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 first 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!
The currently proposed plan is that starting in 2023, the new FHSA 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.
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 or your spouse can't own a home in which you lived, at any time in the year the account is opened or during the previous four calendar years.
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 (or your spouse) haven’t owned a home where you've lived at any time in the year the account is opened or during the previous 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.
There is no minimum amount of money you need to open up a FHSA.
Even if homeownership is still a few years down the road and your budget is tight right now, you can still take advantage of the First Home Savings Account when it’s available. Each year that your account is open, you'll be able to contribute up to $8,000. However, if you open up your account as a first-time homebuyer and can't contribute anything that first year, you'll be able to carry forward up to $8,000 to the next year. That means, in this situation, you’d then be able to contribute up to $16,000 that next year. This carry-over perk only applies for open accounts, so consider opening an account even if you aren’t able to contribute financially the first year.
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 (life-time contribution limit) or ($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 FHSA 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 (undercalled 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 FHSA, 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-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.7 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|
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.
Yes, you can. You can make both an FHSA withdrawal (up to a $40k contribution + your capital growth in the account) and an HBP withdrawal ($35k maximum) for the same qualifying home purchase.
Here is what you’ll need in order to make a qualifying withdrawal:
- Be a Canadian resident
- Be a first- time home buyer at the time you make a withdrawal
- Have a written agreement to buy or build a qualifying home (a housing unit in Canada) before October 1 of the year following the year of the withdrawal
- Intend to live in the qualifying home as your principal residence within one year after buying or building it
If you and your spouse both qualify as first-time homebuyers, you and your spouse can open up a separate FHSAs and contribute within them. This means together you could contribute up to $80k to save towards your first home between your separate FHSA accounts.
However, with the FHSA, you can't have a joint spousal account. You can only open and contribute to your own FHSA and claim the tax deduction. However, you can also gift money to your spouse for them to contribute to their FHSA.
In the case of divorce or separation, FHSAs might need to be split between both partners. If this happens, doing a direct transfer from your FHSA to your former spouse’s or common-law-partner’s FHSA or RRSP/RRIF will not impact either partner's unused FHSA participation room and RRSP contribution room or cause an immediate tax consequence.
However, if you don't transfer your settlement amount directly — ex. you receive your share as cash and then reinvest it in your RRSP later — both partners will be affected in some way. Typically the partner that needs to withdraw the FHSA for the settlement will have to pay taxes on it, and the other partner will reduce their FHSA participation room or RRSP deduction room.
If you don't use your Tax-Free First Home Savings Account to buy a home, you could transfer the funds to your RRSP or Registered Retirement Income Fund (RRIF) if you are 71 or older. This type of a transfer is a tax-deferred transfer.
If you make a tax-deferred transfer to a RRSP or RRIF- this will affect how much you can contribute to your FHSA. For example, if you transfer $10,000 from your FHSA to your RRSP, your RRSP will not be affected, but you will not be able to get that contribution room back in your FHSA.
Alternatively, you can withdraw money from your FHSA, but the funds would be subject to withholding taxes.
If you make an FHSA to RRSP transfer, your RRSP room would not be impacted, but you will forever lose the FHSA contribution room.
There are a couple registered accounts you can use to transfer money to your FHSA: your RRSPs and other FHSAs.
You can transfer from your RRSP to your FHSA in most cases without tax consequences if it is a direct transfer and you don’t go over your FHSA contribution room (with the transfer).
Here are a few other things that are important to remember about RRSP transfers to your FHSA:
- Any transfers from your RRSP to your FHSA are not tax deductible
- If you transfer money from your RRSP to FHSA, you will not get that RRSP contribution room back the next year
- While you can transfer from an RRSP, you can’t transfer from a RRIF to your FHSA
You can also transfer from one of your FHSAs to another of your FHSAs without immediate tax consequences if you are making a direct transfer. (To make these direct transfers you will need to fill out a CRA-prescribed transfer form and give to your bank or other financial institution. Learn more here.
If you prefer not to risk your RRSP contribution room, another option is to transferring money to your FHSA from your TFSA.
The transfer process would be treated as if you make a contribution to the FHSA from your chequing account or another non-registered account. Though you will lose the TFSA contribution room for the amount you transfer to FHSA in the current year, the contribution room will be added back to your TFSA in January of the next year.
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 FHSA, 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.