Home ownership is a dream for many, many Canadians but it’s no surprise that with the increased costs of living and rising house prices, it can be challenging for young people to save up for a down payment.
One of the promises the Liberal Party made during the 2021 federal election aims to change that: a proposed new form of tax favoured account called the First Home Savings Account (FHSA). The account would allow Canadians under the age of 40 to save (and invest) up to $40,000 and withdraw the funds tax-free to buy their first home.
This account combines features of the existing Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). The RRSP allows Canadians to contribute pre-tax dollars, which are then later taxed upon withdrawal, and the TFSA allows Canadians to contribute taxed income, which is withdrawn with no tax consequences.
What makes the FHSA unique is that neither the contributions nor withdrawals are taxed. So, that’s up to $40,000 of untaxed funds to put towards home ownership – tax-free in and tax-free out. And unlike using savings from an RRSP account under the First Time Home Buyer’s Plan, you do not repay the amount when you withdraw it from an FHSA.
Of course, the advantages of this tax shelter only come into play when you invest the money from inside the account – the funds grow tax-free. As with the TFSA and the RRSP, it would be more accurate to call it an investment account rather than a savings account.
If the funds are not used to purchase a home by the age of 40, according to the proposal, the account holder can transfer the full amount to an RRSP account.