Column: Understanding the First Home Savings Account and Its Tax Benefits
Learn how the First Home Savings Account can help first-time buyers save money and reduce taxes while building a nest egg.
COMMUNITY CONTRIBUTION
by Lesley Etchegary-Nicholson
Saving for dreams of your first home, educating your children/grandchildren, and retiring comfortably in this daunting economy is a struggle. Some months, there just isn’t enough for your necessities, never mind your dreams.
But are you really doing everything you can? By saving your money in the right type of investment account, you can reduce income tax and keep more money in your hands.
Most folks are familiar with RSPs and TFSAs. Money contributed to an RSP is tax-deductible and grows sheltered from taxation until you start to withdraw; money contributed to a TFSA is not tax-deductible but does grow tax-sheltered and is not taxable when you withdraw.
These types of accounts are just the beginning of what is available to Canadians. I hope to introduce each of the plans developed by the federal government, in layman’s terms, looking at potential tax savings, features and rules.
This month, we are looking at the “First Home Savings Account” (FHSA), introduced by the federal government in April 2023 to very little fanfare. It really is an amazing plan with so many perks and benefits to individuals and families who are saving to buy their first home.
So, let’s learn a bit more about this….
The generally agreed-upon adage is that taxes and Inflation are the two biggest destroyers of wealth. In my columns, you will find that tax and Inflation are recurring themes.
Tax Freedom Day in Canada this year was June 8th, which means that every dollar you earned up until June 8th was paid out in a variety of taxes. As of July 2025, the Inflation Rate in Canada was 1.70%, which is less troubling (but don’t get me started on Food Inflation) and below the Bank of Canada's Target Rate of 2.0%.
The First Home Savings Account, (FHSA) allows each individual to contribute $8,000 per year (with a Lifetime Maximum), and receive a tax deduction against income.
Of course, there are conditions to be met, such as being over the age of 18 and a Canadian resident (who qualifies as a First Time Homebuyer). The Government of Canada website provides all the fine print at www.canada.ca.
Let’s take a look at a sample couple, Bart & Lisa who are saving for their first home, to help you understand the tax savings achieved just by directing your savings to the FHSA account.
According to Statistics Canada, the median after-tax household income in Owen Sound is $57,600. We will use that basis as our example and show both Bart & Lisa with Taxable Earnings of $30,000 each. In Ontario, that puts them at about a 10% average tax rate (source: E&Y).
The higher your income, the greater the tax savings.
If they direct $200 each per month to an FHSA, they would see combined tax savings of about $480. The benefits don’t stop there. Now Bart and Lisa have a combined $4,800 in their FHSAs that has already earned them $480 by way of tax savings. Bart and Lisa are starting to move their Personal Tax Freedom Day back, simply by redirecting their savings.
Note:
Anything they earn on the $4,800 in their FHSAs is also tax-free (often referred to as tax-sheltered). As Bart and Lisa are in the 10% income tax bracket, they are also sheltering those earnings from tax inside the FHSA.
Your “Contribution Room” starts in the year you open the FHSA, so it’s important to get it done in the next few months (before December 31st). Once your plan is open, if you don’t contribute the maximum of $8,000, the balance gets carried forward (similar to RSPs). It won’t get carried forward if you haven’t opened the account. Again, there is fine print that could impact your individual situation, as detailed on the Government of Canada website.
Let’s meet up with Bart and Lisa 4 years down the road. They were able to redirect their savings to the FHSA - $200/month each over 4 years. They are pretty conservative, especially with their savings, so they still have the full $19,200 plus some tax-sheltered growth to bring their nest egg to a little over $20,400 (at a very reasonable 2% annualized interest, compounded monthly).
In order to use the $20,400 to put toward their first home tax-free, Bart and Lisa need to meet conditions such as:
You must be a First-Time Homebuyer for the purposes of making a withdrawal.
You must have a written agreement to buy or build a qualifying home with the acquisition or construction completion date before October 1st of the year following the date of withdrawal.
You must be a resident of Canada.
You must occupy or intend to occupy the qualifying home as your principal place of residence within one year after buying or building it
Every financial institution offers a First Home Savings Account, with all of the features I have outlined. I don’t see them promoted much by the banks, however, as I think the accounts are viewed as shorter-term with little ability for the banks to make money on them. Don’t let that deter you!
If you are saving for your first home, talk to your bank or financial institution to start getting a First Home Savings Account set up before year-end.
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