax on withdrawals, except in instances like the Home Buyers’ Plan (HBP). With an FHSA, qualifying withdrawals are tax-free. Contributions to your FHSA are generally tax-deductible.

What’s the difference between an RRSP HBP withdrawal and a qualifying withdrawal from an FHSA?

Although both the HBP and the FHSA may be available to help you fund the purchase of a home, the HBP only allows you to borrow money from your RRSP — you’ll be required to pay it back within 15 years. When you make a qualifying withdrawal from your FHSA, you are not required to pay it back to your FHSA.¹ You can also participate in both the HBP and make a qualifying withdrawal from your FHSA for the same qualifying home, as long as you meet all requirements at the time of each withdrawal.

FHSAs, TFSAs and RRSPs all have benefits and drawbacks depending on your personal situation and you may be able to use a combination of accounts to help achieve your specific financial goal. Here are some other key differences and similarities to know when you’re saving to buy a home: