First Home Savings Account (FHSA) – Save $40,000 Tax-free

Buying a first home is an exciting milestone in one’s financial journey. However, saving up enough for the down payment amid rising home prices can be a daunting challenge for many first-time home buyers in Canada. The relatively new First Home Savings Account (FHSA) provides a tax-advantaged method to accelerate down payment savings specifically for your first home.

What is a First Home Savings Account?

A First Home Savings Account (FHSA) is a new registered tax-advantaged savings account introduced by the Canadian government in 2022 to help first-time home buyers save for a down payment on their first home.

The FHSA combines features of an RRSP and a TFSA into a single account, providing tax deductions on contributions and tax-free investment growth. This can help accelerate down payment savings for eligible first-time home buyers in Canada.

Who is Eligible for a First Home Savings Account?

The FHSA eligibility requirements are specifically designed to benefit first-time home buyers in Canada. To open an FHSA, you must:

• Be a resident of Canada
• Be 18 years of age or older (or the age of majority in your province)
• Have a valid Social Insurance Number (SIN)
• Be a first-time homebuyer. This means that you and your spouse or common-law partner have not owned a home that you lived in at any time in the current year or the preceding four calendar years.

For example, if you want to open an FHSA in 2025, neither you nor your partner should have owned and lived in a home in 2025 or between 2020 and 2024. The core intent is to provide access to dedicated savings accounts only for true first-timers, not existing homeowners looking to upgrade or invest in additional properties.

While the FHSA has no upper age limit to maintain an existing account, you cannot open an account in a given year if you are 71 or older as of December 31.

In summary, the FHSA eligibility criteria strike a prudent balance between helping first-time buyers get started early and restricting access only to those who need this dedicated savings tool. Let’s now look at how the account works.

How Does an FHSA Work?

The inner workings of an FHSA borrow concepts from both RRSP and TFSA accounts, but provide additional flexibility tailored to first-time home buyers. Here is an overview of the eight key mechanisms:

• Annual contribution limit – This works similarly to an RRSP. You can contribute up to $8,000 every year to your FHSA. The limit is not indexed to inflation currently.
• Carry forward room – If you don’t max out the $8,000 yearly limit, you can carry forward the unused amount to future years. The carried-over room gets added to the $8,000 annual limit.
• Lifetime contribution limit – The total amount you can contribute over your lifetime is $40,000.
• Tax deductions – Like an RRSP, you can claim tax deductions on your eligible contributions and reduce your taxable income.
• Tax-free growth – Similar to a TFSA, all investment gains, interest, dividends, etc., can grow tax-free inside an FHSA.
• Tax-free withdrawals – If used to buy your first home, withdrawals are made completely tax-free, with no repayment conditions. If withdrawn for other purposes, the amount is considered taxable income for that year.

A quick example can help solidify these rules. Let’s take the case of Miley, who opened her first-ever FHSA account in September 2024 and contributed $6,000. The unused $2,000 contribution room from 2024 will carry forward to 2025, allowing Miley to contribute $10,000 to her FHSA. She can continue contributing to her accounts until she reaches the $40,000 lifetime limit for FHSA contributions or turns 71, whichever comes first.

How Is an FHSA Different From Other Savings Accounts?

The FHSA resembles long-standing accounts like the RRSP and TFSA that Canadians have traditionally used to save for primary goals like retirement or a home. However, key differences are worth noting when using the accounts specifically to purchase your first home.

Compared to an RRSP:

• FHSA has a lifetime contribution limit of $40,000, but contributions to an RRSP have no lifetime cap.
• RRSP allows more significant lump sum contributions based on your earned income, while FHSA has a fixed annual limit.
• You can only deduct RRSP contributions until the end of the year you turn 71. The FHSA lets you keep contributing beyond 71 until you hit the lifetime cap.
• The popular RRSP Home Buyer’s Plan requires any withdrawals to be repaid into the RRSP within 15 years. The FHSA does not require you to repay withdrawals.
• RRSP accounts can be maintained indefinitely, whereas the FHSA has a maximum duration of 15 years.

Compared to a TFSA:

• FHSA contributions get tax deductions, but TFSA contributions do not.
• Both accounts provide tax-free growth on investments.
• TFSA withdrawals are always tax-free, irrespective of usage. FHSA withdrawals must be used to buy your first home tax-free.
• The TFSA has no lifetime contribution limit, while the FHSA is capped at $40,000 in cumulative room.

This table summarizes the key differences between the accounts:

Attribute	FHSA	RRSP	TFSA
Contribution Deductions?	Yes	Yes	No
Tax-free Growth?	Yes	No	Yes
First Home Withdrawals Tax-free?	Yes	Yes (with HBP)	Yes
Lifetime Contribution Limit?	$40,000	None	None
Age Limit for Contributions?	71	71	None
Account Duration Limit?	15 years	None	None

The FHSA fills a clear gap between the benefits of an RRSP and a TFSA for first-time home buyers. The tax refunds on contributions provide immediate savings similar to an RRSP, while the tax-free investment earnings facilitate long-term growth akin to a TFSA. Overall, the FHSA offers the best of both worlds!

What Should You Consider Before Opening an FHSA?

Jumping on the FHSA bandwagon without due diligence can backfire. Before opening an account, consider factors such as your home-buying timeline, savings habits, and investing experience to ensure the FHSA aligns with your profile. Five aspects to examine:

• Home buying timeframe – Are you reasonably confident about purchasing your first home within the next 10-15 years? The account is limited, so you must act before the savings clock expires.
• Meeting lifetime limits – Based on your current income and savings rate, can you max out the $40,000 lifetime FHSA contribution limit? Crunch the numbers.
• Savings acceleration – How much will the tax refunds accelerate your savings rate compared to non-deductible options?
• Investment experience – Are you comfortable investing the funds to benefit from tax-free growth? Low-risk products like GICs have limited return potential.
• Advisor guidance – Consult a financial planner to assess if the FHSA synergizes well with your debt repayment plans, retirement goals, and overall financial milestones.

