Webcast #26: The “First Home Savings Account” Comes Out in 2023

A new registered account to be called the First Home Savings Account (“FHSA”) was introduced in the 2022 federal budget. It’s set to launch in 2023 and will be useful for young Canadian residents looking to save for a down payment to buy their first home.

The account borrows attributes from both the RSP and the TFSA.

Similar to an RSP, contributions will be tax deductible. You can put in $8,000 each year and lifetime deposits will be capped at $40,000.

Just like a TFSA, capital gains and dividends grow tax-free. When the accountholder withdraws money – as long as it’s for the purpose of buying their first home – there is no tax implication.

Unlike both the RSP and TFSA, however, if you fail to maximize the full $8,000 annual contribution limit, unused room will not carry forward. In other words, you can’t put in more than $8,000 per year even if you missed a portion of that amount from the previous year.

To be eligible to open the account, you must be a Canadian resident at least 18 years old and did not own a home in the current or preceding four calendar years.

Once the account is opened, it needs to be closed within 15 years (and used to purchase your first home) if you want to use the funds tax-free. Otherwise, the money transfers to your RSP/RRIF or is withdrawn on a taxable basis.

We like this idea because it helps young Canadians afford to buy a home in an increasingly expensive market. While not enough to buy the entire house, it provides a good opportunity to make a reasonable down payment. If someone deposited $8,000 every year once turning 18 until they turn 22 ($40,000 total) and earned 7% on average each year along the way, the account would be valued at just under $65,000 by their thirtieth birthday.

Remember that those $8,000 annual deposits (or any annual amount, for that matter) are tax deductible. That being said, it might make better sense to wait until you have a full-time job after finishing school to benefit most from the tax deduction. Until that time, perhaps make TFSA deposits.

There’s also the Homebuyer’s Plan (“HBP”), which allows you to withdraw $35,000 from your RSP on a tax-free basis to buy a home. The qualification is that you must repay the money back into your RSP over a 15-year period (1/15th every year) or else it counts as income. You won’t be able to tap into the FHSA and HBP simultaneously, unfortunately, but now there’s an additional avenue available to make a real estate deposit in a tax efficient way.