By Erin Pepler on November 29, 2023
Estimated reading time: 6 minutes

Is the FHSA tax-deductible?

By Erin Pepler on November 29, 2023
Estimated reading time: 6 minutes

Thousands of Canadians have opened an FHSA. If you’re a first-time home buyer saving for a down payment, here’s what to know about FHSA tax deductions.

A young couple hangs a "home, sweet home" sign in their new condo

Photo by RDNE Stock project from Pexels

This is the first year that Canadians have been able to invest in a first home savings account (FHSA). Like other registered accounts, the FHSA offers strong incentive to save. FHSA contributions are tax-deductible, and FHSA withdrawals are tax-free—including any income earned from interest, dividends or capital gains—as long as the funds are eventually used to purchase your first home. What does all that mean for your income tax return?

Before we talk income taxes, here’s a quick refresher on how the FHSA works. This registered account enables eligible prospective homeowners to save for a down payment on their first home. They can contribute up to $8,000 per year, up to a lifetime maximum of $40,000 (twice that amount if you’re part of a couple and you’re both first-time home buyers). An FHSA can stay open for up to 15 years. It can hold different types of investments, including exchange-traded funds (ETFs), mutual funds, guaranteed investment certificates (GICs) and more. Now, let’s look at those tax breaks.

Is there an FHSA tax deduction?

Yes, there’s an FHSA tax deduction. Just like when you invest in a registered retirement savings plan (RRSP), your FHSA contributions are tax-deductible, meaning the amount can be deducted from your taxable income for that year. However, unlike an RRSP, contributions made during the first 60 days of the calendar year are not deductible on your income tax return for the previous tax year. This just means you have to get your contributions in before December 31 each calendar year.

If you haven’t opened an FHSA yet but would like to start the process, there’s still time before the 2023 tax year is over. The FHSA is currently available through Fidelity Investments and other financial institutions.

Are FHSA withdrawals taxed?

One of the key benefits of investing in an FHSA is that withdrawals are not taxable, as long as the funds are being put toward a down payment on your first home. It’s like a tax-free savings account (TFSA) but with specific rules around how withdrawals are used—after all, the account was created to help Canadians save up for a down payment and get into the housing market.

Your FHSA contributions can grow tax-free for up to 15 years, and qualifying withdrawals are not subject to capital gains tax.

Does the size of your down payment matter?

Getting into your first home isn’t just about finding the right property or getting pre-approved for a mortgage—your down payment is incredibly important. When buying your first home in Canada, you’ll be required to put down a minimum of 20% in order to avoid paying mortgage default insurance. So, while it’s possible to purchase your first home with as little as 5% down, you’ll end up with larger monthly carrying costs—and that adds up.

Investing in an FHSA is one way to save up for a large down payment on your first home while earning interest and avoiding taxation on those funds. Depending on your timeline, savings goal and risk tolerance, there are a variety of assets you can choose to hold within the account. The more you save, the stronger your buying power will be, which means more options in the housing market. And remember, you can combine the funds in your FHSA with money from your TFSA or other savings to create a larger down payment. Plus, you can still take advantage of the Home Buyers’ Plan (HBP) and other government incentives.

What if you don’t use your FHSA to buy a home?

What’s life without a few curveballs? It’s not unheard of for an individual to inherit a property, move in with someone who already owns a home or decide to keep renting.

If your home ownership plans change and you have to withdraw funds from your FHSA for a reason other than buying your first property, you can transfer the funds in an FHSA to an RRSP or RRIF (registered retirement income fund) without being penalized. This action won’t impact your RRSP or RRIF contribution limits—essentially freeing up space for an additional contribution of up to $40,000 in that tax year. However, those funds will be taxed later, when they are withdrawn from your RRSP or RRIF, whereas funds withdrawn directly from an FHSA are not taxed if they are being used toward a down payment on your first home.

If transferring the funds in your FHSA to your registered retirement savings isn’t a viable option, you can withdraw the money to use as needed—however, it will be subject to income tax. If you’re not sure how to proceed with your FHSA after a change in life plans, speak to a financial advisor for personalized advice.

Tax-free growth that helps you save for a down payment

An FHSA is one of the many tools available to Canadians to help them buy their first home, and the tax break that comes along with it is a welcome bonus. Keep investing in your future—it’ll be worth it.

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About Erin Pepler

Erin Pepler is a freelance writer based in the Toronto area. A frequent contributor to MoneySense, she is also the author of Send Me Into The Woods Alone: Essays on Motherhood.