When the Canadian government released Budget 2022, one of the key initiatives was to help make housing more affordable. Over the years, we’ve seen the development of various programs aimed at helping more Canadians become homeowners, such as the First-Time Home Buyer Incentive and the First-Time Home Buyers’ Tax Credit. In continuation of their ongoing initiative, the government has announced the creation of a brand-new savings account called the Tax-Free First Home Savings Account, specifically made to help first-time homebuyers save for a down payment on a home. If homeownership is something you’re hoping to achieve, keep reading to learn more about how this account works and how it can help you reach your goals.

What is the Tax-Free First Home Savings Account?

The Tax-Free First Home Savings Account (FHSA) is a registered savings account that would allow prospective Canadian first-time homebuyers over the age of 18 the ability to save a maximum of $40,000 tax-free, with a contribution limit of $8,000 per year. The account will become available to Canadians April 1^st, 2023. An FHSA has similarities to existing registered accounts like the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA) – it’s almost like getting the best of both account types without any of the drawbacks. For example, like an RRSP, contributions to an FHSA would be tax-deductible, and like a TFSA, qualifying withdrawals from the FHSA would be non-taxable. As the government describes it, “tax-free in, tax-free out”.

Who can open a Tax-Free First Home Savings Account?

To be eligible for the FHSA, you would need to meet these criteria:

• Canadian resident
• 18 years of age or older
• Must be a first-time home buyer

Who is considered a “first-time homebuyer”?

For the purposes of this account, the Canadian government has defined a first-time homebuyer as someone who has not owned a home in which they lived at any time during the part of the calendar year before the account was opened or at any time in the preceding four calendar years.

Contributing to a Tax-Free First Home Savings Account

As mentioned earlier, the Tax-Free First Home Savings Account has a lifetime contribution limit of $40,000 and an annual contribution limit of $8,000. After the account has been opened, any unused contribution room up to $8,000 can be carried over to the following calendar year.

$8,000 Annual contribution limit

$40,000 Lifetime contribution limit

Multiple FHSAs can be opened in a variety of account types like high-interest savings accounts, guaranteed investment certificates (GICs), mutual funds or bonds, but the total amount contributed cannot exceed the annual or lifetime contribution limits. Any overcontributions to an FHSA will be taxed at a rate of 1% per month on the highest amount of the overcontribution for the month.

Withdrawing Funds from a Tax-Free First Home Savings Account

After years of diligent saving, withdrawing from a Tax-Free First Home Savings Account will be a much-anticipated moment for potential homeowners! For your FHSA withdrawal to qualify as non-taxable, you would need to make sure it checks all these boxes:

• You must be a first-time home buyer at the time the withdrawal is made or have moved into your first home in the last 30 days
• The home must be in Canada
• You must have a written agreement to buy or build a qualifying home before October 1^st of the year following the withdrawal
• The qualifying home must be your principal place of residence within one year of buying or building it

Is withdrawing from an FHSA the same as a Home Buyers’ Plan (HBP) withdrawal from an RRSP?

While both withdrawals can be used for your first home, there are also some differences. If you’re already contributing to an RRSP, you can withdraw up to $35,000 under the Home Buyers’ Plan. Since the primary goal of an RRSP is to help Canadians save for their retirement, you will have to repay the withdrawal amount within 15 years, otherwise, the withdrawal amount will be added to your taxable income. An FHSA withdrawal, on the other hand, does not need to be paid back.

Tax-Free First Home Savings Account Guidelines and Timelines

One unique trait of the FHSA is that it can only be open for a maximum of 15 years or up until the account holder turns 71 years old. After that point, if the funds haven’t been used, account holders will have two options:

1. Tax-free option: transfer money to an RRSP or Registered Retirement Income Fund (RRIF)
2. Taxable option: withdraw funds to a non-registered account

Maximize Your Homebuying Potential

In addition to improving your credit, and creating a practical budget, saving a solid down payment is an integral step on the way to buying your first home. The introduction of the Tax-Free First Home Savings Account is a great asset that future homeowners can use alongside existing registered savings accounts like an RRSP and TFSA and government programs such as the First Time Home Buyers’ Plan or the First-Time Home Buyer Incentive.

If you’re looking for expert advice to help you get into your first home, reach out to a mortgage broker using our find a mortgage broker tool to get started.