What is the First Home Savings Account?

Workplace savings programs are often thought of primarily in terms of retirement. But the First Home Savings Account (FHSA) can extend that program to a goal many employees are focused on much sooner: buying a first home. It is a registered account that can be incorporated into an employer-sponsored group savings program - and for the right workforce, it is a benefit that stands out.

What is it?

The FHSA is a registered account designed to help Canadians save for a first home, and its appeal comes from combining two tax advantages people usually have to choose between. Contributions are generally tax-deductible, like an RRSP, while qualifying withdrawals to buy a qualifying home are tax-free, like a TFSA. Investment income and gains can also grow tax-free within the account. That combination - a deduction going in and a tax-free withdrawal coming out, with no requirement to repay - is what sets it apart from other savings options.

Who can open one?

To open an FHSA, an individual must be a Canadian resident, be at least 18 (or 19 in provinces or territories where that is the age to enter into the account contract) and 71 or younger as of December 31 of the year it is opened, and qualify as a first-time home buyer. For this purpose, an individual generally qualifies if, in the current year before opening the account and the previous four calendar years, they did not live as their principal residence in a qualifying home that they owned or jointly owned, or that their current spouse or common-law partner owned or jointly owned. That distinction matters - a spouse simply owning a property does not fail the test if the individual never lived in it as their principal residence. The account's maximum participation period ends on December 31 of the year in which the earliest of these occurs: the 15th anniversary of opening the first FHSA, the holder turning 71, or the year following the first qualifying withdrawal.

How does participation room work?

In the ordinary course, an FHSA provides $8,000 of new participation room each year, subject to a $40,000 lifetime limit, and both contributions and transfers from an RRSP use that room (though RRSP transfers are not deductible again). Up to $8,000 of unused room can generally be carried forward, so someone who did not use prior-year room may have up to $16,000 available in a later year - and specialized rules around excess amounts and taxable withdrawals can affect the calculation. Room does not accumulate automatically at age 18; it begins only once the first FHSA is opened. Opening one earlier can start unused room accumulating, but it also starts the maximum participation period, so the timing is worth considering.

Why does it matter in a workplace program?

An employer-sponsored group FHSA is a collection of individual employee accounts, each held between the employee and the issuer, with the employer facilitating contributions - including by withholding amounts from pay and remitting them on the employee's behalf. Where a contribution is withheld this way, it can reduce the remuneration on which income tax is deducted, provided the employer has reasonable grounds to believe the employee can deduct it for the year. That allows the tax benefit to show up through payroll rather than waiting until the employee files their return. For employees, it also makes saving automatic and provides access to a valuable account they might not have set up on their own.

A few things to keep in mind

The FHSA can be used alongside the RRSP Home Buyers' Plan for the same qualifying home, provided each program's conditions are met - giving first-time buyers more than one source of savings to draw on. Contributing or transferring more than the available room creates an excess amount, generally taxed at 1% per month on the highest excess in the month until it is resolved, so employees should track their room and their contributions and RRSP transfers, which they can check through their CRA account. As with any registered account, individual circumstances vary, and specific tax questions are best confirmed with a qualified tax professional.

A program that meets people where they are.

A workplace savings program is strongest when it reflects what employees are actually working toward. For many, a first home is a nearer goal than retirement, and adding access to an FHSA can make a program relevant to both. Whether it belongs in a given program depends on the workforce and how the program is structured - a practical question to work through when reviewing the savings options available to employees.