If you’re planning to buy a first home and you’re saving for a down payment, there’s a new tax-free registered savings account worth knowing about, designed to help Canadians reach that goal a little sooner.
Scheduled to start April 1, the federal government’s new program is known as the Tax-Free First Home Savings Account (FHSA). It will allow Canadians to save up to $40,000, tax free.
The program offers the advantages of both an RRSP and a Tax-Free Savings Account.
Like an RRSP, it allows you a tax deduction when you make contributions. But when you withdraw the funds, you do not have to pay tax, if you follow the rules and use the funds as required.
Who Can Participate: While it’s called a “First Home Savings Account,” you can be eligible even if you have owned a home in the past.
The plan defines first-time buyers as Canadians who are at least 18 (or the age of majority in their province) and have not owned a home at any time in the year the account is opened or during the previous four years.
How it Works: If you are eligible, the new plan allows you to save up to $40,000 in total. The maximum annual contribution is $8,000.
If you contribute less than the annual maximum, you can carry the difference to another year. For example, if you contribute $6,000 in 2023 ($2,000 less than the annual maximum), the program allows you to contribute $10,000 ($2,000 over the maximum) the following year.
Like an RRSP, the plan allows you to deduct what you contribute from your taxable income that year. Depending on how much you contribute, that could mean an income tax refund that could also be added to the savings account.
Your contributions to the account can be invested in mutual funds, and as with a tax-free savings account, growth in your account is tax-free.
Some Conditions: Among the rules, you are required to use the funds for the purchase of a home within 15 years of opening the account or before you turn 71 (whichever is earlier), or the account will be closed. So, before creating an account, consider your time frame for purchasing.
If you change your plans to purchase a home, the program allows you to transfer funds to an RRSP account tax free during those 15 years, or when you reach the 15-year maximum and close the account.
If you withdraw the funds to use them for something else, you will be taxed on what you withdraw, the same way you are taxed if you withdraw funds from your RRSP.
You can also find more details about the program and how it works on the Department of Finance Canada’s backgrounder page, at Design of the Tax-Free First Home Savings Account – Canada.ca
Several of Canada’s banks also have information pages, such as this one from Scotiabank, at How you could use the new Tax-Free First Home Savings Account | Posts (scotiabank.com)
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