Last Updated on Jun 28, 2024 to accommodate an increase in HBP Limit in Federal Budget 2024.

What You Need to Know as a First-Time Home Buyer in Canada

The new Tax-Free First Home Savings Account (FHSA) and RRSP Homebuyer plan can be a game changer for young Canadians to save for a down payment for their first home in today’s inflationary environment. Here are the brief details with examples:

Understanding the FHSA

As a financial planner, I recommend that newcomers to Canada familiarize themselves with the First Home Savings Account (FHSA), a valuable tool for saving towards your first home. The FHSA combines the benefits of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). Here’s how it works:

Tax-Deductible Contributions: Like an RRSP, contributions made to an FHSA are tax-deductible, reducing your taxable income for the year you contribute.

Tax-Free Withdrawals: Similar to a TFSA, any money you withdraw from your FHSA, including investment earnings, is tax-free when used for purchasing your first home.

Contribution Limits: The FHSA has an annual contribution limit of $8,000 and a lifetime contribution limit of $40,000. Staying within these limits can help maximize your tax benefits.

Strategic Use of FHSAs

Long-Term Savings: FHSAs can remain open for up to 15 years, or until you turn 71, providing a long-term savings option for your down payment.

Flexibility: If buying a home is no longer part of your plan, the funds in an FHSA can be transferred to an RRSP or a Registered Retirement Income Fund (RRIF) without immediate tax consequences. Alternatively, you can withdraw the funds, though these withdrawals will be subject to tax.

Important Considerations

Eligibility: Ensure you meet the eligibility criteria for opening an FHSA and using the funds for a first-time home purchase.

Financial Planning: Incorporate the FHSA into your overall financial strategy, balancing it with other savings and investment accounts.

Maximizing Benefits: Make the most of your FHSA by contributing regularly and taking advantage of the tax deductions and tax-free growth.

By understanding and utilizing the FHSA, you can enhance your savings strategy and make the dream of homeownership in Canada more achievable. Consider consulting with a financial planner for personalized advice tailored to your specific situation.

Home Buyers' Plan (HBP)

The Home Buyers' Plan (HBP) is a great resource for first-time home buyers in Canada. It allows you to use a portion of the money you've contributed to your Registered Retirement Savings Plan (RRSP) for a down payment on a home. Here’s a quick overview:

Using Your RRSP: You can withdraw up to $60,000 from your RRSP for a down payment. If both you and your spouse have RRSPs, you can each withdraw up to $60,000, allowing for a combined total of $120,000.

Repayment: The withdrawn amount must be repaid into your RRSP over 15 years. If you do not make the required annual repayment, the unpaid amount will be added to your taxable income for that year.

Tax Benefits: Normally, RRSP withdrawals are taxed as income. However, under the HBP, as long as you adhere to the repayment schedule, the withdrawn amount is not taxed when you take it out.

Extended Repayment Start Time: For withdrawals made between January 1, 2022, and December 31, 2025, you have five years before you need to start repaying the amount to your RRSP, instead of the usual two years.

Important Considerations

Eligibility: Ensure you meet all the eligibility criteria for the HBP. This includes being a first-time home buyer and planning to live in the home as your primary residence.

Financial Planning: Carefully plan your finances to ensure you can meet the annual repayment requirements, avoiding additional taxable income.

Stay Informed: Keep up to date with any changes to the HBP or other first-time home buyer programs that may benefit you.

By understanding and utilizing the Home Buyers' Plan, you can make your journey to homeownership in Canada more manageable and financially efficient.

Tax Savings Example:

If you (and your spouse, if applicable) earn $100,000 in Nova Scotia, putting $8,000 into your FHSA could save you about $3,040 in taxes plus you can save more tax if your can contribute to an RRSP. 

• Anand and Kim's Example:

• • • Anand and Kim, a couple in Halifax earning $100,000 each, allocate $1,666 each month for their home-buying goal for in 5 years.

• • • Breakdown:

• • • • $666/month into Anand’s FHSA ($8k/year)
      • $666/month into Kim’s FHSA ($8k/year)
      • $1000/month into Anand’s RRSP ($12k/year)
      • $1000/month into Kim’s RRSP ($12k/year)

Note: Here, the assumption is made that Anand and Kim have enough RRSP contribution room in each year of contributions.

• Annual Contribution: They contribute $12,000 to RRSP and $8,000 to FHSA, totalling $20,000 each annually, resulting in a tax refund of approximately $7,487 each per year (37.17% marginal tax rate).

• 5-Year Plan: Continuing this for 5 years, each would contribute $100,000, ending up with $60,000 each in RRSPs and $40,000 each in FHSA plans. Their combined annual tax refund would be $14,974 ($ 7,487 each)  saved in their TFSA plans.

• Withdrawal Strategy: They can use the RRSP Home Buyers' Plan, $60,000 each and FHSA together to withdraw all funds tax-free. With the RRSP plan, they'll repay $60,000 over 15 years.

• Total Savings: If they save their tax refunds, they'd have Following amounts accumulated after 5 years. It's a powerful combination.

• Investment Caution: While you can invest in various assets, like stocks, bonds, ETFs, Mutual Funds, GICs, however, be cautious about risks. For short-term funds, it's recommended to avoid risky investments to ensure you don't lose money when you need it.

*# Always check with CRA to ensure your contribution limits to accounts before acting on any information you see online. 

Individual Financial Situations

Everyone’s financial situation is unique, and there is no one-size-fits-all solution for achieving homeownership in Canada. To create a plan tailored to your specific needs and goals, it’s essential to consult with a financial planner. They can help you navigate the complexities of the FHSA, HBP, RRSP, and TFSA to make your dream of owning a home in Canada a reality.

At Setu Financial Partners, we help you to design a tailored strategy for your dream home, stay in touch!

Mutual funds, approved exempt market products and/or exchange-traded funds(ETFs) are offered through Investia Financial Services Inc. The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This newsletter was prepared by Mukesh Patel, CFP who is an Investment Funds Advisor with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this newsletter comes from sources we believe are reliable, but we cannot guarantee its accuracy or reliability.