There are ways for homebuyers to save for their first and possibly subsequent homes. Below, we focus on these options, providing clarity and insight to help you make informed decisions.
| Free Money This information is particularly important if you are giving or receiving a down payment gift, as it can enable these funds to grow effortlessly and without any additional cost. Consulting with a licensed financial advisor is key to determining the best options for your needs. If you like, we can introduce you to our network of trusted advisors. |
This chart compares options to save for a down payment and closing costs, followed by details about each, and a case study.
| First Time Home Savings Account (FHSA) | Registered Retirement Savings Plan (RRSP) | Tax-Free Savings Account (TFSA) | Open Investments | Saving Account | |
|---|---|---|---|---|---|
| Contributions are Tax Deductible |  | | |||
| Withdrawals DO NOT have to be Paid Back | | | | | |
| Tax Exempt Capital Gains | | | |||
| Annual Contribution | $8,000 | $30,780 (1) | $7,000 | Unlimited | Unlimited |
| Lifetime Contribution | $40,000 | See Note 1 | See Note 2 | Unlimited | Unlimited |
| Minimum Deposit Time | N/A (3) | 90 Days | N/A (3) | 90 Days (3) | 90 Days (3) |
| Maximum Withdrawal Per Borrower | Unlimited | $60,000 | Unlimited | Unlimited | Unlimited |
(1) This amount depends on annual income. Unused contributions from previous years can be used in the current or future years.
(2) TFSA contributions are cumulative from 2009 or when a person turns 18, whichever is less.
(3) Typically, funds require a 90-day history of ownership or a gift confirmation.
| Down Payment History |
|---|
| – Regardless of the account, the down payment needs a 90-day history through bank and/or investment statements or confirmation that the funds are gifted. Gifted funds must be deposited into a bank account and then moved to the preferred investment vehicle. – Borrowing for a down payment is also an option, but speak to a mortgage broker to ensure it’s not detrimental to qualifying. – DO NOT keep cash under the mattress, gold in the ground or silver and jewels in your basement. – Cryptocurrency is not accepted by mortgage institutions. Ensure funds are deposited into a bank account at least four months before closing on a property. |
First Home Savings Account (FHSA)
PRO: Reduces Income Taxes | Exempt from Capital Gains | No Maturity Period
CON: Funds must be used to buy a home or transferred to an RRSP
DETAILS
- The maximum annual contribution is $8,000, up to $40,000 for a lifetime. Unused contributions are carried forward.
- Funds can be taken from an RRSP account and various financial sources.
- Funds must be deposited into this account before December 31 of that year.
- If you or your partner owns a home where you’ve lived in the current year or the preceding four years, you’re not considered a first-time homebuyer.
- Funds must be used within fifteen years of opening the account. Unused funds can be transferred into an RRSP. This does not impact available RRSP limits, making it a fantastic investment vehicle.
Registered Retirement Savings Plan (RRSP)
PRO: Reduces Income Taxes
CON: Funds used to buy a home must be repaid.
DETAILS
- The maximum annual contribution is 18% of the previous year’s income, capped at $30,780 for tax year 2023. Unused RRSP contributions are carried forward from one year to the next.
- A minimum of 1/15 of the borrowed amount must be repaid annually. Failure to do so will result in 1/15th of the total funds withdrawn being added to personal income.
- Funds must be in the account for 90 days to be used toward a purchase.
- Must not have owned a home in the past four years.
NOTE: Eligibility begins on Jan. 1 of the fourth year before withdrawing from your RRSP. Let’s say you withdraw on Nov. 15, 2024. To do this, you must not have owned a home since at least Jan. 1, 2020—nearly five years.
- To utilize the program a second time, the previous HBP balance must be fully repaid before Jan. 1 of the year of your next withdrawal.
- Separated couples living apart for 90 days and not residing in a home owned by a new partner or spouse at the time of withdrawal may qualify.
Tax-Free Savings Account (TFSA)
PRO: Capital Gains are tax-exempt
CON: Invested funds do not reduce income taxes
DETAILS
- Contributions are cumulative from 2009 or from the year the investor turned eighteen.
- At the time of this article, the maximum contribution for the year is $7,000, with a cumulative total of $95,000.
Non-Registered Investments
- This option lacks the appeal of tax advantages as seen in other investment vehicles. Due to this, there is limited potential to maximize funds for your first home purchase.
Bank Account
- This choice offers no tax advantages, and the interest rates on savings are very low.
Case Study
Let’s consider a couple earning $75,000 each and living in BC. Each person’s income has a tax bill of $20,618. If they invest $15,000 in an FHSA or RRSP, they will receive a tax rebate of $4,457, a 30% instant return on investment.
If they have $30,000 available for investment, the tax rebate would be $13,408, offering a 45% instant return on investment.
These funds can be reinvested into tax-saving vehicles to increase available funds further. Alternatively, if a portion of the contribution was borrowed, the income tax rebate can be used toward loan repayment.
Summary
If funds are available or will be gifted, leverage the power of income tax savings. Additionally, if an FHSA is used, the capital gains are tax-exempt when the account is cashed in to purchase a home.
Speaking to an accountant, financial advisor and mortgage broker is important to ensure you make the most of your finances. We work with great people and are more than happy to make an introduction.
If you have any questions or would like to discuss your options please click here to book an appointment.
Sources & Useful Links
FHSA
https://www.nerdwallet.com/ca/mortgages/first-home-savings-account
https://www.sunlife.ca/en/investments/fhsa
https://www.questrade.com/learning/investment-concepts/fhsa-101/first-home-savings-account-sign-up
RRSP
https://turbotax.intuit.ca/tips/what-is-an-rrsp-deduction-limit-15763
https://www.moneysense.ca/spend/real-estate/buying/first-time-home-buyer-twice/
TFSA
https://protectyourwealth.ca/reasons-to-have-tax-free-savings-account-tfsa/
Case Study
