Saving is not sexy. There’s no immediate gratification to throwing $600/month into a savings account like a shopping spree or a big night out. However, if you’re a first-time home buyer, saving up a down payment is an essential step.
In April 2023 the Government of Canada implemented a new registered savings plan, the First Home Savings Account (FHSA). For more info on details, click here.
How Does the First Home Savings Account (FHSA) Work?
It operates much in the same way that your TFSA and RRSP do. You contribute to the account from your day-to-day chequing or savings account up to $8,000/year, accumulating to $40,000/total. You can invest in assets like bonds, stocks, and GICs through this account (much like your TFSA and RRSP). The capital gains on or interest earned through these investments are also tax-free.
Here’s a big benefit though. Your contributions act as a reduction of your taxable income much like your RRSP contributions. You may be asking yourself, why is that such a big deal? Depending on your tax bracket, a full contribution of $8,000/year could result in tax savings of approximately $2,000-2,400! You can then apply these savings on your 2023 taxes to your 2024 contribution room, meaning you only have to contribute $5,600-6,000 in 2024 (and so on until you purchase your house).
Here is a table of how this can play out over 5 years assuming you’re taxed at 25% :
| Annual Contributions | Tax Return at Tax Time | ||
| 2023 | $ 8,000.00 | $ – | |
| 2024 | $ 6,000.00 | $ 2,000.00 | |
| 2025 | $ 6,000.00 | $ 2,000.00 | |
| 2026 | $ 6,000.00 | $ 2,000.00 | |
| 2027 | $ 6,000.00 | $ 2,000.00 | |
| Totals | $ 32,000.00 | $ 8,000.00 | |
| Available to Pull for a Down Payment | $ 40,000.00 | ||
That’s potentially a free $8,000 you can get in tax savings over 5 years! This table also does not show the potential ROI on investments held within the FHSA over the course of your savings. You’ll also get bonus savings on your 2027 tax return (realized in 2028).
These funds are also locked in unless you use them for the purchase of a home. If you don’t use them over 15 years, the savings are then transferred into your RRSPs. This can help with the psychology of savings and keep you from withdrawing your savings easily like you can with a TFSA.
For all these reasons setting up a FHSA with your bank or choice or financial advisor is a no-brainer. For more information on how the FHSA fits into your long-term mortgage planning, book a meeting with a licensed mortgage agent today!
