Is an FHSA Right for You? 9 Questions to Help You Decide

Written by The Inspired Investor Team

Saving for a first home has become one of the biggest financial challenges facing young Canadians. The good news? The First Home Savings Account (FHSA) is a powerful tool designed specifically to help get there faster. It combines tax-deductible contributions with tax-free withdrawals, giving you the rare advantage of both an immediate tax break on what you put in and zero tax on what you take out.

The FHSA offers a tax-efficient way to save toward the purchase of a home. And, if you don't end up buying or building a qualifying home, you can direct the funds toward your retirement instead.

So, is an FHSA right for you? We tackle nine common questions to help determine whether it could be the right fit for your portfolio.

1. Who can open an FHSA?

The FHSA is aimed at Canadians planning to buy their first home. To open one, you must be a Canadian resident at least 18 years old (or age of majority in your province) and 71 years or younger as of Dec. 31 of the year you open the account. You also need to have a valid Social Insurance Number and be a first-time homebuyer – which, in this case, means you did not live in a qualifying home as your principal place of residence that you or your spouse or common-law partner owned or jointly owned in the year the account is opened or in any of the four preceding calendar years.

2. How much can I contribute?

You can contribute up to $8,000 per year to an FHSA, up to a lifetime maximum of $40,000. Unused room can be carried over to the next year. For example, if you open an FHSA in 2026 and contribute $6,000, you would be able to contribute up to $10,000 in 2027 (i.e., $8,000 for 2027, plus the remaining $2,000 left from 2026). Carry-forward amounts start accumulating only after you open an FHSA. You can open multiple FHSAs, but the annual and lifetime contribution limits apply to the combined accounts, so be careful with your contributions. There is a 1 per cent tax applied to over-contributions for each month the excess amount stays in your FHSA.

3. What are the tax benefits?

The FHSA combines the tax advantages of a Registered Retired Savings Account (RRSP) and a Tax Free Savings Account (TFSA). And when it comes to taxes, this is a big deal. First, like an RRSP, contributions to an FHSA are tax-deductible. So, if you contribute $8,000 you can deduct the same amount from your taxable earnings. You can use the deduction in the year you contribute or carry it forward to a later year, which may be useful if you expect to be in a higher tax bracket in the future. (Note: Unlike RRSPs, any contributions you make in the first 60 days of the year can't be deducted from the previous year's income.) Second, if you are making a qualifying withdrawal, you won't pay tax on that withdrawal. Like a TFSA, this includes principal and potential growth. (Withdrawals from an RRSP are generally subject to income tax.)

If you are making a non-qualifying withdrawal, then you would pay income tax on the principal and any potential growth, just like an RRSP withdrawal.

4. What investments can I hold in the account?

The list of qualified investments, as defined by the CRA, is the same for the FHSA as it is for the TFSA and other registered accounts. After you contribute to the account, you can choose to invest in publicly traded stocks, ETFs, bonds, etc.

The prohibited investment and non-qualifying investment rules applicable to other registered plans will also apply to FHSAs.

We dive deeper into the rules around what you can hold in the account here.

5. How is the FHSA different from the Homebuyer's Plan?

With the government's existing Homebuyers' Plan (HBP), first-time homebuyers can withdraw (tax-free and without penalty) up to $60,000 from their RRSP to buy a qualifying home. This is considered a “loan" and must be paid back into the RRSP within 15 years.

First-time homebuyers can choose to use both together. This means that by maximizing both programs, you could put $100,000 (plus any investment growth in the FHSA) toward a down payment for each eligible individual.

Comparing the FHSA and the HBP:

• HBP withdrawals must be paid back into your RRSP. FHSA withdrawals do not.
• The FHSA lifetime contribution limit is $40,000. The HBP withdrawal limit is $60,000.
• Any additional withdrawals are ultimately taxable. Qualifying FHSA withdrawals are tax-free.

6. What happens when I want to withdraw the money?

The FHSA is designed for people buying a first home. For this reason, withdrawals will only be tax-free if they meet certain conditions. You must have a written agreement to buy or build your home before October 1 of the year after you make the withdrawal. The home must be in Canada and must be your first, as defined above. You can make one lump-sum withdrawal or multiple, as needed, but the account must be closed by December 31 the following year after your first qualifying withdrawal.

To wrap up the withdrawal rules, you must use the FHSA by December 31 of the year in which the first of the following events occur:

• The 15th anniversary of opening your first FHSA
• You turn 71 years of age
• It has been one year since your first qualifying withdrawal from your FHSA

If your withdrawal does not meet the above requirements, the tax will be withheld at the source by the financial institution at the time of withdrawal, and it will be included as taxable income for the year. You do not get the contribution room back after making a withdrawal.

7. What if I don't buy a house?

If you decide not to buy a house, you can transfer the money you've saved (and any investment income earned) directly to an RRSP or a Registered Retirement Income Fund (RRIF). There is no penalty and no tax at the time of transfer. However, keep in mind that once in the RRSP or RRIF account, the money will then be taxable when you withdraw based on the rules of those account types.

Money transferred from an FHSA to an RRSP or RRIF will not change your unused RRSP deduction room or unused FHSA participation room.

8. Can I contribute to my spouse's FHSA?

While spousal contributions (and deduction claims) are not allowed, there is an opportunity for spouses and common-law partners to work together to maximize the FHSA. The government made an exception to the “attribution" rules, which means you may provide money for your spouse or common-law partner to contribute to their own FHSA without having to take on the tax burden of any income earned in the account (as would normally happen with a spousal transfer of assets).

9. Can I transfer funds from my RRSP to an FHSA?

According to the Canada Revenue Agency, you can transfer between FHSAs or from your RRSP to your FHSA without immediate tax consequences, if it is a direct transfer (which is defined as “a transfer completed directly between the financial institutions of the two plans or accounts involved”).

Also, transfers from your RRSPs to your FHSAs must not exceed your unused FHSA participation room at the time of the transfer, as transfers will use your FHSA participation room.

Want to learn more about the FHSA and how it compares with the RRSP and TFSA? Check out this table on rbcroyalbank.com.