Canada Plans To Launch Tax-Free First Home Savings Accounts In 2023 — Here's How They'd Work
What a Tax-Free First Home Savings Account would get you.👇
Montreal houses with Victorian-inspired architecture. Right: Aerial view of houses and streets in residential neighbourhood in Montreal.
In late 2022, several measures aimed at helping Canadians deal with the rising cost of living received royal assent, including a temporary doubling of the GST credit and a one-time "top-up" of the Canada Housing Benefit. The new year is set to bring additional federal programs, such as new Tax-Free First Home Savings Accounts (FHSA), that are supposed to make life marginally easier.
Here's what you need to know about the proposed Tax-Free First Home Savings Accounts in Canada.
What is a Tax-Free First Home Savings Account?
The federal government's goal with tax-free first-home savings accounts (FHSA) is for young Canadians to more quickly afford a down payment.
The money prospective homebuyers would put into the account would be tax-deductible. That money would be exempt from federal taxes upon withdrawal, too.
Who could open a Tax-Free First Home Savings Account?
To open an FHSA, you would have to be a resident of Canada and at least 18 years old.
In addition, you would have to be an aspiring first-time home buyer, which the government defines as someone who did not own a home they lived in in the calendar year prior to the moment they open their FHSA, nor in four calendar years before that.
So, for example — and assuming the FHSA becomes a reality — someone who wants to open an FHSA in September 2023 can't have owned a home they lived in at any point before that in 2023 or between January 1, 2018, and December 31, 2022.
Is there a proposed limit for the Tax-Free First Home Savings Account?
The proposed maximum amount an individual could put into an FHSA over the course of their lifetime is $40,000. And there'd be an $8,000 annual cap on contributions up to that total amount.
But according to an August 2022 news release, any unused portions of that annual limit would roll over to the following year. For instance, if you were to contribute only $2,000 in one calendar year, you'd be able to deposit up to $14,000 in the next.
Could you own multiple Tax-Free Home Savings Accounts?
It would be possible under the proposed framework, yes. But the lifetime and annual limits wouldn't multiply.
So if you owned two accounts, you'd only be able to put in a combined $8,000 for each year.
Moreover, only one person would be able to claim a deduction for a contribution to a FHSA under the proposed rules. So while someone would be able to give their spouse money for their own FHSA, only the spouse could get the tax deduction.
When can you get a Tax-Free Home Savings Account?
As of August, the government planned to launch FHSAs in mid-2023 and promised that the full $8,000 annual limit would still apply, even if the program is only live for part of the year.
What if you're already on a Home Buyer's Plan?
If you're already using the Home Buyer's Plan, which lets you take money out of a registered retirement savings plan (RRSP) to buy or build a home, you would be able to stay on it when you open an FHSA, the government says. But you wouldn't be allowed to use money from both your FHSA and your Home Buyer's Plan for the same property.
What other housing affordability measures has the Government of Canada announced?
Other measures aimed at making housing more affordable or attainable are in the works.
Beginning January 1, 2023, foreign purchases of homes in Canada will be banned for two years and foreigners who don't live in Canada but own homes in the country will see an additional 1% tax on those properties.
There's also the Canada Housing Benefit top-up, through which eligible low-income renters will get an extra $500.
