It’s no secret that with skyrocketing house prices, saving up for a down payment is more challenging. There are a few government programs to help, including the First-Time Home Buyer Incentive and the Home Buyer’s Plan (HBP), among others. In April, the new First Home Savings Account (FHSA) was launched, adding an extra layer of tax-sheltered savings for buying a new home.

How the FHSA Works

The First Home Savings Account allows you to contribute up to $8,000 per year towards the purchase of your first home. These contributions are tax-deductible, like your RRSP contributions. You also will not need to pay tax on any gains earned in your FHSA, similar to a Tax-Free Savings Account (TFSA).

FHSA Eligibility

The FHSA is available to Canadian residents between the ages of 18 and 71. Both you and your spouse must be a first-time home buyer. For this program, the Canadian government defines a first-time home buyer as:

“… they have not owned a home in which they lived at any time during the part of the calendar year before the account is opened or at any time in the preceding four calendar years.”

Contributing to an FHSA

You can contribute up to $40,000 to your FHSA. While this is a lifetime maximum, the contribution room accrues at $8,000 per year for five years. As soon as you open the account, your contribution room clock begins. Any unused contribution room will carry over to the following year, so you don’t have to contribute the full $8,000 each year. For example, if you contribute $5,000 this year, you are eligible to contribute up to $11,000 next year. You also don’t have to buy a home at the 5-year mark, but you should open the account as soon as possible to maximize the contribution room.

The money you contribute to your FHSA can be held in the same qualified investments as those allowed in a TFSA. This a broad range of investment options, including GICS, mutual funds, bonds and publicly traded securities.

Withdrawing From an FHSA

The government has laid out certain conditions to qualify for a non-taxable withdrawal from your FHSA. You must be a first-time home buyer, which is defined as “…the taxpayer could not have owned a home in which they lived at any time during the part of the calendar year before the withdrawal is made or at any time in the preceding four calendar years.”

Stacking Government Programs

While an FHSA cannot be used together with the First-Time Home Buyer Incentive, it can be used in conjunction with the HBP. These two programs have the following things in common:

  • Tax deductible savings
  • Tax-free withdrawals
  • You and your spouse can each participate, potentially doubling your down payment amount.

These government programs do more than help you save for your first home. Like the RSP, contributions to an FHSA give you a tax deduction, and you will not incur any capital gains should your investments increase in value..

Pro Tip: If you already have the funds for a down payment, maximize your tax savings by using these programs to your advantage before buying a home. For example, if you place your down payment into your RRSP for a minimum of 90 days before withdrawing it for your down payment, you’ll enjoy the tax deduction at the end of the year, putting more money in your pocket!

Are you thinking about buying your first home? Ottawa Mortgage Market can help you get pre-qualified for a mortgage. We can help you see how much home you might be able to afford and answer your questions about mortgages and government programs designed to help. Reach out today!