FHSA: Rules, Contribution Room, and Tax Benefits

The First Home Savings Account (FHSA) is a registered account introduced in April 2023 that allows eligible Canadians to save up to $40,000 tax-free for their first home.

It combines the best features of both the RRSP and TFSA:

• Tax-deductible contributions — like an RRSP, contributions reduce your taxable income in the year you contribute (or you can carry the deduction forward)
• Tax-free growth — investments inside the FHSA grow without any tax on dividends, interest, or capital gains
• Tax-free withdrawal — when you withdraw to buy a qualifying home, the entire amount (contributions + growth) comes out tax-free, like a TFSA

To open a FHSA, you must meet all of the following conditions:

1. Canadian resident — must be a resident of Canada
2. Age 18+ (or provincial age of majority) — varies by province
3. First-time home buyer — you must not have owned a home (or lived in a home owned by your spouse/common-law partner) at any time in the year you open the account OR in the preceding four calendar years

If you previously owned a home but haven't for the past 4+ years, you qualify again. The definition is the same as the Home Buyers' Plan (HBP) definition.

You can hold only one FHSA at a time. You cannot open a new one after you close your first (unless you meet the qualifying period again).

Key detail: unused contribution room carries forward, but only up to one year's worth ($8,000). So if you skip a year, you can contribute $16,000 the next year, but you cannot accumulate more than $8,000 of carry-forward at any time.

Participation room begins accumulating only after you open the account. Opening an FHSA early — even with a small initial deposit — starts the clock on future contribution room.

FHSA contributions are deductible from your income, just like RRSP contributions. You claim the deduction on line 20805 of your income tax return.

You can carry the deduction forward — if it's not advantageous to claim the deduction this year (e.g., you're in a low tax bracket), you can contribute now and claim the deduction in a future year when your income is higher.

This is powerful for young Canadians: open the FHSA early, contribute while your income is low, but save the deduction for when you're earning more and in a higher bracket.

The FHSA can hold the same qualified investments as a TFSA or RRSP:

• Canadian and foreign stocks (listed on designated exchanges)
• ETFs and mutual funds
• GICs and savings deposits
• Bonds (government and corporate)
• Options (specific rules apply)

Investment income (dividends, interest, capital gains) earned inside the FHSA is completely tax-free while in the account — no T3/T5 slips, no foreign withholding tax recovery needed for Canadian-sourced income.

Foreign withholding tax note: Unlike the RRSP (which is exempt from US withholding tax under the Canada-US tax treaty), the FHSA is NOT exempt. US dividends will have 15% withheld, and you cannot recover this. For this reason, prefer Canadian equities or US-listed ETFs in your RRSP if you have both accounts.

To make a qualifying (tax-free) withdrawal, you must meet these conditions:

1. Written agreement to buy or build a qualifying home before October 1 of the year after the withdrawal
2. First-time buyer status — you did not live in a qualifying home you (or your spouse) owned in the preceding four years or current year
3. Canadian resident at time of withdrawal and until acquiring the home
4. Intent to occupy — you must intend to make the home your principal residence within one year of acquisition

The withdrawal can be a lump sum or partial withdrawals over time (as long as the account is still open and you meet the conditions).

Can I combine FHSA with HBP? Yes. You can use both the FHSA withdrawal and the Home Buyers' Plan ($60,000 from RRSP) for the same home purchase. This gives a combined tax-free amount of up to $100,000 for a single buyer.

If you don't use the FHSA for a home purchase, several options exist:

• Transfer to RRSP/RRIF — you can transfer the FHSA balance to your RRSP (or RRIF) tax-free. The transfer does NOT require RRSP contribution room. You already got the deduction when you contributed, so this is equivalent to having made extra RRSP contributions beyond your normal room.
• Taxable withdrawal — you can withdraw the funds, but the full amount is included in your income for the year (like an RRSP withdrawal). No tax on growth is forfeited — you simply lose the "tax-free withdrawal" benefit.
• Account expires — the FHSA must be closed by December 31 of the year you turn 71, or the 15th anniversary of opening, whichever comes first. Any remaining balance must be transferred to RRSP/RRIF or withdrawn (taxably).

Based on the rules above, the optimal approach for most eligible Canadians:

1. Open immediately, even with $1. Contribution room only starts accumulating after you open the account. Opening early maximizes your room over time.
2. Contribute the maximum each year ($8,000). If you can afford it, fill the FHSA before RRSP — the FHSA gives you both the deduction AND tax-free withdrawal.
3. Carry the deduction forward if in a low bracket. Contribute now for the growth, but save the deduction for a year when your marginal rate is higher.
4. Invest aggressively if your timeline is 5+ years. The FHSA grows tax-free. A longer horizon means equities can compound significantly before your purchase.
5. Combine with HBP for maximum tax-free down payment. FHSA ($40,000) + HBP ($60,000) = $100,000 tax-free for an individual buyer.

If you're unsure whether you'll buy a home, it still makes sense to open and contribute: the worst case is an RRSP transfer, which gives you extra registered room you wouldn't have had otherwise.

Inside the FHSA, you do not need to track ACB for tax purposes — all gains are tax-free while inside the account.

However, if you transfer FHSA investments in kind to a taxable account (rare, but possible after account closure), the ACB of those investments becomes the fair market value at the time of transfer — similar to a withdrawal from RRSP followed by a repurchase.

If you transfer from FHSA to RRSP in kind, the RRSP inherits the FHSA's cost base internally, but since it's still registered, no ACB tracking is needed until you eventually withdraw from the RRSP.