Newly Announced Tax Opportunities for First Time Home Buyers

by | Apr 13, 2022

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On April 7, 2022, the Federal Government released a budget with two new proposals for first time home buyers.

 

1. Tax-Free First Home Savings Account (FHSA)- Effective 2023

The ‘Tax-Free First Home Savings Account’ (FHSA) will become available to Canadians starting in 2023.

 

The proposed features of the FHSA are described below. The government is likely to announce further details which could alter the current interpretation of the rules.

 

This program allows you to make tax deductible contributions of up to $40,000 to an FHSA. The funds can subsequently be withdrawn for the purchase of a house on a tax-free basis.

 

The FHSA program is different from the RRSP Home Buyers’ Program (HBP), which is another program designed to assist Canadians in saving for the purchase of a first home. Details and a comparison of both programs are included below.

 

FHSA 

 

Eligibility Requirements:

  To be eligible, you must:

    • Be a Canadian resident

    • Be 18 years of age

    • Have not lived in a home that you owned in any of the prior 4 years

Program Conditions:

    • The maximum annual contribution limit is $8,000

    • The maximum lifetime contribution limit is $40,000 

      • Therefore, it takes at least 5 years to ‘max out’ your FHSA

    • You can only make non-taxable withdrawals from an FHSA for one property in your lifetime

    • You cannot use both the FHSA and HBP for the same property

    • If you don’t use the funds in your FHSA within 15 years of opening the account for the purchase of a qualifying home, you must either withdraw the funds on a taxable basis, or transfer them to your RRSP on a non-taxable basis. This does not impact your RRSP contribution room.

    • You may transfer funds from your RRSP to an FHSA, subject to the annual and lifetime contribution limits. This does not reinstate your RRSP contribution room.

Note: Unused contribution room does not carry over into the following year.

I.e:  In year 1, you contribute $8,000 (annual maximum).  In year 2, you only contribute $3,000. In year 3, your contribution room is still limited to $8,000; you do not get to contribute $13,000 because you did not utilize the full contribution limit in year 2.

Your lifetime limit is still $40,000 – you don’t ‘lose out’ on contributing the $5,000 that you did not contribute in year 2. It will now take at least 6 years to reach the lifetime contribution limit.

 

RRSP Home Buyers Program:

 

You can ‘borrow’ up to $35,000 from your RRSP for a down payment on your first home provided you are eligible.

Eligibility Requirements

To be eligible, you must:

    • Be a Canadian resident

    • Be 18 years of age

    • Have not lived in a home that you or your spouse own in any of the prior 4 years

    • Have contributed the funds to your RRSP at least 90 days prior to withdrawal.

 

This program requires you to repay the borrowed funds back to the RRSP over 15 years. The funds will also become taxable income to you in the future when you withdraw them (presumably, in retirement).

 

COMPARISON OF HBP and FHSA

 

Similarities: 

    • Like an RRSP, contributions to and FHSA are tax deductible. It has not yet been announced whether the deduction must be taken in the year of purchase, or if it can be deferred to a future taxation year when the advantage of a deduction may be higher. 

      • There can be a tax benefit to deferring your deduction until your first or second year of practice, when income is significantly higher. 

 

Differences:

    • With an FHSA, you are limited to purchasing $8,000 per year, with a lifetime maximum contribution of $40,000. With an RRSP, you are limited by your RRSP contribution room.

    • With the FHSA, it takes at least 5 years to contribute the lifetime maximum of $40,000. With an RRSP, if you have enough contribution room, you can contribute a lump sum of $35,000 and withdraw it under the HBP, as long as you do so 90 days prior to making a qualifying withdrawal. 

      • Therefore, if you have a short time horizon for making a house purchase, the RRSP home buyers’ program may be more beneficial for you.

      • If the time constraints are not concerning, the tax advantages of the FHSA outperform the RRSP HBP.

    • You can only make qualifying tax-free withdrawals from your FHSA once in your lifetime. The RRSP HBP can be used more than once, if you qualify.

    • The maximum qualifying withdrawal from an FHSA is $40,000, whereas the maximum qualifying withdrawal under the HBP is $35,000.

    • You do not need to repay FHSA withdrawals. Thus, the $40,000 down payment is effectively tax free. With the RRSP, you must repay your withdrawal over a 15-year period, under the conditions of the program.

 

                In Summary:

ATTRIBUTES

FHSA

RRSP HOME BUYERS PROGRAM

ARE CONTRIBUTIONS DEDUCTIBLE?

YES

YES

MAX ANNUAL CONTRIBUTION

$8,000

 YOUR RRSP LIMIT

MINIMUM TIME REQUIRED TO MAXIMIZE CONTRIBUTION ROOM

5 YEARS

90 + DAYS

NUMBER OF TIMES PROGRAM IS AVAILABLE TO YOU

ONCE IN YOUR LIFETIME

UNLIMITED, AS LONG AS YOU QUALIFY (DID NOT OCCUPY A HOME YOU OR YOUR SPOUSE OWNED IN 4 PRIOR YEARS)

MAX CONTRIBUTIONS FOR DOWN PAYMENT

$40,000

$35,000

REPAYMENT TERMS

N/A

OVER 15 YEARS

 

2. First Time Homebuyer Credit – Effective on purchases made on or after January 1st, 2022

Previously, when an individual purchased a first home, they were eligible for a tax credit of $5,000 (equivalent to $750 in tax savings).

The 2022 Federal Budget has doubled the credit from $5,000 to $10,000, which now provides the taxpayer with $1,500 in tax savings.

 

If you have questions about the above, please contact us.

 

* This article is based on details available as of the release date of the 2022 Federal Budget. Content is for informational purposes only, and is not intended to be used as professional advice. Each taxpayer’s circumstances are unique. Bokhaut CPA makes no representation as to the accuracy and completeness of the information in this article, and will not be liable for any errors or omissions in this information. 

 

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