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Looks like there could be light at the end of the tunnel for your rental life. Learn how to amp up your savings with the new tax-free first home savings account to purchase your first home.
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 contribute up to $40,000 to your first home tax-free, the Tax-Free First Home Savings Account (FHSA).
This means that the dream home on your vision board could become a reality sooner than you imagined.
The new FHSA will allow Canadians who are at least 18 to contribute up to $40,000 into the account for their first home. If eligible, you can contribute up to $8,000 annually, but you have to use these funds within 15 years of opening the FHSA or before you turn 71 (whichever is first), 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 deposit and earn in this account goes towards the down payment on your first home.
So, who can use the account? There are three important components to qualify for this investment vehicle.
- You must 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 are a first-time homebuyer, meaning you (or your spouse) don't own a home that you’ve lived in at any time during the year the account was opened or the previous four calendar years.
If you fit the three requirements mentioned 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.
For the purposes of this plan, you're considered a first-time homebuyer if you or your spouse haven’t owned a home you've lived in at any time during the year the account was opened or during the previous four calendar years. For example, if you bought your first home in 2015, 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. Each year that your account is open, you'll be able to contribute up to $8,000. However, if you open your account as a first-time homebuyer and can't contribute anything that first year, you can carry forward up to $8,000 to the next year. That means you could contribute a total of up to $16,000 the following year. This carry-over perk only applies to open accounts, so consider opening one even if you can’t contribute financially right away.
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 (lifetime contribution limit) or ($8,000 per annum) will compound and grow tax-free. But unlike the TFSA, you don't have the same flexibility in how you will use your savings. The FHSA has to be devoted to the purchase of your first home. Any withdrawals unrelated 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 $60,000 of your RRSP towards a new home (also called the Home Buyers’ Plan) tax free. The catch with the RRSP is that you have to pay that money back within 15 years. With the FHSA, you won't ever need to replace those funds.
Take a look at the breakdown of 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? | $8,000 per year until $40,000 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 maximum of $8,000 for the year. Now what? While you wait for the account to reach the maximum contribution limit of $40,000, you can grow your investment. Your FHSA savings can be invested in mutual funds, Guaranteed Investment Certificates (GICs), and more.
Yes, you can combine the HBP and FHSA towards the purchase of a qualifying first home. This can be done by using the entire balance from your FHSA (including any growth) and up to $60,000 from your RRSP for a qualifying home purchase.
Here is what you need 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 each qualify as first-time homebuyers, you can open separate FHSAs and both contribute to them. This means that between your separate FHSA accounts, you could contribute up to $80,000 to save towards your first home.
Note that 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 gift money to your spouse for them to contribute to their FHSA.
In the case of divorce or separation, FHSAs may need to be split between both partners. If this happens, directly transferring 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 — e.g., 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 who 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, it 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 won’t 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 a FHSA to RRSP transfer, your RRSP room would not be impacted, but you will forever lose the FHSA contribution room.
There are a couple of 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 doesn’t go over your FHSA contribution room.
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 it to your bank or other financial institution. Learn more here.
If you prefer to avoid risking your RRSP contribution room, another option is to transfer money to your FHSA from your TFSA.
The transfer process would be treated as if you contributed 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 following year.
If you are planning to buy a home in the next few years and don’t have enough time to contribute the max amount of $40,000 into the FHSA, you 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.
