Over the last few years, housing prices have reached unprecedented levels, making it difficult for those looking to purchase their first home. Accumulating the significant downpayment needed to meet these higher prices has forced many potential new home buyers out of the market.

Many of us are familiar with using our Registered Retirement Savings Plan (RRSP) funds towards a downpayment under the existing Home Buyers’ Plan. It is an excellent tax sheltering option but is currently capped at a withdrawal of $35,000 that one can use to purchase a qualifying home. This amount may not be sufficient to participate in the current high-priced competitive market. With all these factors in play, the federal government launched the First Home Savings Account (FHSA) on April 1, 2023. Most institutions have indicated that it will be available sometime this year.

A first-time home buyer can benefit from the FHSAs features of depositing money into the account on a tax-deductible basis like an RRSP and redeeming funds tax-free like a Tax-Free Savings Account (TFSA) to purchase a qualifying home.

There is a lifetime contribution limit of $40,000 with an $8,000 annual contribution limit. Any unused room can be carried forward into subsequent years. A qualified first-time home buyer can also participate in the RRSP Home Buyers’ Plan (HBP) in conjunction with this account to establish a potentially higher down payment; both provide a tax reduction. If you’re a couple and are both qualifying home buyers, you can each have an account in your name.

Intergenerational wealth can be a great strategy to help alleviate the size of one’s estate by gifting funds to a child or grandchild to fund this account. It would not provide a tax benefit or deduction by doing so, but it could be a great early inheritance approach.

Frequently Asked Questions

  • Question: How much can I contribute to my FHSA each year? What is the lifetime limit?
    Answer: There is an $8,000 annual contribution limit, which can be carried forward to subsequent years. There is a lifetime limit of $40,000.
  • Question: Can my annual contribution be deducted from my taxable income?
    Answer: Yes, your annual contribution can be deducted from your taxable income.
  • Question: How long can my FHSA remain open?
    Answer: Your FHSA can remain open for 15 years or up to age 71.
  • Question: Can my existing RRSP accounts be transferred to my FHSA tax-free?
    Answer: Yes, existing RRSP accounts can be transferred to your FHSA tax-free.
  • Question: Does my FHSA need to be paid back once I use it?
    Answer: Unlike the RRSP Home Buyers’ Plan, the FHSA does not have to be paid back.
  • Question: What do I earn tax-free with an FHSA?
    Answer: Interest, dividends, or capital gains are earned tax-free
  • Question: Will I be taxed when I redeem my funds to purchase a qualified home?
    Answer: Redemptions to purchase a qualified home are non-taxable.

For more information, contact the Cowan Financial Services team at 519-651-6660 or 1-877-899-2194, email: wealthmanagement@cowangroup.ca.