The Canadian tax system provides a number of opportunities for taxpayers to save on a tax-assisted basis. Most Canadians are familiar with registered retirement savings plans (RRSPs) and many are also aware of the availability of the tax-free savings account (TFSA). The newest (and probably least well known) such tax-assisted savings opportunity is the first home savings account (FHSA), which was introduced by the federal government in the 2023-24 budget and first became available in 2023.
As of November 2024, nearly 1 million (or about 1 in 40) Canadians had opened an FHSA – an impressive number for a program that was not yet two years old. There are, however, likely many more Canadian taxpayers who are eligible for and could benefit from having an FHSA but are unaware of the significant savings and tax advantages which an FHSA offers.
What makes the FHSA program unique among government-sanctioned tax-assisted savings plans is both the very generous tax treatment provided for contributions to and withdrawals from such plans and the enormous flexibility provided to taxpayers when it comes to managing and accessing funds saved through an FHSA.
Most tax-assisted savings plans provide one of two tax advantages – either the opportunity to deduct contributions made from income for tax purposes, or the ability to withdraw funds from the plan free of tax. With an RRSP, funds contributed to the plan can be deducted from income, and funds within the plan can be invested and grow free of tax. However, all funds which are withdrawn from an RRSP – whether original contributions or investment gains – are fully taxable to the RRSP holder at the time of withdrawal. Conversely, when a taxpayer contributes funds to a TFSA, no deduction from income is allowed for the contribution, but investment gains earned within the plan accumulate free of tax, and any withdrawals made (whether of original contributions or investment gains) are received tax-free.
The rules governing FHSAs are unique in that they allow planholders to both claim a deduction from income for contributions made to the plan and to make withdrawals of funds from the plan tax-free (where those funds are used to purchase a home). In addition, funds accumulated within an FHSA can be transferred, on a tax-free basis, to the planholder’s RRSP or to their registered retirement income fund (RRIF). Funds saved within an RRSP can also be transferred on a tax-free basis, within limits, to the planholder’s FHSA. No other currently available tax-assisted savings plan offers taxpayers the ability to transfer funds back and forth between registered plans in this way.
Opening and contributing to an FHSA
The term “first home savings account” is something of a misnomer, as it’s not actually necessary to be a first-time home purchaser in order to qualify. Rather, any Canadian resident who is over the age of 17 but is 71 years of age or younger at the end of the calendar year and who has not lived in a home which they (or their spouse) owned in any of the current or four previous years can open an FHSA. For plans opened in 2025, that would mean that someone who has not lived in a home which they (or their spouse) owned in any of the 2021, 2022, 2023, 2024, or 2025 calendar years would qualify as a “first-time home purchaser”.
Once the FHSA plan is opened, the planholder can contribute up to $8,000 per year to that plan, regardless of their income for that year. The $8,000 per year contribution must be made by the end of the calendar year, but planholders are permitted to carry forward unused portions of their annual contribution limit.
For example, an individual who opens and FHSA in 2025 and contributes $4,000 to an FHSA would be allowed to contribute $12,000 in 2026 (representing $8,000 in contribution for 2026 plus $4,000 carryforward from 2025). Regardless of the schedule on which contributions are made, there is a lifetime limit of $40,000 in contributions for each individual.
As outlined above, the real benefit of the FHSA program lies in the tax treatment of contributions. Individuals who contribute any amount in a year can deduct that amount from income, in the same manner as an RRSP contribution. When the planholder withdraws funds from the FHSA to purchase a first home, those withdrawal amounts – representing both original contributions and investment income earned by those contributions – are not taxed.
While funds are held within the FHSA, they can be held in cash, or can be invested in a broad range of investment vehicles. Specifically, such funds can be invested in mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates (GICs). Regardless of the investment vehicle chosen, interest, dividends, or any other type of investment income earned by those funds grows on a tax-free basis – that is, such investment income is not taxed, either as it is earned or on withdrawal.
Withdrawing funds from an FHSA
The purpose of an FHSA is to allow an individual to save for the purchase of a home on a tax-assisted basis. That being the case, amounts within an FHSA can be withdrawn on a tax-free basis only if such withdrawals are “qualifying withdrawals”, meaning that the funds are used to make a qualifying home purchase. In order for a withdrawal to be a “qualifying withdrawal”, the planholder must have a written agreement to buy or build a home (which must be located in Canada) before October 1 of the next year. In addition, the planholder must intend to occupy that home within a year after buying or building it.
Amounts withdrawn from an FHSA and used for any other purpose are not qualifying withdrawals and the funds withdrawn are fully taxable in the year the withdrawal is made.
While Canadians who open an FHSA and make contributions to it are certainly hoping to be able to purchase a home, there are any number of reasons why their plans could change. Fortunately, the rules governing FHSAs provide planholders with a great deal of flexibility when it comes to the disposition of funds saved within an FHSA, in that planholders can transfer any funds held within their FHSA to an RRSP or RRIF on a tax-free basis. Any such amounts transferred from an FHSA to an RRSP or RRIF will be taxable if they are withdrawn from that plan, in the same manner as any other RRSP or RRIF withdrawal.
It’s also possible to transfer funds held in an RRSP to one’s FHSA. The amount which can be transferred is limited by the contribution room available for the FHSA, but all such transfers take place on a tax-free basis. Details of the rules governing transfers to and from an FHSA and other registered plans are outlined in detail on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account/transfers-into-your-fhsas.html and https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account/withdrawals-transfers-out-your-fhsas.html.
Closing an FHSA
Individuals who open an FHSA have 15 years from the date the plan is opened to use the funds for a qualifying home purchase. (Taxpayers must also close their FHSA by the end of the year in which they turn 71.) While these rules do place some pressure on planholders with respect to the timing of their home purchase, there is some flexibility. Specifically, planholders who have not made a qualifying home purchase within the required 15-year time frame (or by the end of the year in which they turn 71) must then close the FHSA plan, but can still transfer funds held in the FHSA to their RRSP or RRIF, on a tax-free basis.
A detailed summary of the rules and administrative practices governing FHSAs is available on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account.html.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.
