Are FHSA Contributions Tax-Deductible?

This is the first year Canadians can invest in a First Home Savings Account (FHSA). Like other registered accounts, the FHSA is designed to encourage saving by combining tax advantages with flexible investment options. Contributions are tax-deductible, and withdrawals used to buy your first home are tax-free—this includes any interest, dividends or capital gains earned inside the account. How does this affect your income tax return? Read on for a clear explanation.

First, a quick overview of how the FHSA works. This registered account helps eligible first-time buyers save for a down payment. You can contribute up to $8,000 per year, with a lifetime maximum of $40,000 (double that if both members of a couple qualify as first-time buyers). An FHSA may remain open for up to 15 years and can hold a variety of investments, including exchange-traded funds (ETFs), mutual funds, guaranteed investment certificates (GICs) and other eligible securities. Below is a breakdown of the key tax considerations.

Is there an FHSA tax deduction?

Yes. FHSA contributions are tax-deductible, similar to contributions to a Registered Retirement Savings Plan (RRSP). That means the amount you contribute in a given year can reduce your taxable income for that tax year. One key difference from RRSPs: contributions made during the first 60 days of the calendar year cannot be attributed to the previous tax year. To claim a deduction for a tax year, you must make the contribution by December 31 of that same year.

If you haven’t opened an FHSA yet and want to take advantage of the deduction for the 2023 tax year, there is still time to establish an account through major financial institutions such as Fidelity Investments and other banks and brokers that offer the FHSA.

Are FHSA withdrawals taxed?

Withdrawals from an FHSA that are used toward the purchase of your first home are tax-free, including any investment growth in the account. This makes the FHSA similar to a Tax-Free Savings Account (TFSA) in that qualifying withdrawals are not subject to income tax; however, the FHSA has specific rules requiring funds to be used for a first home purchase to retain the tax-free status.

Your FHSA can grow tax-free for up to 15 years, and withdrawals that meet the qualifying home purchase conditions are not subject to capital gains tax.

Does the size of your down payment matter?

The size of your down payment affects more than just your mortgage approval—it influences monthly payments, overall interest costs and whether you need mortgage default insurance. In Canada, putting down at least 20% avoids mortgage default insurance. While a first-time buyer can sometimes purchase with as little as 5% down, smaller down payments typically mean higher monthly carrying costs.

An FHSA can help you save for a larger down payment while sheltering investment growth from tax. Depending on your timeline, savings target and risk tolerance, you can hold a range of assets in the account to pursue higher returns or preserve capital with more conservative options. You can also combine FHSA funds with savings from a TFSA or other accounts to build a larger down payment. Additionally, you may still be eligible to use the Home Buyers’ Plan (HBP) and other government programs alongside your FHSA savings, depending on your situation.

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

Plans change. You might inherit a home, move in with someone who already owns a property, or decide to keep renting. If you do not use your FHSA to purchase a first home, you have a few options:

• Transfer the FHSA balance to an RRSP or a Registered Retirement Income Fund (RRIF) without incurring immediate tax. Such a transfer does not count against your RRSP contribution room, effectively allowing an additional contribution of up to $40,000 in that tax year. Note, however, that those funds will be taxable when withdrawn from the RRSP or RRIF in the future.
• If a transfer to an RRSP or RRIF is not suitable, you can withdraw the funds, but those withdrawals will be subject to income tax.

If you are uncertain which option is best after your plans change, consider consulting a financial advisor for personalized guidance.

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

The FHSA is a practical tool for Canadians saving their first down payment. It combines a tax-deductible contribution and tax-free withdrawals for qualifying home purchases, allowing your savings to compound more effectively. Choose investments that match your timeframe and risk tolerance and keep contributing consistently—doing so can strengthen your buying power and expand your options in the housing market.

More about real estate:

• Can you use the FHSA and HBP together?
• How first-time home buyers can use an FHSA to save for a down payment
• Your FHSA timeline: What to invest in and when
• Can a first-time home buyer have a mortgage co-signer?
• Best FHSAs in Canada: Where to get the new First Home Savings Account