As 2023 comes to a close, you may be thinking about your financial goals for the new year.
While purchasing your first home may seem far-fetched in Canada’s current housing market, it doesn’t mean you have to put everything on pause when it comes to saving toward that goal.
According to the federal government, 150,000 Canadians opened a tax-free First Home Savings Account (FHSA) as of October 2023.
The FHSA was made available to Canadians between 18 and 71 in April 2023.
Those looking to open an account must not have lived in a home they or their spouse owned in the last four years. Prospective homebuyers don’t qualify if they intend to buy a home as an investment property.
The FHSA allows individuals to contribute up to $8,000 per year (up to a lifetime limit of $40,000) to go toward their first down payment.
A maximum $8,000 contribution room can also be carried forward toward the next year.
The account itself can only stay open for 15 years.
Small steps lead to big gains over time
According to Natasha Macmillan, director of Everyday Banking at RateHub, opening an FHSA may seem like a small step toward owning a home, but over time, it can be worth it.
“You might start saving in small increments over time, [but] it does certainly add up and can start to…help with that first house downpayment.”
The contributions made to the FHSA are also tax deductible on annual income returns, similar to a Registered Retirement Savings Plan (RRSP). And like the Tax Free Savings Account (TFSA), withdrawals to purchase your first home are also not taxed.
Essentially, it combines some of the most helpful features of both the RRSP and TFSA.
“Like your RRSP, contributions to your FHSA are tax deductible. So any amount you put in will be deducted from your taxable income, which, at the end of the day, helps you save money on your income tax and the end of the year,” noted Macmillan.
Something else to keep in mind: any unused funds from the FHSA can also be transferred to your RRSP or a Registered Retirement Income Fund (RRIF).
New year, new account?
If you are thinking of opening an FHSA before the new year, Macmillian says there are a few things to keep in mind.
She notes that “it doesn’t really matter” when you decide to open an FHSA, but it can work in your favour to open one before the end of the year if you do have some extra money to contribute to the account.
“If you do end up having [extra money] for this year and next year and you believe you can max out, then opening the account before year-end gives you that additional contribution room for an additional year,” she said.
“But if you don’t think that you’re going to be able to put $8,000 against 2023 and 2024, then it’s possible just to wait till 2024 and use your full contribution room.”
Macmillian also recommends that those interested in opening an FHSA pay attention to the interest rate and “not get stuck with the bank that you always bank with.”
Currently, the FHSA is only offered at some Canadian financial institutions, but Macmillian says that should stop you from doing your rate research.
“[Don’t] just get stuck with the bank that you always bank with,” she said.
“But really look at that interest rate and where you can find the most competitive rate for your funds, and that will really help go the extra distance.”
With files from Kenneth Chan
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