When the team was founded it was meant for the working class french men of Montreal. The french word for these people is Habitant. Which got shortened to habs over time.
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"Habs" is short for "habitants".
The definition of habitant is:
1) a French settler in Canada.
2) a Canadian of French speech and culture, esp. one residing in the province of Quebec.
The canadiens are called "HABS" because of the word "habitants" which the canadiens were called back in the 20s.