An In-Depth Guide to the First Home Savings Account (FHSA)

WRITTEN BY Dan Kent | UPDATED ON: May 30, 2024

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post. Stocktrades Ltd will run advertisements on our posts. These advertisements do not represent an endorsement by us.

Purchasing a home in Canada is increasingly expensive. Consequently, the government has been prompted to create programs and accounts to help new homeowners manage affordability.

The First Home Savings Account (FHSA) is one of those accounts and represents a significant investment vehicle for prospective homeowners in Canada. 

As a tax-advantaged savings plan, it specifically targets individuals aiming to purchase their first home. Through the FHSA framework, eligible Canadians can set aside funds for their future home, with the added benefit of tax-free growth, similar in nature to what is offered by both TFSA and RRSP accounts. 

In fact, I'd call the account a hybrid of both, offering the best of both worlds.

The program's structure encourages saving by allowing for tax-deductible contributions coupled with the ability not to pay tax on the investment income earned within the account.

To sum it up in a single sentence, this account is amazing.

Let's explore its intricacies, what you can do with the account, who is eligible, and much more.

The Basics of the First Home Savings Account

The First Home Savings Account (FHSA) is a significant development introduced by the Canadian government aimed at assisting individuals with saving for their first home.

FHSA contributions are tax-deductible, much like an RRSP. However, where they really shine is the fact they can be withdrawn from the FHSA and used to buy a home without paying tax.

This is much different from the RRSP, which requires you to earn income on the money when it's withdrawn, making the RRSP account more of a tax deferral account.

This is exactly why many states it is a blend of the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) designed specifically for potential first-time homeowners.

Investment growth within the account is also not taxable. Although your contribution to the FHSA is capped at a maximum lifetime limit, you can earn however much you want inside the account.

We'll dive more into the details of all of this later on in the article. Let's instead discuss eligibility.

Eligibility criteria for the FHSA

To open an FHSA, one must be a Canadian resident and at least 18 years old or the age of majority in their respective province. They also need to meet the criteria of first-time homebuyers.

This means they have not owned a home that they occupied as their principal residence at any time in the year the account was opened or during the preceding four years. This includes those who have not lived in a home owned by their spouse or common-law partner in the year of opening the account or the four preceding years. 

The reasoning behind the eligibility is relatively simple. They want to focus on supporting those who have never owned a home before. 

Although it's frustrating if you've owned a home before and do not qualify, this account was really created as a stepping stone to solving the fairly obvious housing crisis we have here in Canada.

The main benefits of the FHSA

Tax-free growth and withdrawals

One of the key benefits of the FHSA is its tax-free status on both growth and withdrawals for a first home purchase. This can allow someone to compound their investment returns inside of the account, allowing for a larger down payment and, ultimately, a better opportunity to become a homeowner.

Tax-deductible contributions

Any contributions made by the FHSA (within the contribution limits, of course) are tax-deductible unless they come from an RRSP.

This means you can utilize your FHSA contributions to reduce your overall taxable income and potentially get a refund come tax time. That refund could then be used to either contribute more to your FHSA when you have an additional contribution room or be stored away for when you're finally ready to buy your first home.

An available backup plan if you don't use it

If you don't decide to utilize the FHSA, you don't have to worry that the money is somehow going to become taxable, or you will lose out on the money or gains in the account.

If the savings in the FHSA are not used for a first home purchase, they can often be transferred to an RRSP or a Registered Retirement Income Fund (RRIF) without penalty. This has its limitations, but because it is so specific to the individual, it is best to view the CRA's website to determine if you're eligible for this.

The main disadvantages of a FHSA account

Limited contribution room

Unlike other savings accounts, the First Home Savings Account (FHSA) imposes a lifetime contribution limit of $40,000 and an annual contribution limit of $8,000. The FHSA contribution room limits could restrict the overall potential growth of savings when compared to other accounts without such limitations.

Designated use

Funds within a FHSA are intended strictly for the purchase of a first home. If an individual decides not to purchase a property or uses the funds for another purpose, they may face tax implications and penalties.

