What you should know about Canada's new Tax-Free First Home Savings Account
The Liberal government dropped its 2023 budget on Tuesday, which builds on investments made in last year’s budget that aim to make housing more affordable in Canada.
One of the proposed measures is set to become a reality this week.
Banks can officially start offering the Tax-Free First Home Savings Account (FHSA) on April 1, according to the 2023 fiscal budget.
But before you decide to open an account, here are some things you should know about the new registered plan.
How does it work?
The FHSA aims to help Canadians save for a down payment to buy their first home amid rising housing prices.
It would allow prospective first-time homebuyers to save up to $40,000 for a down payment on a home. Similarly to a Registered Retirement Savings Plan (RRSP), contributions to the savings account would be tax-deductible. In addition, withdrawals to buy your first home would be non-taxable, like a Tax-Free Savings Account (TFSA).
“Tax-free in, tax-free out,” reads the budget.
The annual maximum contribution to the account is $8,000 per year. The government estimates the FHSA will provide $725 million in support over five years.
Will it really help you afford a home?
Critics are saying the FHSA will not solve housing affordability.
With Canada’s surging inflation rate comes a continued hike in home prices. Although the country saw a decline in home prices last October to December, we are still witnessing aggregate prices of over $1 million, according to a recent report.
For example, in the Greater Vancouver area, the aggregate home price was $1,208,900, and in the Greater Toronto Area, it was $1,068,500.
On top of that, the overall cost of living has risen, with Canadians having to shell out more for food and groceries over the past seven months.
Jason Pereira, president of the Financial Planning Association of Canada, shared a Twitter thread on how “misguided” the new savings account is when it was first announced last year.
Given today’s announcement that the government is going to move forward with the Tax-Free First Home Savings Account, let me just remind everyone how misguided this entire thing is and how it could have been more easily accomplished with existing accounts.
— Jason Pereira (@jasonpereira) April 7, 2022
He argues that the government could have expanded the contribution limit to existing savings accounts like the RRSP and the TFSA instead.
“Is this net benefit of a few hundred dollars per year, AFTER everyone has saved over 110,000, to accomplish anything other than creating more work?” he tweeted. “If 40k was really the difference, then just add 40k in room to everyone’s TFSA next year instead of creating a mess.”
Pereira also added that the only thing that will make homes more affordable is to lower housing prices.
Better Dwelling co-founder and finance expert Stephen Punwasi called the new savings account “insane.”
Last #Budget2022 tweet, but the Tax-Free First Home Savings Account is insane.
You get to put $40k of income, and get a rebate on your taxes. This doesn’t just allow me as a home seller to capture 30% more for a downpayment…
.. it also means taxpayers paid it. 🤪🤣
— Stephen Punwasi 🏚️📉🐈☃️ (@StephenPunwasi) April 7, 2022
“You get to put $40k of income, and get a rebate on your taxes. This doesn’t just allow me as a home seller to capture 30% more for a downpayment… it also means taxpayers paid it,” he tweeted.
Punwasi also pointed out that the example given in the 2022 budget of a first-time homebuyer makes more than the median household income in Canada.
The budget’s scenario describes two aspiring homeowners who both make between $50,000 and $100,000 a year. According to Statistics Canada, the median household income as of 2019 is $62,900.
The federal government also recently made some changes to the rules around the foreign homebuyer ban, and Canadians aren’t thrilled about the updates.