Saving for Your First Home? There's a New Account for That!

When saving for your first home, you may have previously considered a Tax-Free Savings Account (TFSA) or the Registered Retirement Savings Plan (RRSP) first-time Home Buyers' Program. But as of April 1, 2023, you'll have another option to weigh.

The First Home Savings Account (FHSA) provides first-time home buyers greater flexibility regarding contributions, deductions, and investments when saving for a down payment. Like an RRSP, contributions to an FHSA are tax-deductible in the year of contribution, and withdrawals to purchase a first home – including investment income and growth – are not taxable, like a TFSA. The FHSA allows for an annual contribution limit of $8,000, which can be carried-forward, for a lifetime contribution limit of $40,000.

So, where should you start saving if you're a first-time home buyer? All signs point towards the First Home Savings Account. The FHSA appears to be the best of both worlds providing tax-free growth to maximize your withdrawal while reducing your reported income by the amount contributed, providing a tax deduction benefit. The amount withdrawn from the FHSA for a qualifying home purchase does not need to be repaid like the RRSP Home Buyers' Program (HBP), and the balance of the account can be transferred tax-free into your RRSP, if it goes unused. If you've already started saving for a down payment within your RRSP, do not fret! Revised legislation of Bill C-32 has allowed a first-time homebuyer to access both the FHSA and RRSP HBP for their down payment, for a total of $75,000 in capital, plus any growth in the FHSA. That means, if you have an RRSP balance in excess of $35,000 (greater than the HBP withdrawal limit), it may be advantageous to transfer some of your RRSP savings to an FHSA in order to access more of the capital, as funds can transfer between these accounts on a tax-free basis.

Who has access to the First Home Savings Account? The FHSA is available to residents of Canada between the ages of 18 and 71 who have not owned a home in the last five years. An FHSA can be open for a maximum of 15 years, or until the individual turns 71. Qualifying withdrawals follow the same parameters as the RRSP First-Time Home Buyers' Program: (1) the taxpayer must meet the definition of a first-time home buyer; (2) the qualifying home must be located in Canada; (3) the taxpayer must have a written agreement to buy or build a qualifying home before October 1st of the year following the year of withdrawal; and (4) the taxpayer must intend to occupy the qualifying home as their principal place of residence within one year after buying or building it. Any FHSA savings not used to purchase a qualifying home can be transferred, tax-free, into your RRSP or RRIF, without impacting the individual's RRSP contribution limit. Otherwise, the savings will be subject to taxation when withdrawn.

Navigating the purchase of your first home can seem overwhelming, but it doesn't have to be. Deciding which account to use will ultimately depend on your financial goals and circumstances. Although the FHSA seems like a no-brainer when saving for your first home, it's best to consult your financial advisor to determine which account makes the most sense for you. Our advisors at Wise Riddell can help you and your family navigate the process of saving for a first home purchase.

Contact our office today for a no-obligation consultation at (905) 829-4994 or email us at info@wiseriddell.ca.