First Home Savings Account (FHSA) Guide For Newcomers: How It Works & Why You Should Use It

Canada’s First Home Savings Accounts combines the benefits of a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP) to provide tax advantages while you build your savings and when you need to access them. If you’re planning to buy your first home, the FHSA can be a powerful tool to help you reach your goal faster. 

FHSAs: Key Takeaways 

• A First Home Savings Account is a tax-advantaged savings vehicle, but opening one won’t automatically increase your wealth. You need to invest inside the FHSA to make money.
• You generally won’t pay tax on any interest, dividends, or capital gains earned within a FHSA, and you can withdraw funds from your FHSA without paying taxes on the amount withdrawn.
• Similar to an RRSP, your contributions reduce your taxable income, helping you save on taxes.
• The FHSA must be closed within 15 years of opening or by the end of the year you turn 71, whichever comes first. Unused funds can be transferred to an RRSP or RRIF without affecting your RRSP contribution room.

What Is the FHSA? 

The FHSA is a tax-free savings account that allows eligible Canadians to save up to $40,000 toward the purchase of their first home. Contributions to an FHSA are tax-deductible, like an RRSP, and withdrawals for a home purchase are tax-free, like a TFSA. This means you get upfront tax savings and don’t pay tax on any investment growth as long as the funds are used for a qualifying home purchase. 

The FHSA was introduced by the Canadian government in 2023 to support first-time homebuyers in a challenging housing market. If you’re struggling to save for a down payment, this account could help you reach your goal more efficiently. 

How Does the FHSA Work? 

The FHSA operates under specific rules that determine who can open an account, how much you can contribute, and when you can withdraw the funds. Here’s how it works: 

Eligibility Requirements 

To open an FHSA, you must: 

• Be a resident of Canada
• Be between the ages of 18 and 71
• Be a first-time homebuyer, meaning you have not owned a home in the past four years. Yes, this means that if you previously owned a home but now do not, you may be eligible to open a FHSA even though it’s not technically your first time buying a home.  

FHSA Contribution Limits 

The FHSA has both annual and lifetime contribution limits. Each year until your home purchase, you can add up to $8,000 to your FHSA. That’s the annual limit.  

Then, there’s a lifetime limit of $40,000. This means that you’re not permitted to add more than $40,000 to your FHSA, no matter how long you have the registered account for. This might mean that you add $8,000 each year for 5 years, or you might add $4,000 per year for 10 years. However long it takes you, $40,000 is the most you can put into your FHSA.  

Tax Benefits of an FHSA

First Home Saver Accounts offer significant tax advantages, so it can be an amazing tool for saving money in Canada – even if you don’t plan to buy a home in the next few years. (Though, as a newcomer, it’s likely that you do plan to. Many newcomers buy a home within three years of moving to Canada.) 

Here’s why you should open a FHSA:  

• Contributions are tax-deductible, reducing your taxable income for the year (similar to an RRSP). You can actually contribute to both your FHSA and RRSP in the same year to drastically reduce your taxable income.  

• Investment growth is tax-free, meaning you won’t pay taxes on any interest, dividends, or capital gains within the account. This is the same benefit as is offered by TFSAs.  

• Qualified withdrawals are tax-free, so you won’t owe taxes when using the funds to buy your first home. This is a benefit because if you saved money outside of an FHSA, many of the ‘gains’ would be taxable. So if you put the funds in an unregistered GIC, you may pay income tax on the interest. Similarly, if you saved in an unregistered brokerage account instead of a FHSA, you may pay capital gains taxes on the increase in value of your investments. You are not required to pay these taxes on gains in your FHSA. 

• You can transfer the funds to your RRSP if you don’t buy a home. If you transfer the funds directly to your RRSP, it won’t affect your contribution room. This can be a significant perk for newcomers – and it’s why you should consider opening a FHSA even if you’re not sure about buying a home in Canada, since RRSP contribution limits can impact your ability to save for retirement in tax-advantaged accounts.  

Investment Options Within A FHSA 

Like a TFSA or RRSP, you can hold a variety of investments within your FHSA, including: 

If you plan to buy soon, but want the tax deduction for this year: 

• Cash 

If you plan to buy in the next 1-5 years:  

• Guaranteed Investment Certificates (GICs) 

• High-Interest Savings Accounts. 

