For many young adults in Canada, the path to home ownership has become increasingly challenging. Elevated home prices, slower income growth and larger upfront savings required for a down payment have all made it harder for prospective first-time home buyers to enter the housing market.
Recent policy changes have begun to change the picture. The introduction of the First Home Savings Account (FHSA) in 2023, an increase to the Home Buyers’ Plan (HBP) withdrawal limit, and temporary repayment relief for HBP withdrawals (made before December 31, 2028) have given first-time home buyers greater flexibility to structure their savings and funding approach.
Understanding how these programs work and how they can be used in sequence can make a meaningful impact on how quickly and efficiently a Canadian first-time home buyer can build a down payment for a home.
What is the First Home Savings Account (FHSA)?
The First Home Savings Account (FHSA) is a registered plan introduced by the federal government in April 2023 to help first-time home buyers build savings for a home on a tax-advantaged basis. It combines key features of both a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA).
Contributions to an FHSA are tax-deductible, just like an RRSP, which means you can reduce your taxable income in the year that you contribute (or carry the deduction forward for use in future tax years). At the same time, both contributions and any investment growth within the FHSA may be withdrawn tax-free to purchase a qualifying home, similar to the tax-free treatment of withdrawals from a TFSA.
Eligible individuals can contribute up to $8,000 in the first year they open an FHSA. Each year thereafter, an additional $8,000 of contribution room is gained, up to a lifetime maximum of $40,000. An FHSA can remain open for up to 15 years from the date it is established, until the end of the year in which the account holder turns 71, or until the end of the year following a qualifying withdrawal, whichever occurs first.
What is the Home Buyers’ Plan (HBP)?
The Home Buyers’ Plan (HBP) is a federal program originally launched in 1992 that allows eligible first-time home buyers to borrow funds from their RRSP on a tax-free basis to help purchase a home, provided the amounts are repaid over time. The HBP requires repayment of the withdrawn amount to the RRSP over a period of no more than 15 years.
The program saw a meaningful increase to the maximum withdrawal limit in 2023 from $35,000 to $60,000. While repayments are normally required to begin in the second year following the year of first withdrawal, temporary repayment relief introduced by the federal government in 2022 and extended through 2028 delays the start of repayments until the fifth year following the year of first withdrawal.
The HBP and FHSA can be used together to help fund the purchase of a qualifying home, however, many young adults face the practical challenge of limited available cash flow. For those who cannot afford to contribute to both an RRSP and FHSA in the same year, should RRSP contributions be prioritized to support a future HBP withdrawal, or should available savings be directed to an FHSA instead?
FHSA vs. RRSP: Which Should Come First?
For prospective first-time home buyers with limited available cash flow, contributing to an FHSA should generally take precedence over an RRSP. That means opening an FHSA as soon as possible and making an FHSA contribution first. Importantly, the $8,000 annual contribution room within the FHSA only begins accumulating once the account is opened. Even if a contribution isn’t made immediately, opening an FHSA allows annual contribution room to start building toward the $40,000 lifetime limit.
Prioritizing FHSA contributions also allows prospective home buyers to take advantage of FHSA contribution room while keeping their RRSP contribution room available for future use. This can provide greater flexibility as income and savings capacity grow, particularly if future RRSP deductions become more valuable from a tax perspective.
Key Benefits of the FHSA
The FHSA offers a unique combination of benefits for prospective first-time home buyers to serve as the primary growth engine for a future home purchase. By combining the tax-deductibility of an RRSP with the ability to make tax-free qualifying withdrawals, the FHSA enables prospective home buyers to build a larger pool of tax-advantaged savings for a future down payment.
The FHSA also provides flexibility if homeownership plans change. If funds are not used to purchase a qualifying home before the end of the FHSA’s 15-year maximum participation period, the balance can be rolled into an RRSP on a tax-deferred basis without taking up existing RRSP contribution room. In effect, the FHSA creates additional registered savings capacity that can be used for retirement if a home is not purchased. As a result, even individuals who are uncertain about homeownership may still benefit from opening and contributing to an FHSA.
Considerations for the HBP
The HBP can also help prospective first-time home buyers bridge a down payment shortfall by allowing them to access existing RRSP savings without any immediate tax consequences. However, savings withdrawn from an RRSP through the HBP must be repaid over time. In effect, the HBP functions as a 15-year interest-free loan from an individual’s retirement savings. Thanks to current temporary repayment relief rules, repayment does not need to begin until the fifth year following the year of the first withdrawal. Once the 15-year repayment period begins, any required annual repayment that is not met is included in the individual’s taxable income for that year.
HBP withdrawals also come with an opportunity cost. Funds withdrawn from an RRSP lose the opportunity to continue compounding on a tax-deferred basis until they are repaid. As a result, the withdrawal can reduce the amount of capital available to support future retirement goals. At the same time, the HBP can provide substantial additional purchasing power by allowing first-time home buyers to access up to $60,000 of existing RRSP savings tax-free to put toward a home purchase.
Using the FHSA and HBP Together
In many cases, prospective first-time home buyers can benefit from using both the FHSA and HBP as part of a broader down payment strategy. Individuals can transfer funds from an RRSP to an FHSA on a tax-free basis, subject to annual and lifetime FHSA contribution limits. While such transfers are not tax deductible and do not restore RRSP contribution room, they can increase the amount ultimately available for a tax-free qualifying withdrawal from an FHSA. For individuals with an RRSP balance exceeding the HBP withdrawal limit of $60,000 alongside available FHSA contribution room, transferring up to $8,000 annually from their RRSP to an FHSA can help maximize the amount of tax-advantaged savings available for a future home purchase while preserving access to the HBP on the remaining RRSP balance.
For eligible couples purchasing a home together, the combined impact of the FHSA and HBP can be substantial. If each partner contributes $8,000 annually to an FHSA for five years while maintaining an RRSP balance exceeding $60,000, more than $100,000 per person could potentially be available for a down payment on a home ($40,000 plus any growth from the FHSA and $60,000 from the HBP).
An Expanded Tool Kit
The introduction of the FHSA, the increase in the HBP withdrawal limit, and the extension of the HBP repayment relief period have meaningfully expanded the toolkit available to prospective first-time home buyers. Collectively, these changes have strengthened the ability of Canadians to accumulate savings, access existing registered assets, and build larger down payments than may have been possible under previous rules.
Determining how best to take advantage of these opportunities requires careful consideration of an individual’s income level, marginal tax rate, and the expected timeline for purchasing a home. Thoughtful planning and making use of the right mix of accounts and investments can go a long way in making first‑time home ownership more achievable.
At Tacita Capital, we help individuals and families evaluate these considerations within the context of their broader financial plan. If you would like to discuss how the FHSA, HBP, or other registered account strategies can support your long-term goals, we invite you to contact us. Get in touch with a portfolio manager at Tacita Capital here.