A house for sale in Toronto in 2022. A recent report found that most Canadians who save through an FHSA to purchase their first home earn more than $80,000 a year.Eduardo Lima/The Globe and Mail
The first home savings account, or FHSA, is mostly helping those with higher incomes and family financial support, according to a new study by the Canadian Tax Observatory, a non-profit focused on policy research.
Most Canadians who save through the tax-sheltered account to purchase their first home earn more than $80,000 a year, significantly above the national median income for individuals, the report found. At lower levels of incomes, a much smaller share of savers still manage to make large contributions, likely thanks to financial gifts from family, according to the research.
“This should be no surprise,” Heather Scoffield, CEO of the Canadian Tax Observatory and author of the report said in a statement.
“The program is very generous, since it’s tax-free on the way in and tax-free on the way out, and so the FHSA has quickly established itself as a mainstream tax shelter for anyone with extra cash.”
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Created by the government of former prime minister Justin Trudeau, the FHSA allows eligible Canadians to make tax-free contributions, as with a registered retirement savings plan, or RRSP, and also to withdraw the money tax-free, as with a tax free savings account, or TFSA.
Savers can contribute up to $8,000 annually, up to a maximum of $40,000.
The study used Canada Revenue Agency data from 2023, the first year the FHSA became available. It found its highest use among Canadians with incomes between $70,000 and $100,000, although contributors with earnings as high as $250,000 also showed above-average use.
Canadians with incomes below $45,000 are much less likely to put money into an FHSA, the numbers show. But even among them, a small minority managed to make relatively large deposits.
For example, among FHSA contributors with incomes below $20,000, the average annual transfer to the account was $4,000. The data raises the question of where those funds came from, said Ms. Scoffield, who was previously an Ottawa bureau chief and economics columnist for the Toronto Star.
A recent survey by the Canada Mortgage and Housing Corporation found that roughly 40 per cent of first-time homebuyers used FHSA savings for a down payment. A similar percentage also relied on financial help or inheritances, with those gifts averaging more than $74,500.
While the bulk of FHSA contributors are between the ages of 25 and 34, adults under 25 made up the second-largest age group, with just under 95,000 people saving into that account in 2023. The average annual deposit for the youngest FHSA holders was slightly above $5,500.
Young people who receive family help are typically able to buy a home years before those who don’t, said Ms. Scoffield, quoting research from the Bank of Canada.
“There’s also a whole bunch of people whose parents are able to come up with a whole bunch of extra money,” Ms. Scoffield said.
It’s little wonder the FHSA’s uptake has grown sharply in the past few years, she added. But that popularity comes at a cost, she said.
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Data from the Department of Finance shows that by 2027, the FHSA is projected to account for nearly $1.6-billion in foregone federal income tax revenue, up from $545-million in 2023.
By then, FHSA savings are expected to make up just under 10 per cent of the roughly $17-billion in annual revenue that Ottawa will lose to various federal housing tax breaks.
(That government estimate includes measures such as the capital-gains tax exemption on the sale of a principal residence, among many others. But it doesn’t reflect recently announced plans by the federal and Ontario governments to expand a sales tax rebate on newly built homes in the province.)
Given the FHSA’s rapidly growing cost to government revenues and the fact it mostly benefits higher income earners and those with family wealth, Ottawa should avoid increasing the account’s contribution limits to match inflation, Ms. Scoffield said.
The federal government should also examine who really benefits from its many other housing tax breaks, she added.
