Can I use my FHSA to pay for closing costs on my first home purchase in Alberta?

Can I use my FHSA to pay for closing costs on my first home purchase in Alberta?

The First Home Savings Account (FHSA) is a relatively new registered savings plan introduced in 2023 to help Canadians save for their first home. Contributions grow tax‑free, and withdrawals are also tax‑free when used for a qualifying home purchase. Many prospective buyers wonder whether the FHSA can be used for expenses beyond the down payment—specifically, closing costs. The short answer is yes: FHSA funds can be applied to eligible closing costs, provided the overall withdrawal meets the FHSA’s qualifying purchase criteria.

Understanding the FHSA basics

Before diving into closing costs, it’s useful to recap the core FHSA rules that govern any withdrawal:

• Annual contribution limit: $8,000 per year.
• Lifetime contribution limit: $40,000.
• Tax treatment: Contributions are tax‑deductible (like an RRSP), and growth is tax‑free.
• Qualifying withdrawal: Must be used to purchase a qualifying home in Canada that will be your principal residence within one year of withdrawal.
• Repayment: No repayment is required (unlike the Home Buyers’ Plan).

To make a qualifying withdrawal, you must first open an FHSA, contribute funds, and then request a withdrawal when you have a signed agreement to purchase a home. The financial institution will issue a T4FHSA slip showing the amount withdrawn; you report this on your tax return, but the amount is not included in income.

What counts as a qualifying home purchase?

The Canada Revenue Agency (CRA) defines a qualifying home as:

• A housing unit located in Canada.
• Intended to be used as your principal residence.
• You (or your spouse/common‑law partner) have not owned a home in the four‑year period preceding the purchase.

The home can be a single‑detached house, semi‑detached, townhouse, condominium, duplex, or even a mobile home, as long as it meets the residency requirement.

Closing costs that are FHSA‑eligible

When you withdraw FHSA funds, you can use the money for any expense that is directly related to the purchase of the qualifying home. CRA guidance (and the FHSA legislation) treats closing costs as part of the home purchase price, provided they are:

• Paid to a third party (e.g., lawyer, land title office, municipality).
• Reasonable and customary for the transaction.
• Incurred on or before the date of closing.

Typical closing costs in Alberta that meet these criteria include:

• Legal fees and disbursements.
• Land title transfer fees (Alberta Land Titles Office).
• Mortgage default insurance premium (if applicable, paid upfront).
• Property tax adjustments (prepaid taxes).
• Utility hook‑up fees (water, sewer, gas).
• Home inspection fees (if required by lender).
• Appraisal fees (if paid upfront).
• Condo document review fees (for condominium purchases).
• Survey or real property report fees.
• Title insurance.

Expenses that are not eligible for FHSA withdrawal include moving costs, furniture, renovations, or ongoing mortgage payments after closing.

Step‑by‑step: How to use FHSA funds for closing costs

1. Confirm eligibility: Ensure you meet the first‑time home buyer criteria and have an open FHSA with sufficient contributions.
2. Get a purchase agreement: You need a firm agreement to purchase a home (conditional offers are acceptable as long as they become firm before withdrawal).
3. Request a withdrawal: Contact your FHSA provider (bank, credit union, or brokerage) and complete the withdrawal request form. Specify that the funds are for a qualifying home purchase.
4. Receive the funds: The institution will transfer the money to your designated bank account or directly to your lawyer/notary, depending on their process.
5. Pay closing costs: Use the proceeds to settle the invoices from your lawyer, land title office, etc.
6. Document everything: Keep receipts, invoices, and the withdrawal slip (T4FHSA) for your records and potential CRA review.
7. Report on your tax return: Enter the withdrawal amount on Schedule 7 (or the appropriate line) – it will not be taxed.

Practical example: Alberta first‑time buyer

Imagine Maya, a 28‑year‑old software developer in Calgary, who has saved the maximum $40,000 in her FHSA over five years. She finds a condo priced at $350,000. Her mortgage lender approves a 5 % down payment ($17,500). Estimated closing costs are:

Maya’s total cash needed at closing is:

• Down payment: $17,500
• Closing costs: $5,800
• Total: $23,300

She can withdraw $23,300 from her FHSA to cover both the down payment and closing costs. Because the FHSA lifetime limit is $40,000, she still has $16,700 of contribution room left for future years (if she ever needs it). The withdrawal is tax‑free, and she will receive a T4FHSA showing $23,300, which she reports on her return but does not include in income.

Tips for maximizing your FHSA for closing costs

• Contribute early: The earlier you start, the more you can benefit from tax‑deductible contributions and tax‑free growth.
• Keep detailed records: Save every invoice and receipt related to closing; the CRA may ask for proof that the funds were used for a qualifying home purchase.
• Coordinate with your lawyer: Inform your lawyer that part of the funds will come from an FHSA; they can often send the invoice directly to the FHSA provider for a smoother transfer.
• Watch the timing: You must make the withdrawal within 30 days of the home purchase closing date (or as specified by your FHSA provider). Plan accordingly.
• Consider combining with other programs: You can still use the Home Buyers’ Plan (HBP) from your RRSP alongside an FHSA withdrawal, as long as the total does not exceed the purchase price.

Common pitfalls to avoid

• Using FHSA for non‑eligible expenses: Spending FHSA money on furniture, renovations, or moving costs will cause the withdrawal to be considered non‑qualifying, making the amount taxable and subject to penalties.
• Exceeding the purchase price: If you withdraw more than the actual cost of the home (including closing costs), the excess is treated as a taxable withdrawal.
• Missing the first‑time buyer test: If you or your spouse owned a home in the preceding four years, you cannot make a qualifying FHSA withdrawal, regardless of how the funds are used.
• Ignoring provincial nuances: While FHSA rules are federal, some provinces (e.g., Quebec) have additional paperwork for property transfers; ensure your lawyer is aware of the FHSA source of funds.

Conclusion

Using your FHSA to pay for closing costs on your first home in Alberta is not only allowed, it’s a smart way to make the most of the tax advantages the account offers. By treating closing costs as part of the qualifying home purchase, you can withdraw funds tax‑free, reduce the amount you need to save elsewhere, and keep more of your hard‑earned money working for you. Remember to verify your eligibility, keep meticulous documentation, and coordinate with your legal and financial professionals to ensure a smooth transaction. With careful planning, the FHSA can cover both your down payment and those often‑overlooked closing fees, bringing you one step closer to holding the keys to your first home.