First-time home buyer requirement

The FHSA is only available to those who have not owned a home in the year the account was opened or in the four preceding calendar years. This requirement excludes individuals who have previously owned a home from taking advantage of this account's benefits.

Contribution limits and rules for the FHSA

Annual and lifetime limits

The annual limit for the FHSA is $ 8,000, while the lifetime limit is $40,000. Keep in mind, however, that this account is not like the RRSP, in which contribution room carries forward regardless of whether or not you have an account.

What I mean by this is the FHSA was started in 2023. However, if you don't open an account until 2026, you don't get $8,000 worth of room for 2023,2024, or 2025, you simply start at $8,000 in 2026.

This is unlike the RRSP, in which your unused contribution room carries forward regardless of whether you have an RRSP account open.

For this reason, it is very important that you open an account as soon as possible, even if you don't plan on contributing just yet.

Regardless of when you started contributing, the government has also put a lifetime limit of $40,000 in place. This is subject to change, but as of the time of writing, no matter when you open up an account, you'll never be able to contribute more than $40,000.

Cash contributions only

Contributions to an FHSA must be made in cash and cannot directly include securities or assets. In addition to this, the government strongly urges people against borrowing to contribute to the FHSA.

Transferring money to and from the FHSA

Transfers between an RRSP and an FHSA are permitted under certain conditions and could prove advantageous for those with existing RRSP savings. 

Remember, transfers from an RRSP will use up contribution room in the FHSA and will not be tax deductible as you've already claimed the taxable benefits when you placed them in an RRSP, so one must plan these moves carefully to maximize the benefits.

What should you invest in inside your FHSA?

When investing in the FHSA, the choices you make should ultimately be based on your overall risk tolerance and your time horizon. 

For example, someone who wants to buy a home in 2 years may not invest in the stock market and may instead take a more conservative route like a GIC because they don't want the value of their FHSA to deplete in the event of a market crash right before they're going to buy.

The opposite situation would be someone who doesn't plan to purchase a home for 4,5, maybe even 6 years. In this case, they may choose to invest in the stock market if their risk tolerance suits the investment because it tends to yield the highest returns.

Think of these three key factors when choosing what to buy in your FHSA:

  1. Liquidity: The ease with which investments can be converted into cash without significant loss of value.
  2. Growth Potential: The ability of investments to increase in value over time.
  3. Risk Level: The exposure to potential loss that comes with different types of investments.

What can you invest your FHSA in?

  • Mutual Funds: Pooled funds that provide diversified exposure to various asset classes.
  • Bonds: Debt securities that offer a fixed income stream with a variety of term lengths and risk profiles.
  • Stocks: Shares in public companies which may offer dividends and capital gains.
  • Exchange-Traded Funds (ETFs): Funds that track an index, commodity, or a basket of assets like a mutual fund but trade like a stock on an exchange.
  • Guaranteed Investment Certificates (GICs): Investments with guaranteed rates of return over a fixed period.

What happens if one never uses their FHSA?

Should a person not utilize their First Home Savings Account (FHSA) to purchase their first home, there are several scenarios to consider.

Conversion to RRSP/RRIF

An individual may opt to transfer funds from the FHSA to a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF). This transfer must adhere to certain criteria without impacting the RRSP deduction limit.

  • Contributions: Remain tax-deductible
  • Growth: Continues to be tax-sheltered until withdrawal

Account maturity

The FHSA is designed with a 15-year maturity period post-creation. If it is not used for its intended purpose by this time, it will need to be closed.

  • Closure: Requires the account to be either converted or funds to be withdrawn
  • Tax Implications: Withdrawn funds would be subject to tax liability

Other considerations 

Specific rules apply in cases such as the end of a marriage or common-law partnership, becoming a non-resident, or in the event of the holder's death. Upon the demise of the account holder, the FHSA balance can be transferred to a surviving spouse or common-law partner's FHSA, RRSP, or RRIF.

