BAM Key Details:
- As the cost of homeownership continues to grow, the Canadian government has recently introduced a tax-free first home savings account (FHSA) to help more first-time buyers save for a down payment.
- A special report by Royal Bank Financial Planning compares this new savings vehicle with the existing tax-free savings account (TFSA) and a registered retirement savings plan (RRSP).
As the cost of homeownership continues to grow, first-time home buyers are finding it more difficult to save up enough for a down payment on a home. So, Canada’s government has proposed a solution—a tax-free savings account to build up a downpayment.
We bring this to your attention because this new First Home Savings Account (FHSA) could actually be helpful to Canadians saving to become homeowners, unlike some previous options.
The FHSA is a registered savings account designed to help more Canadians become homeowners. But with the existing tax-free savings account (TFSA), as well as the home buyers’ plan (HBP), which allows Canadians to withdraw from their registered retirement savings plan (RRSP) to purchase or build a home, consumers might wonder which option is best to help them save the money for a down payment.
A special report by Royal Bank Financial Planning breaks down the key differences between these options to help consumers choose the most suitable option based on their specific financial circumstances.
Here are a few things that stand out.
Tom Storey Breaks Down the Benefits
New BAM Creator Tom Storey created a video to break down the benefits of this new savings vehicle for his fellow Canadians.
Key differences between the FHSA and TFSA
Here are the most notable differences between the FHSA, the TFSA, and the RRSP:
- The purpose of an FHSA is to build up savings for a first-time home purchase, while the purpose of a TFSA is general savings, and the RRSP is for retirement savings.
- Eligibility — To be eligible to open an RRSP, you must be a Canadian citizen and have a valid SIN (social insurance number); to open a TFSA, you must meet both those requirements and to have reached the age of majority in your province or territory; to be eligible for an FHSA, you must meet TFSA requirements, be at least 18 years of age, and be a first-time home buyer.
- Contribution limit and carry-forward ability—For the FHSA, you start accumulating contribution room (CR) as soon as you open an account, the annual limit is $8,000, and you can carry over any unused CR to the next year (up to $8,000); for the TFSA, you accumulate CR automatically if you’re 18+ and a Canadian resident, starting in 2009, your total contribution limit is $6,500, and you can carry over any unused CR indefinitely; the CR for RRSP depends on your income and the prescribed annual limit.
- FHSA contributions are tax-deductible, as are contributions to the RRSP (HBP); TFSA contributions are not.
- You must be a first-time home buyer to withdraw funds from either an FHSA or RRSP account; with a TFSA, you can generally withdraw any amount at any time, depending on the types of investments held in the account.
- Any withdrawal from a TFSA is tax-free; qualifying withdrawals from an FHSA are tax-free while non-qualified withdrawals are taxable.
- For both FHSA and TFSA accounts, you are not required to repay your withdrawal; with RRSP (HBP) accounts, you must (generally) repay any amount you withdraw to your RRSP under the HBP within 15 years, starting the second calendar year following the year of your withdrawal.
- Withdrawals do not reinstate your contribution room for FHSA and RRSP (HBP) accounts; they DO reinstate your contribution room for TFSA accounts; the amount you withdraw is added back to your contribution room as of January 1st of the year following your withdrawal.
- Account closing timeline—With an FHSA, you’ll need to close the account by 12/31 of the year you turn 71 or by 12/31 of the 15th anniversary of setting up your account; your TFSA can remain open your whole life; and your RRSP must mature by the end of the year you turn 71, at which point, you have three options.
- Transfers to other registered accounts—You can transfer funds from one FHSA to another FHSA, or to an RRSP or an RRIF on a tax-free basis; subject to your FHSA contribution room, you can also transfer funds from a TFSA account to an FHSA or to an RRSP; and you can transfer funds from an RRSP to your FHSA tax-free but not tax-deductible but not (directly) to a TFSA.
- Purpose of withdrawn funds—As long as you meet the conditions for a qualifying withdrawal, any funds you withdraw from an FHSA can be used for any purpose; same with the TFSA and the RRSP, as long as you meet the conditions for the HBP.
- Impact on income-tested benefits—Since contributions to an FHSA or an RRSP (HBP) lower your taxable income, they could have a positive impact on your eligibility for income-tested benefits; contributions to and withdrawals from a TFSA have no impact on income-tested benefits.
Those who qualify for an FHSA can—
- Make pre-tax contributions to the account to save toward a down payment
- Positively impact eligibility for income-tested benefits
- Withdraw funds and use them for any purpose
- Transfer funds to retirement accounts (RRSP)
- Withdraw funds without having to repay the amount (like a TFSA but unlike an RRSP)
- Carry over contribution room to the next year (up to $8,000)
- Use contributions for the year as a tax deduction (like an RRSP but unlike a TFSA)
- Withdraw the funds and use them for any purpose whatsoever
For more details, visit Royal Bank Financial Planning .
Top takeaways for real estate agents
As an agent advocating for your clients, you need to be aware of savings vehicles and other resources available to them that can help with saving money for a down payment—or with paying it.
Get familiar with local as well as state and federal programs that can make homeownership more accessible to more of the renters in your area. Be an essential part of the effort to help as many people as possible build real wealth as a homeowner.