The FHSA: Two Tax Advantages, One Narrow Purpose

The First Home Savings Account, introduced in 2023, combines a feature of the RRSP with a feature of the TFSA: your contributions are tax-deductible, and qualifying withdrawals are tax-free. It’s the only registered account that offers both. The trade-off is in the scope. Where you can use an RRSP or TFSA for almost anything, the FHSA is built around a single outcome - buying a first home - and its rules are structured accordingly.

This is the third post in our series on registered accounts. We covered the TFSA, then the RRSP. This time: how the FHSA works, who’s eligible to use it, and what happens if the home purchase it was meant for doesn’t happen.

What it actually does

You can contribute up to $8,000 a year. Unused room carries forward, but only up to $8,000 at a time - so the most you can ever contribute in a single calendar year is $16,000: this year’s limit plus one year of carryforward. Over the life of the account, your lifetime contribution limit is $40,000.

Contributions get deducted from your income the same way an RRSP contribution does, with one difference: there’s no first-60-days rule. An FHSA contribution can only be deducted against the year you actually made it, and the deadline is December 31 - not the RRSP’s extended window into the following spring.

A qualifying withdrawal - one used toward a first home that meets CRA’s criteria - comes out completely tax-free, growth included. And unlike the Home Buyers’ Plan, you never have to pay it back.

Who it’s for

To open an FHSA, you need to be a Canadian resident, at least 18, and a first-time home buyer as CRA defines it - meaning you haven’t owned and lived in a home as your principal residence at any point in the current calendar year or the previous four. That’s a narrower bar than it sounds: if you owned a home more than four years ago and have since sold it, you can qualify again.

One nuance worth knowing: for opening an account, your spouse or common-law partner’s homeownership counts too. If you’ve never owned a home yourself but currently live in one your spouse owns, you don’t qualify to open an FHSA. That test is specific to opening the account - eligibility for an actual tax-free withdrawal later is based on you alone.

The FHSA and the Home Buyers’ Plan ("HBP") can be used together toward the same purchase. You can pair a qualifying FHSA withdrawal with up to $60,000 from an RRSP under the HBP. You can also move money from an RRSP into an FHSA tax-free - the transfer doesn’t generate a new deduction, and it doesn’t restore the RRSP room you used to make the original contribution, so it’s not a way to “reset” RRSP room, just a way to relocate savings you’ve already deducted once.

What happens if the home purchase doesn’t happen

An FHSA can stay open for a maximum of fifteen years, until the end of the year you turn 71, or until the end of the year after your first qualifying withdrawal - whichever comes first. If none of those have happened and you haven’t bought a home, the account has to be wound down.

At that point you can move the balance into an RRSP or RRIF tax-free, without using any of your RRSP room, or withdraw it directly as taxable income. Either way, the deduction you already claimed on your contributions isn’t clawed back. That’s what makes the FHSA fairly low-risk to open even if you’re not certain you’ll end up buying: worst case, it simply converts into RRSP-equivalent savings rather than losing its tax treatment.

The part that actually matters

If you’re saving specifically toward a first home, the FHSA is usually the most tax-efficient place for that money - it’s the only account giving you both the deduction going in and no tax coming out. And because the fallback is a tax-free move into an RRSP rather than losing the tax treatment altogether, there’s little downside to opening one if buying a first home is even a plausible outcome for you.

Its usefulness is bounded by its purpose, though. It’s not a substitute for a TFSA or RRSP as a general-purpose investment account, and the fifteen-year window means it isn’t meant to be held indefinitely. If you’re already working with more than one registered account, the real question usually isn’t whether the FHSA makes sense - it’s how to sequence contributions across it, your RRSP, and your TFSA in the years leading up to a purchase, which is worth a conversation with your tax advisor directly.

Next in this four-part series: the RESP, and how the government’s matching grants change the way it should be funded.

Strata Capital Partners Inc. ("Strata") is registered as a Portfolio Manager in the provinces of Alberta and Saskatchewan. This article is for informational purposes only and does not consider the reader's specific circumstances. It should not be considered tax advice. The information and views provided herein are effective as at the date of publication only and are subject to change. Strata does not undertake to notify the reader of such changes. All investments involve risk, including the potential loss of principal.