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, in the summer of 2023, the average home in Canada still sold for $709,000. 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. It combines the benefits of a TFSA with those of an 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 tax 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. 

Who can open a First Home Savings Account?

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 (or your spouse or common law partner) own in the year you open your FHSA or four years prior to that. Owning a home, for the government’s purposes, means owing less than 90% of the home’s purchase price.

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 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 in many cases that could mean missing out on a lot of the benefits of a First Home Savings Account. 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.

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 a First Home Savings Account, 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 following 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 RRIF. You could also withdraw it and pay taxes on the amount you saved.