Saving Smarter for First-Time Homebuyers: An FHSA Guide

Balancing everyday expenses while trying to save for a down payment can feel like an uphill battle for many first-time homebuyers. Fortunately, a tax-advantaged investment tool called the First Home Savings Account, or FHSA, may make it easier for individuals and families across Canada to save money for their first house and confidently embark on this exciting new chapter in their lives.

The following guide will outline FHSA basics so prospective homebuyers can consider whether it may be the right savings tool for them.

Qualifying for an FHSA

Banks and brokerages may offer FHSA options for homebuyers who meet the following criteria:

• They’re older than 18 and younger than 71 the year they open the account.
• They haven’t lived primarily in a qualifying home that they owned in the last year or preceding four years.
• They haven’t lived in a home that their spouse or common-law partner owned in that same timeframe, or they’re no longer married at the time of account opening.

Only Canadians who meet all the above requirements may open an FHSA and start making contributions.¹

How an FHSA works

An FHSA is a straightforward and versatile savings tool, which makes it a good fit for many first-time homebuyers. After opening an account, prospective homebuyers can begin depositing up to $8,000 annually, up to $40,000 overall. They can invest those contributions into stocks, bonds, mutual funds, or other assets to grow their savings.²

Choosing investments

Factors like savings goals, timelines, and risk tolerance may influence the best FHSA investments for each person and situation. With a standard, managed FHSA, a financial  advisor may incorporate those preferences into a customized investment portfolio for each client. However, homebuyers who want more control over their money may instead opt for a self-directed FHSA, which gives them the freedom to choose individual investments on the account.

Tax benefits

FHSAs come with several tax advantages that might make it easier to save for a new home. Most FHSA contributions are tax-deductible, leaving account holders with extra cash during tax season. Plus, interest, dividends, capital gains, and other forms of investment growth within the account are tax-free. Finally, withdrawals from an FHSA don’t count toward taxable income as long as they go toward purchasing a qualifying first home.³

So, if an individual contributes $20,000 to their FHSA over ten years and their account sees $3,000 of growth, they can withdraw up to $23,000 tax-free when they’re ready to buy a home.

Withdrawing funds

Account holders can withdraw funds from their FHSA for any reason. However, to enjoy the account’s tax benefits, they have to put the money toward a qualifying home purchase. Costs like the home’s down payment, closing costs, or other expenses related to home buying may qualify. Homebuyers must also meet all of the following requirements to withdraw tax-free funds:

• They live in Canada.
• They have agreed, in writing, to purchase a home in Canada with the funds before October of the following year.
• They’ll live in that home as their primary residence.
• They’re younger than 71.

Withdrawals that don’t meet those qualifications might count toward a person’s taxable income, so it’s important to double-check with the financial institution before making any major changes.⁴

Closing an FHSA  

FHSA account holders have to use their savings on a new home either within fifteen years of opening their account or before they turn 71—whichever comes first. People who haven’t used all their savings in that time should close their accounts to avoid negative tax consequences. Transferring the remaining balance to other accounts, like a Registered Retirement Income Fund or a Registered Retirement Savings Plan, may help account holders avoid increasing their income taxes. A trusted financial advisor can offer guidance.⁵

Is an FHSA worthwhile?

For some Canadian homebuyers, an FHSA is a powerful tool that makes buying a first house more attainable. Investment gains can bolster the house budget, while tax advantages might make it easier to cover other everyday expenses. Prospective homebuyers who value flexible, accessible savings might consider an FHSA to help make their dreams a reality.

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