With the introduction of the FHSA (Tax-Free First Home Savings Account) in April 2023, it raises the question of is the FHSA better investment option over the RRSP (Registered Retirement Savings Plan) Home Buyers Program (HBP)? Many Canadians are going to be faced with the decision of which program to invest their hard-earned money in to reach their goal of buying a home. For right now, let’s put aside the issue of prices of homes and the ability to afford them with higher interest rates, and solely focus on what the two accounts are and how they work.

How each program works

The FHSA allows individuals over the age of 18 to invest an annual maximum of $8,000 up to a lifetime amount of $40,000. The contributions are tax-deductible, growth is tax-free, and qualifying withdrawals are tax-free as well. There is the added benefit that any withdrawal does not need to be repaid. The HBP allows for a one-time $35,000 tax-free withdrawal from the RRSP for the purchase of your first home. All contributions to the RRSP are tax-deductible, the growth is tax-deferred, and qualifying withdrawals under the HBP are tax-free. However, any withdrawal must be repaid back to the RRSP over a 15-year period, or else that money will become taxable.

Amounts towards a home purchase

The first major difference between the two accounts is how much you can withdraw from the account. The HBP is a set $35,000, so even if your RRSP account is at $70,000, you are limited to a $35,000 withdrawal under the HBP. In contrast, there is no withdrawal limit to the FHSA. This means that if the account value of your FHSA is $60,000 and grows based on returns over time, you can withdraw the full $60,000 towards the purchase of your first home. Based on this factor, you can put more money towards a home using the FHSA.

Reaching your limit

How much you can contribute to your RRSP is solely based on your previous years’ income amount. This is 18% of your earned income, up to the maximum of $29,210 for 2022. All unused contribution room in your RRSP is carried forward into the next year. The maximum you can deposit in any given year is based on your contribution limit, and there is no set lifetime limit. With the FHSA, the annual contribution limit is $8,000 with a maximum carry-forward limit of $8,000, and the lifetime contribution limit is $40,000. So, if in 2023 you deposit $5,000 into the FHSA, in 2024 your annual contribution limit will be $11,000 ($3,000 unused from 2022 + $8,000 for 2023).  The HBP has a slight advantage as you have the capability to put more into your RRSP rather than your FHSA in any given year. Allowing you to reach your goal of a down payment for a home in a faster time frame than the FHSA.

Contribution room

Both the RRSP and FHSA allow for a tax deduction on any contributions. However, the calculations are not interchangeable, meaning any contribution to your FHSA will not reduce your RRSP contribution room or vice versa. This allows you to deposit up to the $40,000 lifetime amount within your FHSA and receive a tax deduction without lowering your RRSP contribution room. If you are able to open an FHSA, you automatically receive $40,000 of tax-deductible room in addition to your RRSP contribution room. Any deposits into your RRSP will not hurt the contribution amounts within your FHSA. One nice thing is that you can transfer money from your RRSP to your FHSA based on your FHSA contribution amount. Doing so will not change or replace your RRSP contribution limit for the year, nor will it allow for an additional tax deduction on the money moved. Essentially, doing this transfer will wipe out $8,000 of tax-deductible contribution room. Based on this, there is a benefit to opening an FHSA account so you can take advantage of this $40,000 of tax-deductible room even if you do not use it for your first home.

So, what does this all mean?

Like most financial decisions, which investment account and strategy are best for you will depend on your financial goals, risks, and timelines. Another thing to remember is that this all depends on if the proposed legislation, which will allow an individual to use both the FHSA and HBP, is passed. Otherwise, the decision between the FHSA and HBP will come down to your desired time frame to purchase a home. If you are still unsure which investment account you should utilize first to reach your goals, I offer free consultations over video chat to talk about your situation and what might be best for you.