Next year, Canada plans to introduce a new tax-free First Home Savings Account (FHSA) designed to help Canadians save effectively for a home purchase. The account would allow prospective homeowners to save up to $40,000 tax-free to put toward their first home, according to a recent news release.

The accounts would have an annual contribution limit of $8,000, but any unused portions of that limit will roll over to the next year. This means that, in the example the government gives, if you were to contribute $5,000 in 2023, you'd be eligible to deposit up to $11,000 the following year — $8,000 plus the remaining $3,000 from 2023.

It would be possible to own more than one FHSA, but the contribution limits remain the same, meaning you'd only be able to put $8,000 each year across both accounts. These contributions would all be tax-deductible, and when you're ready to make that big step toward owning your own home, your qualifying withdrawals will also be tax-free.

To make a withdrawal that qualifies for tax exemption, FHSA holders must be first-time homeowners at the time of the withdrawal. This means that you haven't owned any home you've inhabited in the four years before taking money out of the account.

You'd be able to withdraw up to the entire amount of the FHSA in one tax-free transaction once you're ready to own your home. It would also require a written agreement to build or buy a home in Canada and occupy it within a year before October 1 of the year after the withdrawals.

If you're already relying on a Home Buyer's Plan, which lets you take money out of a registered retirement savings plan (RRSP) to buy or build a home, it's worth noting that you wouldn't be able to withdraw from your FHSA and your Home Buyer's Plan for the same house.

The government's goal with the FHSA is to offer new opportunities for Canadians to afford their own home, an increasingly challenging feat in today's economy.

Draft legislation to create First Home Savings Accounts is currently under review. The government plans to launch the program "at some point in 2023."