That’s where the First Home Savings Account (FHSA) comes in. Launched in 2023, this registered account allows eligible individuals to save up to $40,000 for a house, while combining the tax advantages of two existing registered plans — the registered retirement savings plan (RRSP) and the tax-free savings account (TFSA).

Read on for answers to some key questions about the new account.

1. Can I 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 a potential first-time homebuyer not turning age 72 or older in the year. “First-time homebuyer” in this case means you or your spouse or common-law partner did not own a qualifying home that you lived in as your principal place of residence 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. Only up to $8,000 of unused contribution room canbe carried forward to the next year. For example, if you open an FHSA this year and contribute $6,000, you would be able to contribute up to $10,000 in the following year (i.e., $8,000 for the current year, plus the remaining $2,000 left from the previous year). Carry-forward amounts start accumulating only after you open an FHSA and can be carried forward indefinitely (up to the $8,000 limit). 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 an RRSP and a TFSA. 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: Contributions are due on December 31 to qualify for the current year. That’s different than an RRSP, where contributions made in the first 60 days of the year can be deducted from the previous year’s income.) Second, like a TFSA, if you are making a qualifying withdrawal, you won’t pay tax on that withdrawal. This includes principal and potential growth. If you are making a non-qualifying withdrawal, then you would pay income tax on the principal and potential growth, just like an RRSP withdrawal.

4. What investments can I hold in the account?

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

The prohibited investment and non-qualifying investment rules applicable to other registered plans will also apply to FHSAs. Speak to your tax advisor if you have questions on these rules.

Save for your first home, tax-free.

5. How is the FHSA different from the Homebuyers’ Plan?

The government’s existing Homebuyers’ Plan (HBP) allows first-time homebuyers to withdraw up to $60,000 from their RRSP to buy a house tax-free and without penalty. This is considered a “loan” and must be paid back within 15 years, or you will have to pay tax on any money that hasn’t been recontributed to your RRSP.

The HBP can be combined with an FHSA, which means that by maximizing both programs, you could put up to $100,000 (plus any investment growth in the FHSA) toward a down payment. You have a maximum of 15 years to save within an FHSA, and the account must be closed in the year you turn 71.

Comparing the FHSA and the HBP:

• HBP withdrawals must be paid back into your RRSP. FHSA withdrawals do not.
• The FHSA lifetime contribution limit ($40,000) is lower[BB2] than the maximum HBP withdrawal limit ($60,000), but investment gains could result in you having more money to use from an FHSA than through the HBP.
• After you pay the HBP back into your RRSP, withdrawals are ultimately taxed. Qualified 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 the end of the year following the year of your first qualifying withdrawal.

If your withdrawal does not meet the above requirements, it will be included in your taxable income for that year and tax will be withheld. You do not get the contribution room back after making a non-qualifying withdrawal.

7. What if I don’t buy a house?

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

When you transfer money from an FHSA to an RRSP, it doesn’t change your RRSP contribution limits, neither does it impact your unused RRSP contribution room. On the flip side, you won’t get that FHSA contribution room back – once used, it’s gone.

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 can lend a spouse or partner money for an FHSA without having the income or gains attributed back to you for tax purposes.

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

You can transfer money from an RRSP to an FHSA tax-free, as long as it’s a direct transfer. That means it has to be done by the financial institutions that hold the accounts – you can’t remove the money from an RRSP yourself and put it into an FHSA. Transfers from an RRSP to an FHSA will not be tax deductible. This transfer will consume your FHSA contribution room, it cannot exceed your FHSA contribution room for the year, will not provide any additional income deduction and won’t reinstate your RRSP contribution room.

So, is an FHSA right for you? If you’re looking for a tax-efficient way to save toward the purchase of a home, then it may be. And if you don’t end up buying or building a qualifying home, you can direct the funds toward your retirement.