Even though the federal government’s First Home Savings Account (FHSA) was only introduced in 2023, by the end of 2024, almost a million Canadians had already started investing in one.
This tax-free savings account was introduced as a way to help first-time homebuyers save for a down payment. With the high cost of housing in many parts of Canada, a lot of potential homebuyers were struggling to get onto the property ladder.
The FHSA has clearly struck a chord with many would-be homeowners. But how does an FHSA help you to save faster for a down payment? There are several ways an FHSA can help you to reach your down payment savings goal sooner. Let’s take a look.
Immediate tax benefits from an FHSA
Contributing to an FHSA provides an immediate tax break. You can claim a tax deduction for the amount you contribute, meaning that you can reduce your taxable income by every dollar you put into the account.
Let’s look at some examples of different income levels with FHSA contributions of 10% of income:
| Income | FHSA contribution | Taxable income |
| $50,000 | $5,000 | $45,000 |
| $70,000 | $7,000 | $63,000 |
| $80,000 | $8,000 | $72,000 |
Depending on your income level and where you live, this could result in significant tax savings and potentially provide you with a tax refund of thousands of dollars. You could then put those savings into your FHSA and grow it even faster.
Tax-free growth in an FHSA
As with other government-registered accounts, such as the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP), you can hold a variety of investments in your FHSA that go far beyond cash or high-interest savings. These include:
- Mutual funds and exchange-traded funds (ETFs).
- Most stocks and other securities listed on a designated stock exchange.
- Bonds.
- Certain shares of small business corporations
Your investments can then grow with interest (typically paid out by bonds), dividends (paid out by some companies to shareholders) and capital gains (the amount the value of your investments grows). If you held these investments outside of registered accounts, you’d be taxed on this growth, but when they’re within an FHSA, you pay no tax whatsoever. This keeps more of your money invested, which allows it to grow faster.
For example, let’s say you opened an FHSA with a deposit of $5,000 and invested that in mutual funds that delivered a combined annual return of 8%. At the beginning of the second year, you’d start off with $5,400 in savings and would earn returns on that amount. This process continues year after year. Over time, the impact of this compounding could significantly increase your savings, making it easier to reach your down payment goal.
Tax-free withdrawals with FHSAs
You can contribute up to $8,000 per year to your FHSA, with a maximum lifetime contribution amount of $40,000. However, if, after opening your FHSA, you don’t make the maximum contribution one year, that amount can be carried forward to the following year. So, let’s say you contributed $4,000 in your first year; in the second year you would be able to contribute up to $12,000.
Once you’ve saved enough and are ready to buy your first home, you can withdraw funds from your FHSA without paying any tax (unlike with an RRSP, where withdrawals are classed as taxable income). This means you can use the full amount you've saved (plus any growth) to help with your down payment and closing costs.
For tax-free withdrawals, the funds must be used for buying or building a qualifying home in Canada. The home needs to be your primary residence within a year.
Combining the FHSA with the Home Buyers’ Plan
One of the most effective strategies for saving for a down payment is combining the proceeds from your FHSA with the Home Buyers’ Plan (HBP). The HBP allows you to withdraw up to $60,000 from your RRSP to use toward the down payment for a qualifying home.
This could potentially provide you with over $100,000 in total savings to put toward your down payment, which could help get you into your first home much faster.
You do, however, have to repay the money you take out of your RRSP as part of an HBP; typically, you need to start repaying this money back into your RRSP two years after the year you buy your house, and you then have 15 years to repay the whole amount. These repayments don’t affect your RRSP contribution limit and are not tax-deductible if you previously claimed the deduction.
Does an FHSA make sense for you?
The FHSA is designed to help first-time homebuyers get into their first home sooner. However, an FHSA isn’t for everyone; ask yourself these questions to help you decide if an FHSA is right for you:
- Are you a first-time homebuyer? The FHSA is specifically designed for people who’ve never owned a home in Canada or haven't owned a home for at least four years. If you don't meet these criteria, you may not be eligible to open an FHSA.
- What are your current financial priorities? If you have a steady income and can afford to pay into an FHSA, it can really help speed up your savings for a down payment. However, if you have large debts or other important financial goals, it may be wiser to focus on those parts of your financial plan first.
Having a solid financial plan in place is crucial to fully maximize the benefits of your FHSA. Talk to your IG Advisor about FHSAs and how to integrate them into your overall financial strategy.
They can guide you through the intricacies of the FHSA, ensuring that you make well-informed decisions that align with your financial plan. If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Advisor. Trademarks, including IG Wealth Management and IG Private Wealth Management, are owned by IGM Financial Inc. and licensed to subsidiary corporations.
