What Is the First Home Savings Account and How Does It Work?

Buying a house can be fun. Also: expensive. Unless you’re sitting on a multimillion-dollar inheritance or you’ve just won the lottery (if you’re in Vancouver or the GTA, better to do both), becoming a homeowner can feel out of reach for a lot of people right now. Even though prices fell by nearly 20% last year, as of January 2023, the average home in Canada still sold for $612,000. In Vancouver or Toronto, bump it up to more than $1 million.

While there’s no easy solution, Ottawa has come up with something: the First Home Savings Account (FHSA). It combines the benefits of a Tax-Free Savings Account (TFSA) with those of a Registered Retirement Savings Plan (RRSP). And, after being up in the air for months, it officially launched April 1, 2023.

The FHSA lets first-time homebuyers save up to $40,000, tax-free, to put toward a down payment. How it works is a little complicated, so we’ve gathered some common questions and answered them below.

What is an FHSA?

FHSAs are very, very specific tax-free savings accounts that help Canadians save up to $40,000 toward buying a first home (in Canada). You can contribute as much as $8,000 per year, but unused portions of your contribution limit carry forward. For example, if you contribute $5,500 in 2023, the maximum contribution you could make in 2024 would be $10,500 (the $2,500 space leftover from 2023 plus the $8,000 of new contribution room from 2024). 

What are the benefits of an FHSA? 

Like an RRSP, any contributions you make to your FHSA reduce your taxable income for the year. Like a TFSA, the money in your FHSA (including any gains) will not be taxed. 

Let’s say you put $8,000 a year for five years (a total of $40,000) straight from your paycheque, tax-free, into an FHSA and you get an 8% annual return on your investments. In that case, you would end up with $48,810 — that is, your $40K investment plus an $8,810 return. And remember: that money is all yours. You have to pay zero tax on it when you withdraw it for a down payment.

Suppose you instead decide to put $8,000 from your paycheque into a savings account. Well, unlike with an FHSA, you have to pay tax on that money, which, assuming a 32% tax rate, means that $8K becomes $5,440. If you put that same amount into savings annually for five years and get a 5% yield, you’ll end up with $29,610 (partially because your gains are also taxed). That’s an almost $20,000 difference between an FHSA and savings. Plus, let’s be real: the temptation to use your money on other purchases will probably be greater with savings than with an FHSA.

Who can open an FHSA?

To open an FHSA, you need to be between the ages of 18 and 71 and a resident of Canada. Since the account is meant to help first-time homebuyers, you also can’t have lived in a home you own in the year you open your FHSA or four years prior to that.

What if I have beneficial ownership?

If you own 25% or more of a home, the law considers you a beneficial owner — and that counts as ownership according to the FHSA. If that's you and you want to use an FHSA, you'll need to wait until at least five years after you’ve lived in that house to open one. 

Can I use an FHSA to buy an investment property?

No. In order to make a withdrawal from an FHSA, the government requires you to “intend to occupy the qualifying home as [your] principal place of residence within one year after buying or building it.” 

What assets can go in an FHSA?

You could treat it like a savings account and deposit money, but that would mean missing out on a lot of the benefits of an FHSA. Like an RRSP or a TFSA, an FHSA can hold stocks, mutual funds, bonds, GICs, and other assets, so long as the total contribution remains under the $40,000 lifetime limit. Note: some financial institutions may not offer every type of asset to be held in their FHSAs.

Are there penalties for over-contributing to your FHSA? 

Any contributions over the $8,000 annual limit (except for any unused portions from the previous year) will be hit with a 1% penalty every month until you correct the issue.

How quickly do I have to use the funds in my FHSA?

From the time you open an FHSA, you have 15 years to spend the money on a down payment toward a home. When you remove funds from your account, you’ll need to close on the home by Oct. 1 of the year you took the money out and move in within a year. Otherwise, you’ll be taxed retroactively. 

What happens if I don’t use the money in my FHSA?

If you don’t use the money in your FHSA within 15 years of opening the account (or by the year you turn 71), you can transfer it, tax-free, to an RRSP or a Registered Retirement Income Fund. You could also withdraw it and pay taxes on the amount you saved.