If you plan to buy in 5 or more years:  

• Mutual funds 

• Exchange-Traded Funds (ETFs) 

• Stocks and bonds. 

This flexibility allows you to grow your savings through investing rather than just setting aside cash. 

Withdrawals and Home Purchases 

To withdraw money tax-free from an FHSA, you must meet some pretty strict criteria. These do catch some home buyers off guard, so it’s important to carefully review them before signing any paperwork for your new home. You must:  

• Be a first-time home buyer (under the FHSA definition for a withdrawal). This is a little more complex than just not having owned a home before – because you can be eligible even if you owned a home in the past. Check out the Government’s definition here.   

• Use the funds to purchase a qualifying first home or for other qualifying expenses, such as closing costs, legal fees, a deposit on the home, or moving expenses 

• Be a Canadian resident at the time of withdrawal until you acquire the home.  

• You must plan to live in the home within one year of buying it.  

• Make the withdrawal within 15 years of opening your FHSA. 

• Make the withdrawal within certain specific timeframes involving when you signed your contract to buy or build the home and when you close on the home.  

If you don’t use the funds within this period, you can transfer them to an RRSP or RRIF without affecting your contribution room or you can withdraw the funds as taxable income. You aren’t able to transfer it to other tax advantaged accounts (like an RESP) without paying income tax on the withdrawal.  

FHSA vs. RRSP Home Buyers’ Plan (HBP): What’s the Difference? 

The Home Buyers’ Plan (HBP) is another program that helps first-time buyers, but it works differently from the FHSA. Here’s how they compare: 

Helpfully this isn’t an either/or situation. You are able to save for a down payment for your first home in the FHSA and your RRSP. So you can take whatever funds you have in your FHSA and up to $60,000 from your RRSP to buy your first home. If you have a spouse, they can also do the same. This gives you a lot of saving power for your first home.  

FHSA vs. TFSA: Which One Should You Use? 

If you’re debating between saving in an FHSA or a TFSA, here’s what to consider: 

A TFSA is more flexible since withdrawals can be used for anything, while an FHSA is more beneficial for home savings due to the tax deductions. 

Generally speaking, if you’re not sure if you will need the money in the short-term, it may be better to put the funds in your TFSA. This is because you can withdraw the money from your TFSA without penalty at any time. Once you move money into your RRSP or FHSA, there can be large penalties for accessing that money (other than to buy your first home).  

Who Should Open an FHSA?

The FHSA is a great option if: 

• You are planning to buy your first home within the next 15 years. 

• You want to reduce your taxable income while saving your down payment. 

• You want tax-free investment growth and withdrawals for homeownership. 

• You haven’t owned a home in the past four years. 

How to Open a FHSA 

Opening an FHSA is straightforward and similar to opening a TFSA or RRSP. Follow these steps: 

1. Choose a financial institution: Banks, credit unions, and online brokerages offer FHSAs. Our partner Scotiabank offers FHSA accounts.  
2. Check eligibility requirements: Ensure you qualify as a first-time homebuyer. 
3. Make contributions: Deposit up to $8,000 per year and claim tax deductions. 
4. Carefully track your contributions. Remember, you can’t contribute more than $8,000 in one year unless you have unused contribution room from previous years.  
5. Decide on investment options: Choose between cash savings, GICs, mutual funds, ETFs, or stocks. 
6. Grow your savings: Invest your funds to maximize growth potential. Remember that this is a separate step. Just putting your money into a FHSA does not mean it will grow.  
7. Withdraw when ready: Use the funds tax-free for a home purchase or transfer them to an RRSP if needed. Be sure to read all the withdrawal requirements carefully because these can be complex.  

Final Thoughts: Is the FHSA Right for You? 

The First Home Savings Account (FHSA) is one of the most valuable tools available to first-time homebuyers in Canada. It combines tax-free withdrawals, tax-deductible contributions, and investment growth, making it more beneficial than saving in a regular bank account. 

If homeownership is on your horizon, consider opening an FHSA as soon as possible to start taking advantage of its benefits. Even if you’re still a few years away from buying, the tax advantages can help you build your down payment more efficiently. 

Would you like help comparing the FHSA to your other savings options? Speak to a financial advisor to determine the best strategy for your situation.