Published: October 8, 2021
Last Updated: October 8, 2021
Overview – Proposed First Home Savings Account
During the 2021 federal election, the Liberal Party of Canada proposed introducing a new form of tax favoured account: the First Home Savings Account (FHSA). As the name suggests, this account is intended to provide tax incentives for Canadians saving for a down payment on their first home. As the Liberal Party of Canada won the most seats of any party in the 2021 federal election and will almost certainly form a minority government for the 44th parliament, it is plausible that the FHSA will be introduced into Canadian tax law. As such, tax savvy Canadians should take time to consider how the First Home Savings Account could fit into their tax and financial planning. Note that if and when the FHSA is actually introduced, it may take a different form that it was described in this article.
Basic Features – Proposed First Home Savings Account
The First Home Savings Account is intended to combine features of the Registered Retirement Savings Plan (RRSP) and the Tax Free Savings Account (TFSA). As with an RRSP, when a Canadian individual makes a contribution to the FHSA, he or she will be entitled to a corresponding deduction from his or her income for that year. Income earned in the First Home Savings Account will not be taxed. Unlike a Registered Retirement Savings Plan, it is possible for the holder of the First Home Savings Account to withdraw funds without a corresponding income inclusion so long as those funds are applied towards the purchase of the holder’s first home. This means that contributions that are eventually withdrawn and used for the purchase of the holder’s first home will effectively receive the tax benefits typically associated with both an RRSP (a deduction at contribution time) and a TFSA (tax free investment income).
Only Canadian individuals under the age of 40 will be able to use a First Home Savings Account. If the funds in the First Home Savings Account is not used by the time the holder reaches the age of 40, those funds will convert into Registered Retirement Savings Plan funds.
The existing descriptions of the FHSA imply that individuals eligible will have a lifetime threshold of $40,000 for which the tax-free withdrawal treatment applies. To date, there has been no indication that this threshold is contingent on income (like a RRSP contribution room) or builds up on an annual basis (like TFSA contribution room).
Features to be Determined – Proposed First Home Savings Account
Many aspects of how the First Home Savings Account would operate are unclear. One important aspect that has yet to be specified is how contributions to a FHSA will be limited. Since funds in a First Home Savings Account are supposed to convert into funds held by a Registered Retirement Savings Plan when the holder turns 40, one possibility is that contributions the FHSA will share the same contribution limit for RRSPs. If the First Home Savings Account does not share a contribution limit with the RRSP another possibility is that the FHSA will either effectively allow eligible individuals to increase their RRSP limit when they turn 40, or there will be adverse tax consequences of some kind for individuals with a FHSA which exceeds their Registered Retirement Savings Plan contribution room when the plan converts to an RRSP.
Another important aspect of the proposed First Home Savings Account that remains undetermined is the scope of assets that will be eligible to be held in a FHSA. Registered Retirement Savings Plans and Tax Free Savings Account allow for a wide variety of securities to be held in them, with some restrictions to prevent abuse and with notable exceptions such as direct holdings of cryptocurrency. It has not yet been specified whether a similarly wide scope of eligible investments will be available for First Home Savings Accounts.
Pro Tax Tips – Proposed First Home Savings Account
That there is a deduction for contributing to a First Home Savings Account means that the tax saved from the deduction depends on the holder of the FHSA’s marginal tax rate in the year the deduction is available. It is likely that maximum contributions to the First Home Savings Account will be limited in some form. This means that it can be advantageous to adjust annual contributions to the FHSA to maximize your tax savings. Our expert Canadian tax lawyers can provide tax planning advice once the details of the First Home Savings Account are released.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
It is a proposed registered account that is intended to facilitate saving for a down payment for Canadians under 40 who have not yet purchased their first house. It combines aspects of the RRSP and TFSA by allowing deductions for contributions and up to $40,000 to be withdrawn without an income inclusion if the withdrawal is applied to the purchase price of the holder’s first home.
In the event that the holder of the FHSA contributes and then later makes a withdrawal used to pay for the holder’s first home, then the holder will have received a contribution deduction and also made a tax-free withdrawal from the FHSA. In most circumstances this offers a better outcome than either an RRSP or a TFSA. However, if the savings are intended for retirement and not used for purchasing a first home, the tax results of contributing savings to a FHSA may not be better than contributing to a RRSP or TFSA. A consultation with an expert Canadian tax lawyer will determine the optimum tax planning strategy for the various tax-free accounts.