Finance Minister Chrystia Freeland’s 2022 federal budget unveiled $10-billion in new spending aimed at tackling the challenge of affordability for potential home buyers with a suite of proposals. Along with money for new home construction, curbs on speculation and foreign buyers, the Liberal budget also outlined the Tax-Free First Home Savings Account (FHSA), which aims to help would-be homeowners purchase their first home.
The FHSA is expected to take effect in April 2023. Here’s what you need to know, and what is included in the new program.
What is the Tax-Free First Home Savings Account?
Starting in 2023, first-time home buyers would be able to save up to $40,000 in a new account. As with a registered retirement savings plan (RRSP), contributions – in this case, up to a maximum of $8,000 a year – would be tax-deductible.
As with a tax-free savings account (TFSA), withdrawals to purchase a new home would be tax-free. Investment growth inside the account would also be tax-free. You can also hold multiple FHSAs, but combined contributions cannot exceed yearly or maximum limits.
If the funds in the FHSA are not used within 15 years of first opening the account, the account will have to be closed and the unused savings must be shifted to an RRSP or RRIF, or withdrawn on a taxable basis.
Two changes have been made since the initial announcement:
- You can now carry over unused FHSA contribution room.
- You can use both Ottawa’s Home Buyers’ Plan (HBP) along with the FHSA to save for a down payment.
Originally, the annual contribution limit of $8,000 could not be carried forward.
Why did the government introduce it?
A great deal of emphasis in the budget – and billions in new spending – is aimed at housing affordability. The typical home price in Canada skyrocketed 51 per cent in just the past two years, fuelled partly by speculators and record-low mortgage rates that are now headed upward.
In fact, competition is heating up again as residential real estate prices have declined across the country following rapid interest rate increases by the Bank of Canada.
The Liberals first proposed this savings account as a 2021 federal election campaign promise to “allow Canadians under 40 to save up to $40,000 towards their first home, and to withdraw it tax-free to put towards their first home purchase, with no requirement to repay it.”
Who is eligible?
When the Liberals proposed the savings account in the 2021 election campaign, it came with an age limit of 40. The age restriction was removed in the 2022 federal budget.
How much can you put away each year?
You can put away up to $8,000 per year in an account, with a lifetime contribution limit of $40,000.
When will it be available?
The FHSA is expected to launch in April 2023. The government says it will work with financial institutions to ensure accounts can be opened for contributions that year.
Can potential home buyers use money from both their RRSP and FHSA to buy a home?
Originally, the plan did not allow for homebuyers to use both an FHSA withdrawal and an HBP withdrawal to pay for the same house purchase. The HBP allows you to withdraw up to $35,000 tax-free from an RRSP to buy a first home.
That has changed and prospective homeowners will be able access both accounts when purchasing their first home.
How much will the program cost?
According to the 2022 federal budget, the government estimates the FHSA program would cost $725-million in tax revenue over five years.
The 2023 federal budget will be released on March 26.
Big mortgages, few listings and fierce competition: Welcome to the spring housing market of 2023
Nine strategies for using a First Home Savings Account
Tax-free first home savings account: Three way to make the most of it
The new federal First Home Savings Account is the only savings program that is truly tax-free
With reports from Matt Lundy, Jason Kirby, Erica Alini, Rachelle Younglai and The Canadian Press.