Previously there was only one program available to Canadians where they can pull money out of an investment account tax-free for a down payment on their first home. Starting in 2023, a new account will be introduced: the Tax-free First Home Savings Account (FHSA). It will allow Canadians to invest money towards the purchase of their first home tax-free.

What is it?

The FHSA is a new investment account that allows Canadian residents, aged 18 or older, an annual contribution of $8,000 up to a lifetime contribution limit of $40,000. You can carry forward up to $8,000 of unused contribution room. Unlike the Tax-Free Savings Account (TFSA), you only receive a contribution room once you open the account. You can have multiple FHSA, but your annual and lifetime contribution room available is based on your total annual contribution room. For instance, if you have 2 accounts, you still can only contribute $8,000 annually. The account can only be active for 15 years or until the individual turns age 71, whichever comes first.

Taxation

Any contributions to the FHSA are tax deductible in the deposit year or can be carried forward indefinitely to be used at another time. Contributions into your FHSA do not affect your RRSP contribution room, so you can take advantage of both accounts without the contributions to one impacting contributions to the other. Any interest or growth of your investments within the FHSA is tax-free and any qualifying withdrawals towards a home purchase are tax-free. There is also no requirement to pay back the money, unlike the Home Buyers Program (HBP). Any unqualified withdrawals will be included as income for that tax year with taxes will be withheld at the source, and any withdrawals will not result in a loss of the available contribution room.

Transfers

If you do not utilize the FHSA by year 15 or age 71, the full amount can be transferred to an RRSP or RRIF without affecting your contribution room in those accounts. Meaning, if your RRSP contribution room is only $10,000 and your FHSA account has a value of $50,000, you can transfer the full amount without penalties for overcontributing to the RRSP. You can also transfer money from your RRSP to the FHSA up to the annual contribution room; these transfers will not result in further tax deductions on your income each year.

Considerations

The amount of money you withdraw from your FHSA is not capped at $40,000. If you can maximize your FHSA deposits and have favourable growth resulting in the account grows to $75,000, you can take out the full amount for buying a home. You are also able to use a spouse’s FHSA towards a down payment. If you have been investing in your RRSP to utilize the HBP, it might not be in your best interest to transfer money from your RRSP to FHSA; doing this means you will permanently lose the contribution room in your RRSP. For instance, if your contribution room in the RRSP is $10,000 and your transfer $8,000 to the FHSA, your RRSP contribution room will still be $10,000 and does not increase by $8,000.

In conclusion

If you are just starting to invest, an FHSA might be your best move to capitalize on the tax deduction without affecting your RRSP contribution room. There is still a lot to be known about this account as the final legislation has not been approved yet. As with any investment decision, always consult with a financial advisor who understands your financial goals and the full picture to provide the best answer to your questions.