Understanding FHSA contribution limits

Interested in ramping up saving for your first home? One option is the First Home Savings Account (FHSA). This savings vehicle gives eligible future first-time homeowners in Canada a way to contribute up to $40,000 in the account toward their home purchase.

We break down how much you can contribute to an FHSA, including ways to use carryforward amounts and spousal contributions.

In order to be eligible for an FHSA, you need to meet all of the following criteria:

• Prospective first-time homeowner
• Canadian resident
• You have to be at least 18 or 19 years of age (depending on your province or territory)
• You or your spouse can't own a home in which you lived, at any time in the year the account is opened or during the previous four calendar years

There's a bit of flexibility on what's classified as a first-time homeowner. You're considered a first-time homeowner if you haven't lived in a qualifying home that you owned or jointly owned within the past four calendar years.

Additionally, if you purchased rental or income property and never lived in it, you may qualify for an FHSA.

Keep in mind that only the account holder is eligible to claim the tax deduction for contributions made to an FHSA. For example, a family member cannot contribute to your account and take the tax benefits for themselves.¹

Currently, individuals with an FHSA can contribute up to $8,000 annually. If you overcontribute to your account, there are tax consequences. Expect to pay a 1% tax each month on the highest excess FHSA amount in that month until that overcontributed amount is removed from the account.²

For example, if you contribute $6,000 to your FHSA in February, and then $4,000 in March, you'll have contributed $2,000 over the annual $8,000 limit. You'll then need to pay a 1% tax on that $2,000 each month until you fix this mistake or until the annual contribution limit resets the following January. There are different options to removing the excess amount – from making a taxable withdrawal from your FHSA to making a transfer from your FHSAs to your RRSP or RRIF Learn more here.

While over-contributing can be a costly mistake, there's no penalty if you cannot contribute the maximum $8,000 each year. In fact, the unused contributions from a previous year can be carried forward and added to your annual contribution limit for subsequent tax years (up to an additional $8,000 per calendar year).² This allows you to play catch-up on your savings during years when you have more disposable income or if you receive a tax return or inheritance.

Here's how that might look: You're only able to contribute $2,000 in your first year of opening an FHSA. The next year, you receive a substantial tax refund and are able to contribute $14,000 ($8,000 annual contribution limit + $6,000 carryforward amount from your first year) without penalty or loss of tax benefits.

You can contribute to your FHSA account for 15 years or until you hit $40,000, which is the lifetime limit.¹ Even if you don't think you'll hit the $40,000 milestone, the FHSA is still worth considering for saving toward a home purchase. Once you are ready to use your funds, you can withdraw up to $40,000 plus any capital growth tax-free and use it toward your home purchase.

In order to avoid tax consequences, you have to close your FHSA before your maximum participation period ends, which includes the 15th anniversary of opening your account, when you turn 71 years old, or the year following your first qualifying withdrawal.²

The best reason to save for a home with the help of an FHSA is the tax benefit. You may be asking, "How much does an FHSA actually reduce my taxable income?"

When you make contributions to your FHSA, you're eligible to claim a deduction on your income tax return. The amount of the deduction is equal to the total contributions you made to your FHSA within the tax year, up to the annual contribution limit of $8,000. This means that your taxable income will be reduced by the amount you contribute to your FHSA.

For example, if you contribute $5,000 to your FHSA in a tax year, you can deduct $5,000 from your taxable income when filing your income tax return. As a result, your taxable income will be lower, which may lead to a reduced tax liability. The same rule applies for carry-over contributions — if you're able to contribute $10,000 with your carry-over amount, you can deduct $10,000 from your taxable income.

You can also choose to deduct the contribution in a future year, as long as you don't go over $40,000 of lifetime deductions. Over-contributions to FHSAs, however, cannot be deducted and can impact how much you can deduct altogether.

Keep in mind that unlike RRSP, contributions made to your FHSA during the first 60 days of the year aren't deductible on your previous year's income tax and benefit return. So if you contribute on January 1, 2024, you're not able to deduct them on your 2023 tax filing like you are for RRSPs. If you wish to write off your contributions, you'll need to make them between January 1 and December 31.³

Yes, you can contribute to both FHSA and RRSP  accounts to the maximum annual limits. Transfers made from your RRSP to your FHSA are not tax-deductible, and transferring funds from your RRSP to an FHSA doesn't open up room in your RRSP.

You'll also be able to use up to $60,000 from your RRSP for your first home under the Home Buyers' Plan (HBP) , but you'll have to repay the amount within 15 years, unless you are over the age of 55. You don't have to repay your withdrawal from your FHSA.⁴

Your spouse or common-law partner can also contribute to their own FHSA up to $40,000 for the lifetime of the account as long as they meet the eligibility requirements. When it's time to buy your first home, you'll both be able to withdraw up to a combined $80,000 plus your capital growth in the account.

While your spouse or partner can have their own account, you cannot contribute to it or reap tax benefits on it.² For example, if you make $100,000 per year and want to save $8,000 in your account and $8,000 in theirs, you'd only be able to deduct your $8,000 contribution during tax time. Your taxable income would be $92,000, not $84,000.

You're not able to transfer your funds from your FHSA to a current or former spouse or partner without tax consequences. The only way to avoid tax issues is if the law proves that your spouse or partner is entitled to a portion of your fair market value (FMV) of your FHSA and the funds are transferred directly to that spouse or partner's FHSA, RRSP or RRIF. Withdrawing from your FHSA to give funds to your former spouse or partner will result in taxation.⁵

Since FHSAs are a new tax-free savings vehicle for 2023, it's important to have all of your questions answered so you don't over-contribute or miss out on the tax benefits. Here are some more common questions and answers that can help you decide how much to contribute and when to withdraw from your FHSA.

The current FHSA contribution limit is $8,000. This is the first year for these types of accounts, so carry-over amounts will not take effect until next year.

If you opened an account in 2023, you’re able to contribute up to $8,000. If you didn't contribute the full amount, you can put that leftover or carry-over amount in your FHSA in addition to another $8,000. The maximum contribution you can make in 2024 is $16,000, assuming you opened an account in 2023 and didn't make a contribution.

Yes, however, the annual and lifetime limits remain the same. If you open an FHSA and contribute $5,000, you can only contribute an additional $3,000 to another account that calendar year.

No. This account is only for first-time homeowners who have not lived in a qualifying home that they owned or jointly owned within the past four calendar years. If you sell your current home and rent for the next four years, for instance, you'll then be eligible to open an FHSA. If you own a rental property and have never lived in it, you can be eligible for an FHSA.

There's no minimum holding period.

The FHSA is an exciting new program that can help turn your home- buying dreams into a reality. Even if you aren't sure if you want to buy a home or if you can contribute $8,000, now is still a great time to consider opening an FHSA. Once you open your account, you have 15 years to contribute (or until you turn 71, whichever happens first) and use it for your first home purchase. If you don't use it for a home, no worries — you can do a tax-deferred transfer to your RRSP or RRIF.⁴