The First Home Savings Account, explained

The FHSA borrows the best half of each. Contributions are deductible against your taxable income the way RRSP contributions are, so a full $8,000 year reduces the income you are taxed on by $8,000. Withdrawals for a qualifying home purchase are tax-free the way TFSA withdrawals are, and unlike the Home Buyers' Plan there is nothing to pay back afterwards.

That combination does not exist anywhere else in the Canadian tax system. For someone who is genuinely buying a first home, contributing to an FHSA before an RRSP or a TFSA is close to automatic.

The mechanics of the contribution room are where most explanations go wrong, so here they are precisely.

A withdrawal that meets every condition below is a qualifying withdrawal: entirely tax-free, growth included, with nothing to repay. Miss one condition and the whole amount becomes taxable income in the year you receive it, so this is worth checking rather than assuming.

Nothing is lost, which is what makes opening one early such a low-risk decision. The balance transfers directly into an RRSP or a RRIF with no tax owing, and — importantly — without using any of your RRSP deduction room. Effectively you get extra tax-sheltered retirement room you would not otherwise have had.

The deadline sits on the account rather than the money. It has to be closed by the end of the fifteenth year after opening, by the end of the year you turn 71, or by the end of the year following your first qualifying withdrawal, whichever comes first. Make sure it is a direct transfer between institutions: withdraw the money yourself and it becomes taxable income, and re-contributing it to an RRSP consumes RRSP room.

These are separate programs and you can use both for the same home, in the same purchase, provided you meet each one's conditions at the time of each withdrawal. There is no requirement to choose.

The Home Buyers' Plan lets you take up to $60,000 out of your RRSPs with no tax withheld. Together with $40,000 of FHSA contributions that is $100,000 per person directed at a first home, plus whatever the FHSA earned along the way. A couple who both qualify can each do it.

The two are not equivalent, though, and the difference matters when you decide which to draw down first. An FHSA withdrawal is permanent and tax-free. The Home Buyers' Plan is a loan from your own RRSP: you repay a fifteenth of the balance each year over fifteen years, and in any year you repay less than the minimum, the shortfall is added to your taxable income. If you only need one of them, use the FHSA.

This is the part that costs people money, because the phrase "first-time buyer" means two different things depending on who is asking.

Ontario's land transfer tax refund is worth up to $4,000 provincially — no land transfer tax at all on the first $368,000 of the price — and up to a further $4,475 against Toronto's municipal land transfer tax inside the city. But Ontario's test is far stricter than the CRA's. You must never have owned an eligible home anywhere in the world, at any time. There is no four-year reset. The Ministry of Finance states it plainly: you cannot re-qualify as a first-time homebuyer, and it notes that this rule may differ from federal programs.

How you came to own the previous home is irrelevant — a purchase, a gift and an inheritance all disqualify you equally. And the spouse rule is unforgiving: if your spouse owned an eligible home at any time while they were your spouse, no refund is available to either of you.

So it is entirely possible to sell a home, wait out the CRA's four calendar years, legitimately open an FHSA, make a qualifying tax-free withdrawal, use the Home Buyers' Plan as well — and still owe every dollar of Ontario land transfer tax. The federal programs reset. Ontario's does not.

If you have no realistic prospect of buying and you need the money accessible, a TFSA is the better home for it. FHSA money is not locked up in the way an RRSP is, but a withdrawal that is not a qualifying withdrawal is fully taxable as income, which is a poor outcome for what was meant to be savings.

If your income this year is unusually low — a first job, a year of parental leave, a year of self-employment losses — the deduction is worth comparatively little. Contribute anyway to start the room accruing, but carry the deduction forward and claim it in a higher-earning year.

And if carrying high-interest debt is the real problem, clear that first. No registered account returns anything close to what a credit card charges, and a lender will look at those balances when deciding what you can borrow. Arriving at a purchase with $40,000 saved and $20,000 of consumer debt is a materially worse position than arriving with $20,000 saved and none.