The Federal Government has announced a new vehicle to help first time home buyers that combines the best features of a RRSP and a TFSA. They call it the tax-free first home savings account (FHSA) and the money you put into this account will be tax deductible like an RRSP. The beauty is that when you take the money out for the purpose of buying a house, that money is NOT taxed! The only other vehicle that allows tax-sheltered growth without taxation at the end is a permanent life insurance policy but you have to die to benefit from it. Well, most of the benefit goes to the heirs, so this is better.
There is a maximum $8000 per year contribution room which does not accumulate. That is, use it or lose it. And you are allowed a maximum total contribution of $40,000. This is a higher limit than the Home Buyer’s Plan which allows the withdrawal of $35,000 from your RRSP tax-free but with the HBP you have to repay it within 15 years. By the way, you are not allowed to use both plans at the same time and withdraw $75,000 for your first home purchase. Use one or the other.
You have to close the account when you make your first purchase or when your account has been active for 15 years. That is, you have 15 years to find that home and then you’ll have to close the account. The money will be taxed as income but you can roll it into your RRSP.
I would say the FHSA is better than an RRSP. Even if you have the slightest chance of buying a property in the future, you should use the FHSA before the RRSP because if you don’t use it to buy a home, you can always transfer the balance to your RRSP later without tax implication. The money will be taxed when it is withdrawn from the RRSP. So for people who don’t plan on buying a place, the FHSA becomes a way to save an extra $40,000 tax sheltered growth in your RRSP. If this sounds too good to be true it might be. This program starts in 2023 and the government still has time to change its mind.
If you want to see the official documents, click the link below.
