Buying a home for the first time?
With home prices soaring, it is becoming more difficult for people to afford to purchase a home. Recently, the Government of Canada has created a new savings mechanism called the ‘Tax-Free First Home Savings Account’. This account is to help first time home buyers save for a home.
This account has a life-time contribution limit of $40,000 and an annual contribution limit of $8,000. The contributions are tax deductible, which means you will save taxes on the money you contribute. To qualify, you must be 18 years old, a Canadian resident, and have not owned a home for a minimum of 4 years prior to opening the account. Withdrawals, including growth on the money, are not taxable when used for purchasing a home. You are also able to transfer the money to an RRSP if it is not used for the purchase of a home without affecting your contribution room. Keep in mind, if you withdraw the money for purposes other than purchasing a home, you will be taxed on it. Something else to keep in mind is that the account can only be open for 15 years.
The account allows for the flexibility to invest in a number of options including bonds, stocks, GICs, mutual funds to name a few. However, given this money is being saved for purchasing a home you may want to consider that your investment time horizon could be relatively short, therefore fixed income options like GICs, cash or short-term bonds may be appropriate. If your home purchase looks to be several years down the road and you have a longer time horizon, then perhaps stocks or mutual funds might make sense. This would be something to discuss with your financial advisor.
One strategy to get the most out of your money, would be to invest in the Tax-Free First Home Savings Account first (as your contribution is tax deductible), then invest your refund into your Tax-Free Savings Account. This would allow you to have multiple sources of tax-free money for a down payment!
The traditional Home Buyers Plan is still in existence as well. This account also allows you to save money for a home if you are a first-time home buyer. In this case, the money you contribute is to your RRSP and is tax deductible and it grows tax deferred, however, you have to re-pay the withdrawals back over 15 years to your RRSP. If you don’t pay it back, you are then taxed on the money as income. The Home buyers plan only allows for a maximum withdrawal of $35,000.
The new Tax-Free First Home Savings account appears to be more effective than the previous Home Buyers Plan for a few reasons. First, it doesn’t use your RRSP room and allows for a higher amount withdrawn as you are able to withdraw $40,000 plus any investment growth. Lastly, the Tax-Free First Home Savings account does not have any repayment requirements.
So when does the new Tax-Free First Home Savings Account start? While it is expected to be implemented in 2023, not all the details have been finalized yet. Once they are, you can be assured we will let our clients know it is available.
Celeste Yuzdepski, Wealth Advisor, B. Comm, CFP®, CIM®, CFDS, FCSI®