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If you or a family member are thinking of buying your first home, there are three tax-advantaged savings programs that can help you come up with that initial down payment, reducing the amount you will need to borrow as a mortgage and potentially saving you thousands of dollars in interest costs. The three sources of tax-free down payment cash are, in my order of preference, the first home savings account (FHSA), the tax-free savings account (TFSA) and your registered retirement savings account (RRSP), accessed via the federal Home Buyers’ Plan (HBP).

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A recent tax case, decided last month, may provide first-time home buyers with more flexibility should they wish to use the HBP. But, before delving into the details of this case, let’s briefly run through how you can use these three plans to help fund your down payment.

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Launched in 2023, the FHSA is a new registered plan that gives prospective homebuyers the ability to save $8,000 per year, up to a $40,000 lifetime limit, on a tax-free basis toward the purchase of a first home in Canada. The FHSA combines the best feature of the RRSP, being a tax-deductible contribution, with the most attractive feature of the TFSA, the tax-free withdrawal of all contributions, investment income and growth earned in the account when used to buy a first home.

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The FHSA can remain open for up to 15 years or until the end of the year you turn 71, whichever comes first. Any funds in the FHSA not used to buy a qualifying home by this time can be transferred on a tax-deferred basis into an RRSP or registered retirement income fund (RRIF), without needing to have any RRSP contribution room available, or the funds can be withdrawn on a taxable basis.

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The next best method of funding your down payment is a withdrawal of funds from your TFSA. The TFSA limit for 2025 is $7,000 and your cumulative TFSA limit could be as high as $102,000, depending on your age. You can withdraw the entire balance of your TFSA for a down payment, tax-free, and then recontribute the amount withdrawn in any future year.

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But for most first-time homebuyers, FHSA and TFSA savings alone may be insufficient to fund a large enough down payment, so many Canadians continue to tap into their RRSPs, via the HBP, to help come up with additional funds. The HBP allows a first-time homebuyer to withdraw up to $60,000 from their RRSP to buy or build a new home without having to pay tax on that withdrawal.

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Amounts withdrawn under the HBP must be repaid over a maximum of 15 years, starting in the second calendar year after the withdrawal; otherwise, the amount that was required to be repaid but which was not repaid in a particular calendar year is added to the participant’s income for that year.

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Unlike the FHSA, however, the borrowed funds to be withdrawn under the HBP must have been in your RRSP for at least 90 days before they are taken out, or the RRSP contribution may not be deductible.