RRSP or FHSA, Which One Should You Use for Your Down Payment?

With tax season in full swing, Canadians were deciding in February how much to deposit into their RRSP to reduce their taxable income for 2023.

But for first-time buyers, there is another account that was recently created that also reduces your taxable income – the First Home Savings Account (FHSA).

So with both of these accounts allowing to reduce your taxes, as well as use the savings for your first home purchase, which one should you use?

In today’s blog post, we will talk about the differences between these two accounts to help understand the difference to know why you might choose to use one over the other.

To begin, as a first time-buyer it’s important to point out that if you have the ability to contribute to both accounts, you absolutely can use both.

The Home Buyers’ Plan (HBP), also referred to as the “RRSP Program” will allow you to pull up to $35,000 from your RRSP for the purposes of purchasing your first home.

Now, there is some fine print that is really important to know around this program if you're looking to use it.

First off, if you're looking for the money that you deposit into your RRSP to also be tax deductible from your income, the money will need to sit in your account for a minimum of 90 days before you pull that money out from your home purchase.

Additionally, any money that you pull out from your RRSP does need to be redeposited into your RRSP over a 15-year period. For example, after you pull money out from your RRSP, you'll be given a two-year grace period where you don't have to make any contributions back into your RRSP for retirement. After those two years are up, you will then need to take that money that you did pull out, divide that by 15, and that's the amount of money that you'll need to re-contribute every year to your RRSP. Otherwise, that income will get claimed as income on your taxes for that year.

The First Home Savings Account (FHSA), which was introduced last year in 2023, allows first-time home buyers to save an additional $40,000 tax-free to purchase your first home.

Now this program can be used in combination with the RRSP program. However, if you're trying to decide which one you should use over the other, there's a couple of really important details to understand.

First off, the FHSA account doesn't have the same 90-day rule to get the tax benefits like the RRSP program does. So that means if you put money in the FHSA, you can pull that money out the very next week for your home purchase and still get the tax deductions.

Another main benefit or difference between these two accounts is that once you've used the FHSA for your home purchase, there is no re-contribution rules like there are with the RRSP program. That's because once you purchase your first home, the account is no longer available to you since now you're a homeowner, so there's no account to re-contribute to.

To decide which account you might want to use over the other, it's important that you talk to a certified professional accountant (CPA).

Written by:

Cody Rowe
Mortgage Consultant
DLC – Modern Mortgage Group
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