Looks like there could be light at the end of the tunnel for your rental life. Homeownership might be closer than you think ⁠— with a new way to amp up your savings with the recently announced tax-free home savings account.

The Liberal government's 2022 federal budget proposal tackled the ever-growing issue of home affordability. Along with increasing new home production and doubling the first-time homebuyer's credit, they've introduced a new way to save up to $40,000 on your first home tax-free called the Tax-Free First Home Savings Account (FHSA).

All of this means that the dream home on your vision board could actually happen sooner than you thought it would!

Taking a closer look at the Tax-Free First Home Savings Account

The currently proposed plan is that starting April 2023, the new Tax-Free First Home Savings Account will allow Canadians who are at least 18 to save up to $40,000 for their first home. If eligible, you can contribute up to $8,000 each year to the account but (and there's always a but, right?) you have to use these funds within 15 years of first opening an FHSA or before you turn 71 (whichever is earlier), otherwise the account would have to be closed.

This new account is a great savings vehicle for your homebuying goals because you never pay a tax bill on these savings.* It's the best part of both a Registered Retirement Savings Plan (RRSP), which gives you tax-deduction perks, and a Tax-Free Savings Account (TFSA), which lets your investments grow without a tax bill. This means that the money you put in and earn in this account goes towards the down payment of your first home.

Who's eligible for the Tax-Free First Home Savings Account?

So, who can use the new account? There are three important components to qualify for this investment vehicle.

  • You need to be a resident of Canada
  • You have to be at least 18 years of age (or the age of majority in your province or territory)
  • You can't own a home at any time in the year the account is opened or during the previous four calendar years. 

Who doesn't qualify for the Tax-Free First Home Savings Account?

If you fit the three requirements we talked about above, you likely qualify. But if you are looking to buy a second home or a new home as a previous homeowner, this account isn't for you.  

You are considered a first-time homebuyer, for the purposes of this plan, if you haven’t owned a home within the last four calendar years. For example, if you bought your first home in 2015 and sold it in 2018 and have been renting or living with parents or a non-spouse ever since, you would be considered a first-time homebuyer again.

How does it compare to an RRSP or TFSA?

Wondering how this new account stacks up with the TFSA and RRSP? The Tax-Free First Home Savings Account in Canada is the best of both worlds.

Like your TFSA, the maximum contribution of $40,000 ($8,000 per annum) will compound and grow tax-free . But unlike the TFSA, you don't have the same flexibility for how you will use your savings. The Tax-Free First Home Savings Account has to be devoted to the purchase of your first home. Any withdrawals not related to buying a home, will not meet the criteria of a qualifying withdrawal, and therefore will be taxed.

Right now, you can withdraw up to $35,000 of your RRSP towards a new home (called the Home Buyer's Plan) tax free. The catch is that with the RRSP, you have to pay that money back within 15 years. With the Tax-Free First Home Savings Account, you won't need to replace those funds.

Take a look at the breakdown on how these accounts work.

 

  FHSA TFSA RRSP RRSP - Home Buyers’ Plan
Who qualifies for the account?  Any Canadian resident over 18 years old (or age of majority in your province), as long as they haven’t owned a home in the current year or previous 4 years Any individual 18 years old (or age of majority in your province) or older who has a valid social insurance number (SIN) Any Canadian resident or non-resident under the age of 71 Any Canadian resident under the age of 711
Tax-deductible contributions? Yes No Yes Yes
Tax-free withdrawals? Yes 2 3 Yes No Yes 4 5
Max contribution limit? $8k per year until $40k max 3 6 Subject to Canadian Revenue Agency (CRA) regulations Subject to CRA's regulations n/a
Deadline to close account? December 31 of the year of the account’s 15th anniversary or when the plan holder turns 71, whichever happens first.The account must also be closed within one year of the first qualifying withdrawal. n/a December 31 of the year you turn 71 is the last day you can contribute to the account n/a

 

What to do with your newly invested FHSA savings

You've contributed the max $8k for the year, now what? While you wait for the account to hit the maximum contribution limit of $40k, you can grow your investment. Your FHSA savings can be invested in mutual funds, Guaranteed Investment Certificates (GICs) and more.

Once the plan is made available, you can work with your Scotia advisor to talk about which options will work best for your financial plan. 

What happens if you don't use your tax-free home savings?

If you don't use your Tax-Free First Home Savings Account to buy a home, you can transfer the funds to an RRSP account anytime within 15 years or at the time you need to close your account The transfers will not impact your RRSP’s contribution room. Alternatively, you can withdraw the amount, but the funds would be subject to withholding taxes. 

Taking advantage of these special home savings and tax credits

If you are planning to buy a home in the next few years and don’t have enough time to earn the max amount of $40,000 in the Tax-Free First Home Saving Account, you still could still use your savings from the account in combination with the other new tax proposals.

The federal government also announced that the First-Time Home Buyers' Tax Credit will increase to $10,000, which provides up to $1,500 in direct homebuyer support.8 Plus, the First-Time Homebuyer Incentive, which allows new owners to lower their monthly payments, has been extended until March 31, 2025.

Ready to get your finances on track for your future? Come in and speak to a Scotia advisor today