For many Canadians, the dream of owning a home feels increasingly out of reach. Skyrocketing prices, high interest rates, and the daunting task of saving a substantial down payment can make the journey seem impossible. But what if there was a powerful new tool designed specifically to help you achieve that dream faster and more tax-efficiently?

Enter the First Home Savings Account (FHSA). Introduced by the Canadian government in April 2023, the FHSA is a game-changer for first-time homebuyers, combining the best features of an RRSP and a TFSA to supercharge your down payment savings.

This complete guide will walk you through everything you need to know about the FHSA, from eligibility and contributions to tax-free withdrawals and how it stacks up against other popular registered savings accounts.

What is the FHSA (First Home Savings Account)?

At its core, the FHSA is a registered savings plan designed to help eligible first-time homebuyers save for a down payment on a home. It offers a unique “double tax advantage” that makes it incredibly powerful:

1. Tax-Deductible Contributions: Like an RRSP, the money you contribute to an FHSA can be deducted from your taxable income, potentially lowering your tax bill in the year of contribution.
2. Tax-Free Withdrawals: Like a TFSA, any qualifying withdrawals you make from your FHSA to purchase your first home, including all investment growth, are completely tax-free.

This combination means you save on taxes upfront, and you never pay tax on your investment gains or when you withdraw the money for your home. It’s truly designed to put more money towards your down payment.

Who is Eligible to Open an FHSA?

To open an FHSA, you must meet specific criteria set by the Canada Revenue Agency (CRA):

• Age: You must be at least 18 years old (or the age of majority in your province/territory, if higher, e.g., 19 in some provinces) and under 71 years old as of December 31st of the year you open the account.
• Residency: You must be a Canadian resident.
• First-Time Home Buyer Status (for opening): This is crucial. At the time you open the FHSA, you (and your spouse or common-law partner, if applicable) must not have lived in a qualifying home as your principal place of residence that you owned or jointly owned in this calendar year (the year you open the account) or at any time in the previous four calendar years.

This definition ensures the account is truly for those who haven’t recently been homeowners. For example, if you owned a home in 2020 but sold it and rented since, you might qualify to open an FHSA in 2025.

FHSA Contribution Limits: How Much Can You Save?

The FHSA comes with clear contribution limits:

• Annual Contribution Limit: You can contribute up to $8,000 per year to your FHSA.
• Lifetime Contribution Limit: There’s a total lifetime maximum of $40,000 you can contribute across all your FHSAs.

Understanding Carry-Forward Room: One of the most valuable features is the carry-forward rule. If you don’t contribute the full $8,000 in a given year, the unused portion accumulates as carry-forward room, up to a maximum of $8,000 per year. This carry-forward room is added to your next year’s annual limit.

• Example: If you open your FHSA in 2025 and contribute $3,000, you’ll have $5,000 of unused room. In 2026, your FHSA contribution room would be $8,000 (new annual limit) + $5,000 (carried forward) = $13,000. You can never carry forward more than $8,000 from a previous year.

Over-Contribution Penalties: Be careful not to over-contribute! If you contribute more than your available FHSA participation room, you’ll generally face a penalty tax of 1% per month on the highest excess amount for each month it remains in your account.

Contribution Deadline: Unlike RRSPs, where contributions in the first 60 days of the year can be deducted for the previous year, FHSA contributions made anytime in a calendar year count for that specific year.

What Investments Can You Hold in an FHSA?

The FHSA offers flexibility in what you can hold, similar to an RRSP or TFSA. You can choose from a wide range of “qualified investments” to grow your savings tax-free, including:

• Cash
• Guaranteed Investment Certificates (GICs)
• Mutual Funds
• Exchange-Traded Funds (ETFs)
• Individual Stocks
• Bonds

This allows you to tailor your investment strategy to your risk tolerance and timeline for purchasing a home. For example, if your home purchase is several years away, you might invest in growth-oriented ETFs, while closer to your purchase date, you might shift to more conservative options like GICs or cash.

