Planning to buy a home in the next few years? One of the first steps you should take is understanding the best savings strategies so you can feel prepared and confident when the time comes. In Canada, there are three key savings options that buyers should know about – First Home Savings Account (FHSA), Tax-Free Savings Account (TFSA), and the Home Buyers’ Plan (HBP).
First Home Savings Account (FHSA)
The First Home Savings Account (FHSA) is a new registered plan designed to help Canadians save for their first home. It combines the features of an RRSP and a TFSA in terms of structure and tax treatment.
How the FHSA Works:
- Tax-Deductible Contributions: Contributions to the FHSA are tax-deductible.
- Tax-Sheltered Growth: Funds within the FHSA grow tax-free.
- Tax-Free Withdrawals: Withdrawals for a qualifying home purchase are tax-free.
- Contribution Limits: You can contribute up to $8,000 per year, with a lifetime maximum of $40,000. Unused contribution room can be carried forward.
- Deduction Flexibility: Deductions can be carried forward to future years.
- Account Duration: The account can remain open for 15 years or until the account holder turns 71.
- Non-Home Purchase Withdrawals: If the funds are not used for a home purchase, they can be transferred tax-free to an RRSP or RRIF without affecting contribution room. Direct withdrawals for other purposes are taxable.
Who Should Use an FHSA?
First-time homebuyers can greatly benefit from incorporating an FHSA into their savings strategy. It’s also helpful for those with higher future incomes, as they can defer deductions to those years.
Tax-Free Savings Account (TFSA)
A Tax-Free Savings Account is a versatile registered investment account that can be used for various financial goals, including saving for a home.
How the TFSA Works:
- Contribution Room: The contribution limit for 2023 is $6,500. Total contribution room has been accumulating since 2009, reaching $88,000 for eligible individuals by 2023.
- Tax-Free Withdrawals: Withdrawals and any growth within the TFSA are tax-free, and the withdrawn amount is added back to your available contribution room the following year.
Who Should Use a TFSA?
While a TFSA is not specifically for home purchases, they can be a powerful tool for those saving for a home, especially if they don’t qualify as first-time buyers or have no spare RRSP funds. TFSAs offer flexibility for those who are uncertain about their home buying timeline.
Home Buyers’ Plan (HBP)
The Home Buyers’ Plan allows Canadians to borrow from their RRSP for a first-time home purchase.
How the HBP Works:
- Eligibility: Must be a first-time homebuyer.
- Withdrawal Limits: Up to $35,000 can be withdrawn ($70,000 for couples).
- Repayment: The borrowed amount must be repaid over 15 years, with minimum annual repayments of 1/15th of the withdrawn amount.
Who Should Use the HBP?
If you have significant RRSP savings, using the HBP makes sense. It’s beneficial for those in higher tax brackets due to the deductibility of RRSP contributions. However, it’s crucial to plan for the required repayments.
Comparing FHSA, TFSA, and HBP
| Feature | FHSA | TFSA | HBP |
| Eligibility | First-time home buyers | Canadians 18+ with a SIN | First-time homebuyers with RRSPs |
| 2023 Contribution | $8,000 | $6,500 | N/A |
| Tax-Deductible Contributions | Yes | No | Yes (when made to an RRSP) |
| Tax-Free Withdrawals | Yes (for home purchase) | Yes | Yes (if repaid) |
Starting your savings early is essential to ensure you can pass the mortgage stress test and afford a down payment. Regardless of the account type, prioritizing high-interest savings will help you accumulate the necessary funds to make a home purchase. Once you have a solid plan, consider whether an FHSA, TFSA, or HBP best suits your needs to amplify your savings.
Pro Tip: To optimize your savings, you don’t have to limit yourself to one account. You can leverage multiple accounts to maximize tax benefits and flexibility.
At Homewise, we’re happy to help buyers get their foot in the door while understanding all of the fine print and rules around the process. If you’re planning to make a home purchase soon and want expert advice from our dedicated mortgage professionals, contact us today.
