JUNE 18, 2024

Explore your savings options – buying your first home

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When you are thinking of purchasing your first home, saving for a down payment can feel very overwhelming. For those who are facing this decision you have an option in the First Home Savings Account (FHSA), a new savings vehicle introduced by the Federal Government in 2023 for first-time home buyers who did not own a qualifying home which served as a principal place of residence in the year the account is opened or in any of the four preceding calendar years. If you have a Registered Retirement Savings Plan (RRSP) there is also the Home Buyers’ Plan which allows a withdrawal from an RRSP account for a downpayment and 15-years to pay it back without penalty. In this month’s RIC Tip we compare the features of the FHSA to the RRSP.

Contribution roomCanadian residents can contribute up to $40,000 towards their first home, with an annual limit of $8,000, but must avoid over-contributing.18% of prior year’s income (minus any pension adjustment) to a maximum of $30,780 for 2023 plus any unused contribution room. Find out how much room you have by checking your CRA account or your last NOA -Notice of Assessment
Annual contribution deadlineDecember 31February 28 (for the proceeding tax year)
Carry forward on unused contribution roomNo carry forward amount until account is opened - FHSA could be opened starting April 2023.Until the year the contributor or eligible spouse turns 71.
Maximum participation period
  • 15th anniversary of opening your first FHSA.
  • The year you turn 71.
  • The year following your first qualifying withdrawal from your FHSA.
By end of the year which the plan holder turns 71.
Tax deductible contributionsYes, reduces taxable income.Yes, reduces taxable income.
Tax on withdrawalsNo, provided you are making a qualifying withdrawal or designated amount, or an amount otherwise included in your income. In all other cases an amount withdrawn from your FHSA must be included in your income tax in the year the withdrawal was made.Taxable income in the year withdrawn.
Tax on income or capital gainsSame as above.Tax deferred until withdrawn.
Over contribution penaltyYes, excess subject to 1% tax per month.Yes, excess subject to 1% penalty per month if exceeds more than $2,000.

Can I have both FHSA and an RRSP account at the same time?

Yes, you can have both an FHSA and an RRSP account at the same time. However, it’s important to note that the contribution limits for each account are separate, and over-contributing to either account can result in penalties.

How do I withdraw money from my FHSA and RRSP?

You can withdraw money from your FHSA tax-free if you meet the qualifying withdrawal conditions. To make a qualifying withdrawal, you must fill out Form RC725, Request to Make a Qualifying Withdrawal from your FHSA and give it to your FHSA issuer.

You can also withdraw money from your RRSP at any time, but you will be subject to withholding tax. The amount of tax you will have to pay depends on the amount you withdraw and the province you live in. You can also withdraw money from your RRSP under the Home Buyers’ Plan (HBP) or the Lifelong Learning Plan (LLP).

What happens to FHSA contribution if I change my mind about buying a qualifying home?

You can transfer the balance of the account on a tax-deferred basis to your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) without impacting your contribution room. Then again, you can withdraw the funds and pay the required taxes.

It’s important to know the similarities and differences between these two investment vehicles, and then compare that to your own unique situation before deciding. If you are still unsure, consider talking to one of our Retirement Information Consultants. We can help you understand your personal situation and how this decision fits into your overall financial plan.