Unlocking the Canadian Dream: An In-Depth Guide to First Home Savings Accounts

Guide to Canada's First Home Savings Accounts
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Published: October 31, 2023

Buying a home is often considered a rite of passage into adulthood, a milestone that signifies stability and long-term planning. In Canada, however, purchasing a home—especially for the first time—is easier said than done. Real estate prices have been on an upward trajectory for years, particularly in metropolitan areas like Toronto and Vancouver. Against this backdrop, the Canadian government offers several programs to help first-time homebuyers, and one of the most promising is the First Home Savings Account. This blog post aims to provide an in-depth guide to how this account can make the daunting task of buying your first home a little easier.

Disclaimer: Information in this article is accurate as of the time of writing, but laws and regulations change. Be sure to consult up-to-date sources and financial advisors before making any major financial decisions.

 

What Exactly is a First Home Savings Account?

A First Home Savings Account is a special type of account intended to assist Canadians in saving money for a down payment and other costs related to buying their first home. The accounts were first announced by the government in 2022. Similar to the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP), the First Home Savings Account offers tax benefits that can accelerate your saving process.

 

Why You Should Consider Opening a First Home Savings Account

Tax-Free Growth and Deductions

Just like with a TFSA, the money you earn through interest, dividends, or capital gains within the First Home Savings Account is not subject to tax, if the funds are used for a qualifying home purchase. Further eligible contributions will be tax deductible. Transfers from an RRSP are not eligible for deductions but will utilize contribution room.   

Investment Flexibility

You’re not restricted to merely stashing away cash. You can diversify your holdings by investing in various assets such as stocks, bonds, and mutual funds, to name a few, all while enjoying the benefits of tax-free growth.

Simplified Withdrawals

When the time comes to buy your home, you can withdraw your funds without tax penalties, provided you meet all qualifying conditions. This is a major benefit over retirement accounts, which may charge penalties for early withdrawal or have more restrictive conditions.

 

How to Get Started

Step 1: Determine Your Eligibility

The primary eligibility criteria for opening a First Home Savings Account usually include:

– Canadian residency

– Aged 18 or above

– Qualification as a first-time homebuyer

Step 2: Select a Financial Institution

Speak to your advisor or a representative from a major banks, credit unions, and other financial institutions that offer First Home Savings Accounts. 

Step 3: Documentation

Expect to provide some or all of the following:

– Proof of identity (passport, driver’s license)

– Social Insurance Number (SIN)

– Proof of residency

– Proof of first-time homebuyer status (this could vary by institution)

Step 4: Making Contributions

Once your account is active, you can contribute either through a lump sum or periodic deposits, depending on what’s more feasible for you. Some people find that setting up automatic transfers helps them maintain a consistent savings habit. In the year you create your account the maximum contribution limit is $8000 and similar to your TFSA account each January you will have an additional $8000 you can contribute up to the maximum of $40,000 or five years of making full contributions. You are allowed to carry forward a maximum of $8000 of contribution room to use in the following year.  

Step 5: Invest Wisely

Given the array of investment options available, it would be wise to consult a financial advisor to create an investment strategy tailored to your risk tolerance and time horizon. Focusing on portfolios and or funds that are expected to have a low level of volatility would be ideal.

Step 6: Monitor and Reassess

Regularly check on your account to see how your investments are performing. Make adjustments as needed, either by re-balancing your portfolio or reviewing your willingness and ability to absorb risk. 

 

Caveats and Cautions

Non-Qualifying Withdrawals

A non-qualifying withdrawal is a withdrawal from your FHSA account that is not for the purpose of purchasing your first home. This will result in the full amount of the withdrawal being taxable to similar to how a withdrawal from an RRSP will be taxed.

Exceeding Contribution Limits

Going beyond the prescribed limits may result in tax implications and other penalties, so it’s important to stay within the bounds set by the regulatory authorities. When you have an excess contribution to your FHSA you will be charged a 1% penalty for the highest excess amount in the month, for each month that the excess remains in the account. 

Eligibility Changes

Your eligibility can change if you go through life events such as marriage or a change in homeownership status, which could potentially affect your tax benefits. If you find yourself in a situation where you will no longer be able to use the FHSA you can transfer the funds to a registered retirement saving plan RRSP or RRIF without any immediate tax implications. 

 

Conclusion

Navigating the path to homeownership in Canada is no small feat, particularly for first-time buyers who have to contend with steep prices and complex financing options. The First Home Savings Account serves as an invaluable tool in this journey, offering a range of benefits designed to help you reach your goal of buying your first home. By maximizing the advantages of this special savings vehicle, you’re taking a significant step toward securing your dream home in Canada. 

Remember, this account is just one piece of the puzzle. It’s essential to also consider other facets of financial planning and consult professionals (like our team at Moraine Wealth Advisory) for a comprehensive home-buying strategy.

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