The Tax-Free First Home Savings Account is a tax-advantaged accounts for Canadians under the age of 40 to invest for a down payment on their first home. The account has a $40,000 lifetime contribution limit.
If the account holder does not use the account for a down payment on their first home by age 40, they can transfer the full amount to their RRSP completely tax-free.
What is the Tax-Free First Home Savings Account?
Details about what exactly the Tax-Free First Home Savings Account is are still emerging, but based on the explanation on the Liberal Party’s website, it is a completely tax-free investment account for Canadians under the age of 40 to help them save for a down payment on their first home.
The account has to be used for a down payment on your first home. We can expect rules such that it must be your primary residence, and not an investment property.
How does the Tax-Free First Home Savings Account work?
The Tax-Free First Home Savings Account, which already being dubbed the “House TFSA”, works like a mix between the RRSP and TFSA.
Like the Registered Retirement Savings Plan (RRSP), you can claim your contributions to your Tax-Free First Home Savings Account to receive a tax deduction. This makes all your contributions to the account completely tax free. Like the Tax-Free Savings Account (TFSA), when you withdraw your contributions and any investment gains from the Tax-Free First Home Savings Account, you will pay no income taxes.
Similar to both the RRSP and TFSA, the Tax-Free First Home Savings Account grows completely tax free. Your investment income within the account, like dividends and capital gains, are not subject to income taxes.
Tax-free contributions, tax-free withdrawals
The Tax-Free First Home Savings Account is a supercharged tax-free account. You pay no income taxes when you make contributions, no income taxes on investment income earned within the account, and no income taxes at the time of withdrawal.
It is completely tax-free from start to finish.
But the account has to be used for a down payment on a home. It is likely that if you make a withdrawal and do not buy a home, your withdrawal will be subject to income taxes at your marginal rate.
No pay back
Unlike borrowing from your RRSP under the First Time Home Buyer’s Plan, you will not need to repay the amount you withdraw from your Tax-Free First Home Savings Account.
This account has one purpose and one purpose only: a down payment on your first home.
Once you buy your first home, you have no need for the account anymore. If there is any amount leftover, you will likely be able to transfer it to your RRSP tax-free or withdraw the amount and be taxed at your marginal rate.
Can I invest the Tax-Free First Home Savings Account?
Yes! Again Canada fails at naming registered accounts and continues to call them “savings account” when they should be named “investment account”.
You will be able to invest your Tax-Free Home Savings Account in the stock market, where all investment income including interest, capital gains, and dividends will remain completely tax-free.
You will likely be able to invest your Tax-Free First Home Savings Account in any of the following:
- Guaranteed Investment Certificates (GICs)
- Mutual Funds
We can expect the Government of Canada to put similar limits on the Tax-Free First Home Savings Account as they do on the TFSA to not be used “as a business”. High-frequency, high-risk trading activity that results in massive investment gains are likely to be subject to income taxes. The Government knows how precious tax-free investment room is, and they do not want to be taken advantage of.
Can I combine the Tax-Free First Home Savings Account with my TFSA and RRSP?
Yes. You will be allowed to combine the Tax-Free First Home Savings Account with withdrawals from your Tax-Free Savings Account and First Time Home Buyer Plan RRSP withdrawals.
Based on the account minimums, someone may have a combination that looks like this:
- Tax Free Savings Account: $75,500
- RRSP First Time Home Buyers Plan: $35,000
- First Home Savings Account: $40,000
Total Available Down Payment: $150,500
However, many people have over $100,000 in their TFSA at this point. If they use the First Home Savings Account even for a couple years, they could end up with over $200,000 for a down payment between all their accounts.
Example: Julie turns her First Home Savings Account into a $79,000 down payment
Julie is 24 and opens a Tax-Free First Home Savings Account with her self-directed brokerage. Over the next 5 years she contributions $8,000 per year until she reaches the maximum contribution limit of $40,000.
She leaves the account and lets it grow with dividends and capital gains for another 5 years. Over the 10 years she has the account, she earns the average stock market rate of return of 10%.
By age 34, the balance has grown to $78,658.60. She decides to cash out her Tax-Free First Home Savings Account to put a down payment on her first home.
Do I have to pay it back?
You do not have to pay back the Tax-Free First Home Savings Account. This is an account that is designed to be closed once you purchase your first home. There will be no need and no opportunity to keep the account open and build it back up.
What happens if I don’t use the Tax-Free First Home Savings Account for a down payment?
If you turn 40 without putting a down payment on your first home, you can transfer your entire Tax-Free First Home Savings Account to an RRSP. Because you already claimed the income tax deduction, you will not make another claim now that you move the money to your RRSP.
What if I’m over the age of 40?
If you are over the age of 40, you are not eligible for this account. That may seem frustrating. Remember that you had access to houses that were 20% to 80% cheaper than they are now.
If you wish to commiserate your frustration, ask older GenX how they felt when the Tax-Free Savings Account was rolled out to people age 18.
What if I already have a home and want to buy a second property?
If you have already purchased a home, you already have your first home. You will not be eligible for this account.
What will this do to the Canadian housing market?
This will do what all things that make buying a home easier: drive prices further up.
What may make home ownership personally more affordable for you in the short term is likely to exacerbate Canada’s already problematic housing market in the long term.
Furthermore, providing another tax-shelter disproportionately serves wealthy Canadians who can afford to invest in yet another tax-advantaged account. It may look like something that helps the middle class get a foothold in an expensive real estate market. All it’s really doing is giving rich families another way to reduce their income tax burden.
This savings account was introduced as a vote-grab by the Liberal Party of Canada for the Federal Election in September of 2021. It is currently a campaign promise and not yet available to Canadians. This article will be updated when more detail becomes available.