What you should know about Canada's new tax-free home savings account
The Liberal government revealed its 2022 federal budget on Thursday, which included a plan to spend $10 billion on housing affordability over the next five years.
One of the new measures announced will hopefully help Canadians save for a down payment to buy their first home.
The federal government introduced the Tax-Free First Home Savings Account (FHSA) under the robust housing plan, which will be available to use starting next year.
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How does it work?
The FHSA aims to help young people save to buy a home amid rising home prices.
It would give prospective first-time home buyers the ability to save up to $40,000 for a down payment for a home. Similarly to an RRSP, contributions to the savings account would be tax-deductible. Withdrawals to buy your first home would be non-taxable like a TFSA.
“Tax-free in, tax-free out,” reads the budget.
The annual maximum contribution to the account is $8,000 per year. The government is estimating that the FHSA would 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. For example, a new report found that the average selling price of a property in Toronto is now at $1,299,894. In February, the average price for a home in Canada hit a new record high of $748,450, up 21% year-over-year.
On top of that, the overall cost of living has risen, with Canadians having to shell out more for gas, food, and appliances since January.
Jason Pereira, president of the financial planning association of Canada, shared a Twitter thread on how “misguided” the new savings account is.
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 budget of a first-time homebuyer makes more than the median household income in Canada.
The budget’ scenario describes two aspiring homeowners that both make between $50,000 and $100,000 a year. According to Statistics Canada, the median household income as of 2019 is $62,900.
What else is under the housing plan?
Alongside the FHSA, the government is doubling the First-Time Home Buyer’s Tax Credit to up to $1,500.
In an attempt to cool off the housing market, the Liberals also introduced a two-year ban on foreign home buyers, and a national plan to end blind bidding, which one report says could raise home prices faster.
They also announced an extension of the Rapid Housing Initiative, with new funding that’s expected to create at least 6,000 new affordable homes.