  • Assets: May be transferred to a spouse's or partner's registered account
  • Withdrawals: Non-spousal beneficiaries would receive the funds, subject to applicable taxes

Qualified FHSA withdrawals

When an individual uses funds from the FHSA towards the down payment of a qualifying home purchase, they can withdraw the money tax-free, assuming all conditions for a qualifying withdrawal are met. 

The property must be in Canada, and the individual must intend to use it as their principal place of residence within one year of purchase. 

You can make either total or partial withdrawals to meet down payment needs.

Transition to home ownership after the down payment is paid

Once the down payment is secured through the FHSA, individuals transition to obtaining a mortgage—a loan secured against the value of the home.

They will need to negotiate terms such as interest rates and repayment periods, factors that affect monthly payments and the overall cost of the home purchase. Regular mortgage payments build equity over time, gradually increasing the homebuyer's ownership stake. 

Comparing the FHSA to other accounts

FHSA vs. RRSPs

The First Home Savings Account (FHSA) and RRSPs are both tax-advantaged vehicles designed to aid Canadians in achieving long-term financial goals. 

However, while contributions to an FHSA are tax-deductible, similar to an RRSP, there are differences in their primary purposes and withdrawal regulations. 

RRSPs are intended for retirement savings, and early withdrawals can lead to a tax hit unless used for the Home Buyers' Plan or Lifelong Learning Plan, which requires repayment. 

In contrast, the FHSA facilitates non-taxable withdrawals without repayment obligations, provided the funds are used for a first-time home purchase.

wdt_ID Features FHSA RRSP
1 Contribution Limit $8,000 yearly; $40,000 lifetime Up to 18% of previous year's earned income, subject to an annual cap
2 Tax Implications Tax-deductible contributions; tax-free withdrawals for home purchase Tax-deductible contributions; taxable withdrawals
3 Purpose First-time home purchase Retirement savings
4 Withdrawal Rules Non-repayable for home purchase Home Buyers' Planwithdrawals must be repaid; otherwise, taxable

FHSA vs. TFSAs

FHSAs and TFSAs share similarities in that both offer tax-free growth on investments. However, the main difference is that TFSA contributions are not tax-deductible. 

However, TFSAs allow for tax-free withdrawals for any purpose, offering greater flexibility compared to the FHSA, which is specific to first-time home purchases.

wdt_ID Features FHSA TFSA
1 Contribution Limit $8,000 yearly; $40,000 lifetime Subject to annual limit set by government
2 Tax Deduction Contributions are tax-deductible Contributions are not tax-deductible
3 Withdrawal Flexibility Tax-free for home purchase; penalties for non-qualified use Tax-free for any purpose
4 Purpose Home purchase for first-time buyers General savings and investment

Which banks and brokerages offer a FHSA?

Several Canadian banks have been quick to provide the First Home Savings Account (FHSA). Several brokerages have also adopted the account, and you'll generally find coverage at a wide variety of institutions.

If you want a more conservative FHSA, this account is likely best

Equitable Bank's FHSA account pays a set rate of interest on the balance. You can also buy some of its GICs inside the account, which are often some of the best GIC rates in the country.

The reason I'm saying this is best for the conservative route is the fact that Equitable Bank does not offer stocks, bonds, ETFs, mutual funds, etc. For the most part, the GIC is going to be the only thing you can buy in the account.

This is probably the better route to take for short-term thinkers and those who may need the money in a year or two to ensure that the capital is there when they need it.

Click here to open up a FHSA with Equitable Bank

If you're willing to be aggressive with your FHSA, this account is likely best

One of the most attractive offers for a FHSA account at this current time is Qtrade. The platform offers cheaper commissions than most major and even discount brokers, along with providing investors with the tools and research reports they need to succeed in the markets.

With a Qtrade FHSA, you can buy and sell stocks, bonds, mutual funds, ETFs, and more. This allows you to compound the earnings inside this account so that you have more when it comes time to make that down payment.

Qtrade also has cash bonuses available for those who choose to open up a FHSA with them.

Click here to open up a FHSA with Qtrade