How the New Tax-Free Home Savings Account Can Help You

There has long been a conversation in Canada about rising house prices and a lack of affordability for first-time buyers. The Liberal Government’s 2022 federal budget has allocated $10-billion into solutions to try and tackle this problem, one of which being a new Tax-Free Home Savings Account (THSA), designed specifically to help Canadians purchase their first home. Please note that this a proposed measure in the 2022 Budget.
 
This new savings tool has incredible potential to help Canadians reach the milestone achievement of becoming a homeowner. While we wait for legislation to be drafted, here is what we know so far.
 
What is it?
The FHSA is expected to launch in 2023 and will have a contribution limit of $8,000 a year, capping out at $40,000 in total. Although the account was initially proposed for people under 40, there were no age restrictions announced in the 2022 budget. For now, the assumption is that it will be available to all Canadians over the age of 18, however keep your eyes peeled for more details in the first draft of legislation.
 
The FHSA will borrow some principles from the pre-existing savings accounts we know and love. Similar to a registered retirement savings plan (RRSP), all contributions will generate a tax deduction and just like a tax-free savings account (TFSA), all contributions and investment gains will be non-taxable. However, an important difference to note is that any unused contribution space cannot be carried forward.
 
As well, this goal-oriented savings tool has a time limit more similar to a registered education savings plan (RESP) and can only stay open for 15 years. Any money that hasn’t been used to buy a house after that time will rollover into an RRSP, tax-free and regardless of whether the RRSP holder has contribution room.
 
Why does the time limit matter?
The 15-year time limit is important to consider to ensure you are maximising what this tax-free savings account can do for you.
 
Unlike a TFSA – where the earlier you start saving and taking advantage of compound interest, the better – if you start saving in your FHSA at 18, you must by a house by the time you’re 33 or all of your funds will be transferred to your RRSP, where withdrawals for purchasing a home are a bit more complicated.
 
The RRSP has the Home Buyers’ Plan (HBP) which allows account holders to withdraw money to buy or build their first home, however you can only withdraw $35,000 or less, tax will not be withheld on withdrawals and some locked-in or group RRSPs will not let you withdraw at all. Keep in mind, the HBP only gives you a 15-year window to pay back any withdrawn funds. We would strongly advise taking advantage of the FHSA first as it cannot be used in conjunction with the HBP.
 
As well, considering the combination of the FHSA time-limit, the fact that annual contribution space doesn’t roll-over, and the advantageous tax deduction this account offers, it’s best to wait to open an account until you are in a position to maximise your contributions and fully capitalise on the benefits that it offers.
 
Can parents help their kids?
It’s no secret that parents in Canada have been helping their children buy their first home for generations, increasingly so in recent years. Many parents are hopeful the FHSA will be an opportunity to help their children save efficiently, however no details have been announced yet on whether or not there will be tax consequences for account users making contributions using gifted money; however, considering this is allowed with TFSAs, it’s a likely possibility.
 
If this detail is finalised and parents can help their children save for their first home, the FHSA looks like it may be the most effective way to do so, even more than helping contribute to their TFSA. The details of what works best for you and your children will change case-by-case, however even if your child is unsure of when or if they plan to be a homeowner, contributing to their FHSA (at the right time) will at minimum help subsidise their retirement later in life if they choose not to use it for a home.
 
 
Although we are still waiting for legislation to be drafted, from what we know so far, this new savings account has the potential to help millions of first-time buyers across Canada. If you or a loved one are considering buying your first home and looking for more personalised advice on what options are best for you, please don’t hesitate to reach out to our team to schedule a consultation.