Saving for the future is a crucial financial goal, and two popular options that offer unique advantages are First Home Savings Accounts (FHSA) and Tax-Free Savings Accounts (TFSA). Both serve as powerful tools for building financial security, but they cater to different objectives. Understanding the differences between these accounts is essential for making informed decisions about your savings strategy. In this comprehensive guide, we’ll delve into the key features, benefits, and considerations of FHSA vs TFSA, helping you navigate the path towards your financial goals with confidence.
Table of Contents
FHSA vs TFSA : Features Comparison
| TFSA | FHSA | |
| Contributions | The money deposited in a TFSA is after-tax contributions, which means taxes are implied on the money you contribute in a TFSA. Here’s a simple way to think about it: the money you put into a TFSA account doesn’t lead to any tax deductions from your annual income. For instance, if you have an annual income of $100,000 that is subject to taxation, and in the same year, you contributed $5,000 into your TFSA, this contribution won’t be subtracted from your taxable income, as it would be in an FHSA or an RRSP. | The contributions are tax-deductible, meaning, the amount you contribute in a year is deducted from your taxable income for the year. Ex: Let’s say you have a taxable income of $100,000 for the year. You contributed $8000 in the FHSA account. Your new net taxable income for the year would be ($100,000-$8000) $92,000 now. |
| Withdrawals | You can withdraw your savings at any time, without any capital gains tax (tax in your withdrawal) and penalties. The tax-free component is crucial: you’ll pay zero taxes on investment income. It doesn’t matter if your investments grow from $5,000 to $500,000. As long as your investments are sheltered in a TFSA, the CRA won’t tax you on the money you withdraw. | Tax free withdrawal when withdrawal is made for buying your first house. |
| Contribution limit | There is an annual limit on the contributions you can make in a TFSA. For 2023, the maximum annual contribution you can make in a TFSA is $6500 (as against $6000 for 2022). But any unused contributions in a year can be rolled over to the next year. Furthermore, any withdrawals you make in the TFSA in the previous year is also added to your TFSA contribution limit. | CAD 8,000 in one year and CAD 40,000 for the lifetime |
| Eligibility | A Canadian resident or citizen with age 18 years or more can open a TFSA. | A Canadian resident or citizen with age 18 years or more can open a TFSA. Be a first time home buyer in Canada. |
| Good for? | A TFSA is preferable when you aim for relatively short term investments, for example for buying a car, downpayment for your house, etc. | Those who are planning to buy their first house. |
| Growth of funds | Tax deferred growth of funds: The contributions you make within a Tax-Free Savings Account (TFSA), along with the accrued interest on your contributions, remain exempt from taxation. | Tax deferred growth of funds: This means that the contributions you make in an FHSA, along with the accrued interest on your contributions, remain exempt from taxation. |
What is TFSA?
A TFSA is a registered retirement and savings account for residents in Canada, in which your contributions grow tax-free and even your withdrawal is tax-free.
This means that the contributions you make within a Tax-Free Savings Account (TFSA), along with the accrued interest on your contributions, remain exempt from taxation. Even upon withdrawal of funds from a TFSA, no capital gains tax is imposed.
However, money deposited in a TFSA is after-tax contributions, which means taxes are implied on the money you contribute in a TFSA. Hence, akin to its counterparts like an RRSP and FHSA, a TFSA does not provide tax rebates by reducing your taxable income.
The TFSA allows you to invest your funds in stocks, ETFs, and more, without incurring any taxes on the interests and gains.
What is FHSA?
The “tax-free first home savings account” or “first home savings account” or simply the FHSA is a registered savings plan specifically designed for Canadians aiming to buy their first home.
Your contributions made in an FHSA grow tax-free. This means that the contributions you make within a FHSA, along with the accrued interest on your contributions, remain exempt from taxation.
Withdrawal of funds from an FHSA, as long as it is done for buying your first house, has no capital gains tax imposed.