Making a Qualifying FHSA Withdrawal: The Tax-Free Advantage

This is where the FHSA truly shines. When you’re ready to buy your first home, you can make a “qualifying withdrawal” that is completely tax-free. To do so, you must meet specific conditions at the time of withdrawal:

1. First-Time Home Buyer Status (for withdrawal): You (and your spouse/common-law partner, if applicable) must not have lived in a qualifying home as your principal place of residence that you owned or jointly owned in this calendar year (at the time of withdrawal, except for the 30 days immediately before the withdrawal) or in the previous four calendar years. (Note the slight difference in the “first-time” definition compared to opening the account).
2. Written Agreement to Buy/Build: You must have a written agreement to buy or build a qualifying home (a housing unit located in Canada) by October 1st of the year following the year of your withdrawal.
3. Intention to Occupy: You must intend to occupy the home as your principal place of residence within one year after buying or building it.
4. Canadian Resident: You must be a Canadian resident from the time you make your first qualifying withdrawal until you acquire the qualifying home.
5. Form RC725: You must complete Form RC725, Request to Make a Qualifying Withdrawal from your FHSA, and provide it to your financial institution.

If you meet these conditions, the withdrawal is 100% tax-free – you don’t pay tax on the contributions (because they were deductible), nor on any investment gains earned within the account. Plus, unlike the Home Buyers’ Plan (HBP) from an RRSP, you do not need to repay the money into your FHSA.

Account Closure: After your first qualifying withdrawal, you must close all your FHSAs by December 31 of the following calendar year.

What Happens If You Don’t Buy a Home?

Life happens, and plans change. If you don’t end up buying a qualifying home, your FHSA still offers flexible options:

• Tax-Free Transfer to RRSP/RRIF: You can transfer the funds from your FHSA to your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) on a tax-free basis. This transfer does not reduce your available RRSP contribution room. The funds then become subject to the RRSP/RRIF rules, meaning they will be taxed upon withdrawal in retirement.
• Taxable Withdrawal: If you choose not to transfer the funds to an RRSP/RRIF and simply withdraw them, the amount will be added to your taxable income for that year, and withholding tax will apply.

Maximum Participation Period: Your FHSA can remain open until December 31st of the year in which the earliest of these events occurs:

• The 15th anniversary of opening your first FHSA.
• You turn 71 years of age.
• December 31st of the year following your first qualifying withdrawal.

FHSA vs. RRSP Home Buyers’ Plan (HBP) vs. TFSA: A Comparison

The FHSA is a powerful tool, but how does it fit with other popular Canadian savings accounts, especially if you’re saving for a home?

Can you combine FHSA and HBP? Yes, absolutely! For many first-time buyers, combining these two powerful tools can maximize their down payment. For example, a couple could potentially access up to $200,000 for a down payment ($40,000 x 2 FHSAs + $60,000 x 2 HBP). It’s generally recommended to prioritize maxing out your FHSA first due to its no-repayment benefit.

How to Open an FHSA in Canada

Opening an FHSA is similar to opening other registered accounts:

1. Choose a Financial Institution: Most major Canadian banks (RBC, TD, BMO, CIBC, Scotiabank), credit unions, online brokerages (e.g., Questrade, Wealthsimple Trade), and robo-advisors now offer FHSAs.
2. Verify Eligibility: Ensure you meet all the FHSA eligibility criteria before applying.
3. Gather Required Documents: You’ll typically need your Social Insurance Number (SIN) and valid government-issued identification.
4. Complete the Application: Fill out the necessary forms provided by your chosen financial institution.

Fund Your Account: Decide how you want to contribute (e.g., lump sum, regular automatic contributions).

Conclusion

The First Home Savings Account (FHSA) is a monumental addition to Canada’s financial landscape, offering an unprecedented advantage for first-time homebuyers. With its unique blend of tax-deductible contributions and tax-free withdrawals, it truly stands as the most powerful savings vehicle yet for achieving the dream of homeownership.

Don’t let the complexity of the housing market deter you. By understanding and strategically utilizing the FHSA, you can significantly accelerate your path to a down payment. Start by assessing your eligibility, open an account, and begin building your tax-free down payment today. Your future home awaits!

Disclaimer: The information in this article is for general informational purposes only and should not be considered financial, legal, or professional advice. Rates, terms, and product details may change at any time. Please confirm all information directly with the relevant provider before making a decision. ScoopRate Canada may receive compensation from partners when you apply through certain links. This does not influence our editorial opinions or product rankings.