If you’re saving for a first home, you’ve probably heard of the Home Buyers’ Plan (HBP). This long-running program allows you to borrow up to $35,000 from your registered retirement savings plan (RRSP) to buy or build a qualifying first home for yourself and then repay the amount you borrow over the next 15 years.
Starting in April 2023, the Canadian government is introducing a brand new savings account, called the First Home Savings Account (FHSA). A cross between an RRSP and a Tax-Free Savings Account (TFSA), the FHSA allows you to save up to $8,000 a year up to a maximum of $40,000 for your first home.
It’s a cross between an RRSP and TFSA because, like an RRSP, the contributions you make to an FHSA are tax-deductible and, like a TFSA, the money you earn from your FHSA investments over time are not taxed — as long as these funds are used toward the down payment of your first home within 15 years of opening your account.
(Keep in mind there is also other support for first-time homebuyers in the form of the First-Time Home Buyers’ Tax Credit and the First-Time Homebuyer Incentive — ask your advisor or financial institution for details.)
Here are some interesting features and benefits of the FHSA you should know about:
- You don’t have to choose between using the HBP and FHSA to buy a first home — you can use funds from both, which could amount to more than $75,000 toward a home.
- If you’re a couple, you can combine your individual HBP and FHSA savings toward a joint new home purchase.
- If you don’t contribute the full $8,000 a year to your FHSA, like your TFSA and RRSP, that contribution room gets added to subsequent years’ contribution room until you reach your $40,000 maximum lifetime contribution.
- Your annual FHSA contribution gives you a tax deduction, exactly like your RRSP — so the FHSA is almost like getting bonus RRSP contribution room, except that those funds must be used in the future for your first home.
- If you don’t know whether to use the HBP or FHSA to buy your first home and you don’t want to use both, it makes more sense to use the new FHSA because, unlike the HBP, you don’t have to repay the funds in the future.
- It’s worth pointing out that, while it’s called a First Home “Savings Account”, you’re not limited to leaving the funds you save in a traditional low-interest-type savings account. Inside the FHSA account, just like in an RRSP account or TFSA account, the funds can be invested in financial products like GICs, ETFs, mutual funds, stocks and bonds.
- Finally, if down the road you decide not to purchase a first home with the funds in your FHSA, you can cash out the funds and pay income tax on them. Or you can also transfer those funds, tax-free, into your RRSP.
To learn more about the FHSA or other accounts and plans like the ones discussed here, please don’t hesitate to reach out to us anytime.