The contributions are tax-deductible, meaning, the amount you contribute in a year is deducted from your taxable income for the year.
Withdrawals-FHSA vs TFSA
FHSA Withdrawals
The First Home Savings Account (FHSA) is specifically designed to help first-time homebuyers in Canada. Since it is tailored for purchasing your first home in Canada, withdrawals for other purposes incur taxes.
It is crucial to exercise caution when making withdrawals from FHSA, as improper handling can result in taxes and penalties. What are these important considerations? Let’s take a look:
Withdrawals are exempt from taxation when:
- You are in Canada at the time of withdrawal.
- The withdrawal amount is less than or equal to CAD 40,000 (forty thousand).
- The withdrawal is made with the express purpose of purchasing your first home in Canada, where you plan to reside. This must be substantiated by presenting a signed agreement to either build or buy a home in Canada before October 1st of the year following the year of withdrawal.
For instance, if you withdraw your FHSA funds by September 27th, 2023, you must provide your signed agreement to build or buy a house by October 1st, 2024.
Should these conditions not be met, your FHSA withdrawals will be added to your taxable income for the year, and taxes will be imposed.
TFSA Withdrawals
Withdrawal at any time and for any purpose: One of the key advantages of a TFSA is the flexibility it offers for withdrawals. Funds can be taken out at any time, for any purpose, without any tax implications or any penalty.
No limit on withdrawals: There is no limit on the amount you can withdraw from your TFSA at any one time.
No tax implications or penalties on withdrawals: Withdrawals do not count as income, which means they have no impact on benefits like the GST Credit, Employment Insurance and Old Age Security.
Withdrawals from the previous year are added to the contribution room for the following year: Any amount withdrawn in the past year is added back to the contribution room the following year.
Eligibility-FHSA vs TFSA
FHSA Eligibility
In order to open a FHSA account, you should meet the below conditions at the time of opening of the account.
- Age of 18 years or more at the time of opening of the account.
- Not more than 71 years of age on December 31 of the year of opening of the account.
- A resident of Canada.
- A first-time home buyer: This means you you did not, at any time in the current calendar year before the account is opened or at any time in the preceding four calendar years, live in a qualifying home (or what would be a qualifying home if located in Canada) as your principal place of residence that either:
- you owned or jointly owned
- your spouse or common-law partner (at the time the account is opened) owned or jointly owned
Source canada.ca website
TFSA Eligibility
- Resident of Canada and has a valid SIN number
- Must be at least 18 years of age or older.
Please note that, any individual that is a non-resident of Canada who has a valid SIN and who is 18 years of age or older is also eligible to open a TFSA. However, any contributions made while a non-resident will be subject to a 1% tax for each month the contribution stays in the account.
Investment Options- FHSA and TFSA
FHSA Investment options
Stocks, options, bonds, mutual funds, ETFs and GICs
TFSA Investment options
The TFSA can be used as another savings account or as an investment account. You can invest in eligible or permitted TFSA investment options. Non-qualified investments, which are not allowed in a TFSA, would be taxed heavily. The list below shows some common types of eligible investments that are allowed in a TFSA:
- Cash
- Stocks
- Bonds
- Mutual Funds
- Guaranteed Income Certificates (GICs)
- Exchange-Traded Funds (ETFs)
- Qualified Small Business Corporation (SBC) Shares
Conclusion
In the realm of personal finance, choosing the right savings vehicle can make a significant impact on your financial journey. First Home Savings Accounts (FHSA) and Tax-Free Savings Accounts (TFSA) each offer distinct advantages tailored to specific goals. Whether you’re focused on homeownership or broader financial growth, understanding the nuances of these accounts empowers you to make decisions aligned with your aspirations. Remember, there’s no one-size-fits-all approach, and consulting with a financial advisor can provide valuable insights based on your unique circumstances. By leveraging the benefits of FHSA or TFSA, you’re taking a significant step towards securing a prosperous future.
