Why Investors Should Open an FHSA Even If They Don't Think They Need One
Many Canadians believe the First Home Savings Account (FHSA) is only for active house hunters. However, waiting until an investor is “ready” to buy is often a strategic mistake.
The FHSA offers a unique combination of tax benefits—tax-deductible contributions (like an RRSP) and tax-free withdrawals (like a TFSA). But these benefits are strictly limited, and investors must close the account within 15 years of opening it (or by age 71, whichever comes first).
Maximizing Tax Deductions and Tax-Free Growth
The FHSA offers a powerful dual benefit: it generates an immediate tax deduction (like an RRSP) and allows investments to grow completely tax-free (like a TFSA).
By contributing to an FHSA instead of a non-registered (taxable) account, investors not only keep more of their investment returns, but they also generate a tax refund that can be reinvested to further accelerate wealth accumulation.
Consider the difference over 10 years for a single $8,000 contribution, assuming a 4% annual return and a 25% marginal tax rate.
- FHSA Strategy $8,000 invested in FHSA + $2,000 tax refund invested in a taxable account.
- Non-Registered $8,000 invested in a taxable account.
| Year | FHSA Value (Tax-Free) | Refund Value (Taxed) | Total FHSA Strategy | Non-Reg Value (Taxed) | Difference |
|---|---|---|---|---|---|
| 0 | $8,000 | $2,000 | $10,000 | $8,000 | +$2,000 |
| 1 | $8,320 | $2,060 | $10,380 | $8,240 | +$2,140 |
| 2 | $8,653 | $2,122 | $10,775 | $8,487 | +$2,288 |
| 3 | $8,999 | $2,185 | $11,184 | $8,742 | +$2,442 |
| 4 | $9,359 | $2,251 | $11,610 | $9,004 | +$2,606 |
| 5 | $9,733 | $2,319 | $12,052 | $9,274 | +$2,778 |
| 6 | $10,123 | $2,388 | $12,511 | $9,552 | +$2,959 |
| 7 | $10,528 | $2,460 | $12,988 | $9,839 | +$3,149 |
| 8 | $10,949 | $2,534 | $13,483 | $10,134 | +$3,349 |
| 9 | $11,387 | $2,610 | $13,997 | $10,438 | +$3,559 |
| 10 | $11,842 | $2,688 | $14,530 | $10,751 | +$3,779 |
Note: The “Taxed” accounts assume a 4% gross return reduced by a 25% tax rate, resulting in a 3% net return.
By using the FHSA, an investor ends up with 35% more wealth after just 10 years. This gap continues to widen every year the funds remain invested.
This advantage comes from:
- Compound Growth on the Deduction The $2,000 tax refund is invested and grows on its own.
- Tax-Free Growth The $8,000 inside the FHSA compounds without being dragged down by taxes.
The longer the money stays in the account (up to the 15-year limit), the larger this gap becomes.
Investment Flexibility: It’s Not Just a Savings Account
Despite the name, the First Home Savings Account is a fully capable investment vehicle. Investors aren’t limited to earning simple interest. Like an RRSP or TFSA, an FHSA can hold a wide range of qualified investments, including:
- GICs (Guaranteed Investment Certificates) For those seeking guaranteed principal and steady growth.
- ETFs (Exchange-Traded Funds) and Mutual Funds For broad market exposure and higher potential returns over the long term.
- Stocks and Bonds For building a custom portfolio tailored to a specific risk tolerance.
This flexibility means investors can pursue significant growth within the tax shelter, rather than letting their down payment stagnate in a low-interest account.
What If the Home Purchase is More Than 15 Years Away?
Since the FHSA has a maximum lifespan of 15 years, investors planning for a purchase further in the future might worry about “timing out.” However, there is a seamless strategy for this scenario.
If the 15-year deadline arrives before a home is purchased, the funds can be transferred directly to an RRSP on a tax-deferred basis. This transfer does not require RRSP contribution room.
Once the money is in the RRSP, it can continue to grow tax-deferred. When the investor is ready to buy a home (even decades later), they can access these funds using the Home Buyers’ Plan (HBP).
- Step 1 Maximize FHSA for 15 years.
- Step 2 Transfer to RRSP before the account expires (preserving the tax shelter).
- Step 3 Withdraw up to $60,000 tax-free under the HBP rules when purchasing.
Note Unlike FHSA qualifying withdrawals, HBP funds must be repaid to the RRSP over 15 years. Any missed repayments are added to taxable income for that year.
This makes the FHSA valuable even for young adults or those with uncertain timelines.
Conclusion
The FHSA is a “use it or lose it” opportunity for tax sheltering. Because the $40,000 lifetime limit takes five years to accumulate and accounts must close within 15 years of opening, the cost of waiting is high. Even if homeownership seems distant, opening an FHSA and making contributions—even small ones—allows investors to secure tax advantages that they cannot reclaim later.
Investors should treat the FHSA as a long-term component of their financial strategy. Opening the account starts the clock and lets the benefits compound.