TFSAs and FHSAs: Tax-Free Wealth Building Tools

There are few investment options without potential tax consequences. Two important exceptions are the Tax-Free Savings Account (TFSA) and the First Home Savings Account (FHSA). For younger Canadians, the benefits of tax-free growth compounding over time can be substantial. Older investors interested in tax-efficient, intergenerational wealth transfers can consider assisting younger family members with TFSAs and FHSAs. Unlike the US, there are no taxes on cash gifts in Canada.

The popular TFSA has provided opportunities for tax-free investment growth since 2009. According to Statistics Canada, which publishes TFSA statistics with a two-year lag period (2024 information is based on 2022 data) approximately 17.7 million people hold more than 28 million TFSA accounts. This means roughly 54% of Canadians aged 18 or older have one. In 2022, 55% of them put money into a TFSA, but only 16% maximized their contribution.

Key TFSA information

• To open a TFSA you must be a Canadian resident with a valid SIN (Social Insurance Number) and age 18 or older.
• The annual contribution limit for 2024 is $7,000.
• Investment gains within a TFSA and TFSA withdrawals are both tax-free.
• Contributions are not tax deductible.
• Contribution room is cumulative, so you can make up any unused room from past years all the way back to 2009 if you were 18 that year.
• The maximum contribution room for 2024 is $95,000 for anyone who was 18 in 2009 but has never contributed.
• Future annual contribution limits will be indexed to inflation and rounded to the nearest $500.
• The 2025 limit is expected to remain at $7,000, lifting the cumulative room to $102,000 since 2009.
• Investment gains within a TFSA do not count against annual contribution limits.Withdrawals create additional contribution room for the following year equal to the amount withdrawn.

Understanding contribution room

Your annual contribution room is the total of the following:

• The dollar limit of the current year ($7,000 in 2024).
• Any unused TFSA contribution room from previous years.
• The dollar amount of any withdrawals made in the previous year.

Note that if you withdraw and recontribute to a TFSA in the same year without having contribution room available, you will be taxed 1% a month on the amount of the overcontribution.

Example: You have maximized your annual contributions for 2024. On January 15th,2025 you withdraw $9,000. This creates new room of $9,000 for 2026. If you (re)contribute that money in 2025 (over and above your annual contribution of $7,000) you will be taxed on it. You should instead wait until January 2026, at which point you will have contribution room of $9,000 plus the annual contribution limit for that year.

You can track your total TFSA contribution room using CRA’s online My Account service. Be aware however that your contribution information there is typically updated just once per year, so it may not be current. It’s important to keep your own records of contributions and withdrawals.

Starting early and maximizing contributions whenever possible can drive tax-free TFSA growth over time. The annual limit started at $5,000 in 2009 and gradually rose over time, including a one-time only boost to $10,000 in 2015. Investment choices for TFSAs are as diverse as a standard investment account. Your advisor can make suggestions to complement your overall financial profile, including investment objectives, age, and progress towards retirement income goals

FHSA

The FHSA is a new investment vehicle designed to help Canadians save for their first home. Introduced on April 1, 2023, the FHSA combines some features of both a TFSA and an RRSP and offers tax advantages that make it a good savings option for first-time homebuyers. As of December 31, 2023, there were 739,310 FHSA holders. The value of all FHSAs at the end of 2023 was estimated by CRA to be approximately $2.8 billion. The average balance was $3,900, and the median was $2,610, with 44% of account holders reporting taxable income of $53,359 or less. FHSA investment choices include stocks, bonds, mutual funds, ETFs and GICs.

To open an FHSA you must be a Canadian resident with a valid SIN (Social Insurance Number), age 18 or older and be a first-time home buyer. This means you did not live in a home owned by you, your spouse or common-law partner, at any point in the year the FHSA is opened or previous four years, including ownership shares in co-op housing.

While the FHSA is specifically intended to help first time home buyers it also offers some flexibility for those who ultimately decide against a buying a home within the 15-year lifecycle of an FHSA

Key FHSA information

• Contribution room starts accumulating when an FHSA is opened.
• The annual contribution limit is $8,000 and the lifetime limit is $40,000.
• A maximum of $8,000 in unused contribution room can be carried forward to a future year, so a much more restrictive definition of unused room than a TFSA.
• Unlike a TFSA, FHSA contributions are tax-deductible.
• The tax deduction can be taken in the year of the contribution or carried forward.
• FHSA withdrawals are tax-free.
• An FHSA can remain open for 15 years or until the end of the year you turn 71, whichever comes first, but you are not required to buy a home in that period.
• After 15 years you can transfer all the money in an FHSA to an RRSP or RRIF tax-free.

To make a qualifying FHSA withdrawal you must:

• Be a first-time home buyer and Canadian resident when you make the withdrawal.
• Have a purchase agreement to buy or build a home in Canada before October 1st of the year after the withdrawal.
• Live in the home as your primary residence within one year of buying or building it.

Making a withdrawal starts the process of closing the FHSA because it must be shut down by the end of the calendar year following the withdrawal. The FHSA holder cannot open another one in their lifetime. Contributions made after the withdrawal are not tax-deductible.

Similar but different – and let time do the work

Both the TFSA and FHSA provide tax-free opportunities to save and invest. Differences between them include tax treatment of contributions, the amount of carry forward contribution room and the longevity of the accounts.

The utility of each will vary depending on personal circumstances, with the FHSA being available only for those who have never owned a home. As with most investments, time is a critically important factor for capturing the benefits of compound growth. The longer you can invest, the greater the potential rewards. Parents and grandparents seeking targeted, tax-efficient tactics for intergenerational wealth transfers can explore the possibilities for helping younger family members participate in both of these compelling opportunities. Your advisor can provide more information and assist with appropriate investment choices