You stand to gain tremendously by optimizing the FHSA as part of your first home strategy. Being thoughtful about aligning it to your financial roadmap is crucial.

How Does Closing an FHSA Account Work?

An FHSA must be closed by December 31 of whichever of the following is earliest:

• The year you turn 71.
• 15 years after opening your first-ever FHSA.

What if you don’t buy a home? If your plans change or you don’t use the funds within the 15-year limit, you have two main options:

• Transfer to an RRSP or RRIF: You can transfer the funds tax-free to your RRSP or a Registered Retirement Income Fund (RRIF). This transfer does not require or use up your existing RRSP contribution room.
• Taxable withdrawal: You can withdraw the funds, but the amount will be added to your taxable income for that year and will be subject to withholding tax.

Ideally, you should plan your contributions so that the bulk of the FHSA funds can be utilized to buy your first home within the 15-year timeframe. But the flexibility to move leftovers into your retirement nest egg is an excellent fallback option.

The key benefit of the FHSA is realizing the dream of home ownership. So, what does the process entail when you are finally ready to make that first purchase?

Making an FHSA Home Purchase Withdrawal

When the exciting day comes that you’ve found your dream first home, there are specific steps and criteria required to make a tax-free FHSA withdrawal to fund the down payment:

• Provide home purchase proof – You need a written purchase agreement proving you intend to buy a qualifying home. The purchase date must be before October 1 of the year following your withdrawal.
• Move-in within a year – You must occupy the home as your primary residence within 12 months of purchase. It cannot be merely an investment property.
• Remain a Canadian resident – You must be a Canadian resident on the date of the FHSA withdrawal and remain a resident until you own the home.
• Close accounts – All your FHSAs must be closed by December 31 of the year after your first qualifying home purchase withdrawal.

If you satisfy these conditions, the funds can be withdrawn tax-free, and you can enjoy the savings on your hard-earned first home. No tax withholding or income inclusion will apply to your withdrawal amount.

Strategic Use and Investment Options for Your FHSA

Simply opening an FHSA is the first step; strategically managing it is what builds wealth. Understanding your investment choices and how to use the account with a partner are crucial.

Investment Options within an FHSA

Like a TFSA or RRSP, an FHSA is not just a savings account; it’s an investment account. You can hold a variety of qualified investments, including:

• Guaranteed Investment Certificates (GICs): Low-risk, fixed-return investments.
• Bonds: Loans to governments or corporations that pay interest.
• Mutual Funds: Professionally managed portfolios of stocks and bonds.
• Exchange-Traded Funds (ETFs): Baskets of securities that trade on an exchange like a stock.
• Stocks: Individual shares of publicly traded companies.

Your choice of investment should align with your risk tolerance and home-buying timeline. A shorter timeline may call for lower-risk investments like GICs, while a longer timeline might allow for a portfolio with more growth potential through ETFs or stocks.

Strategic Use for Couples

The FHSA is an individual account. This means that if you and your spouse or partner are both eligible first-time home buyers, you can each open an FHSA. This allows you to collectively save up to $16,000 per year and a lifetime total of $80,000 towards a down payment, with both of you receiving tax deductions on your respective contributions. You can then both make qualifying withdrawals for the purchase of the same qualifying home.

Combining the FHSA and the RRSP Home Buyers’ Plan (HBP)

You are permitted to use both the FHSA and the HBP for the same qualifying home purchase. This allows an individual to withdraw their entire FHSA balance and up to $60,000 from their RRSP under the HBP, providing a substantial source of down payment funds.

Which Financial Institutions Offer FHSAs in Canada?

Since the FHSA launched in 2022, the availability is still expanding as Canada’s major banks roll out their offerings. Here are 8 of the top financial institutions providing FHSA accounts so far:

RBC – As Canada’s largest bank, RBC was one of the first to offer FHSAs the flexibility to open self-directed investment accounts or have advisors manage the funds.

TD – TD has also made it easy to open FHSAs online and access their specialized TD GoalAssist tool to plan your home savings strategy. You can choose from various investment options, from cash to mutual funds.

Scotiabank – Scotiabank provides FHSA eligibility checks on its website and allows funding of the account via three methods: lump sum, recurring contributions, or transfers from existing Scotia accounts.

CIBC – CIBC Smart Account is specifically designed to combine daily banking features with FHSA savings. Seamlessly contribute to your FHSA, TFSA, and personal savings in a single integrated account.

BMO – BMO offers FHSA accounts with various investment options, from GICs to mutual funds. Their advisor’s guidance helps create a personalized home savings plan.

HSBC – HSBC provides easy online applications for FHSAs. You can monitor account performance and contribute more through their digital banking platform.

Wealthsimple – Known for simplified investing, Wealthsimple allows you to open online self-directed or managed HSFA accounts. They offer free access to financial planners for guidance.

Questrade – As a low-cost online brokerage, Questrade enables the opening of self-directed FHSA investment accounts with access to ETFs, stocks, bonds and more.

In addition, many credit unions, such as Coast Capital Savings, affiliate banks like Tangerine, and robo-advisors like WealthBar, also offer FHSA accounts. Check eligibility requirements and investment options before selecting a provider.

FAQs about First Home Savings Accounts (FHSA)

Article Sources

1. Tax deductions for FHSA contributions – canada.ca
2. Closing your FHSAs – canada.ca