The feds create a new tax-free account for first-time home buyers

Craig Wong, The Canadian Press

Posted Thursday, April 7, 2022 at 5:59 pm EDT

Last Updated Thursday April 7, 2022 5:59 pm EDT

OTTAWA – Canadians looking to save a down payment to buy their first home will have a new tax-free savings account to use starting next year.

The federal government announced the Tax-Free First Home Savings Account (FHSA) in the budget Thursday, as well as doubling the first-time homebuyer tax credit up to $1,500 in an effort to make buying a home a little easier. .

Home prices in Canada have soared over the past year as Canadians flooded the housing market over the course of the pandemic, making it difficult for many to find a foothold.

According to the Canadian Real Estate Association, the national median home price hit a record high of $816,720 in February, an increase of more than 20 percent compared to the previous year.

“As home prices rise, so does the cost of the down payment,” the government says in the budget.

“This represents a significant barrier for many looking to own a home, especially young people.”

Contributions to the new accounts will be tax deductible, as will registered retirement savings plan (RRSP) contributions, and the money in the accounts and any investment earnings will not be taxed when you withdraw to buy a first home that qualifies

The accounts will have a lifetime contribution limit of $40,000 and an annual contribution limit of $8,000. Unused annual contribution room will not carry over.

In addition to the sharp increase in home prices, Canadians feel affected by inflation, since the increase in the prices of everything else takes a greater toll on already tight family budgets.

Borrowing costs are also rising as the Bank of Canada raises its key interest rate target, which has a direct impact on variable-rate mortgages. Rates on fixed-rate mortgages have also risen, raising costs for first-time homebuyers who opt for greater certainty when it comes to their mortgage interest rate, as well as those who need to renew their mortgages.

Mathieu Laberge, advisory services partner and regional economic and political leader at KPMG, says the new savings account provides the right incentive for people to save for a down payment on their first home.

“What first-time homebuyers are struggling with right now is building up enough equity for a down payment,” says Laberge.

“I think it was developed in a way to maximize incentives to save in the sense that it’s like an RRSP. The amounts you put into the account are actually tax-free and when you withdraw them, unlike an RRSP, you don’t pay taxes on them.”

Laberge says some potential homebuyers could also use the accounts to save a little more than they otherwise would and build up a little more before moving into a home, which can ease demand.

James Laird, co-founder of and president of mortgage brokerage CanWise Financial, was disappointed that the home value limit to qualify for mortgage default insurance was not raised from $1 million to $1.25 million, but he praised the new savings accounts.

“It’s a very strong tax-free vehicle that will really help Canadians who are trying to save for a down payment,” says Laird.

The new account joins Tax-Free Savings Accounts that allow investments to grow tax-free, but do not generate a tax deduction when you make a contribution.

Homebuyers can also withdraw up to $35,000 from their RRSP accounts to help purchase a home, but that money must be paid back.

The government says Canadians will still be able to access their RRSP savings under the Home Buyers Plan (HBP) under existing rules, however they will not be able to take both an FHSA withdrawal and an HBP withdrawal to pay for the same qualified home.

Individuals will also be able to transfer funds from an RRSP to an FHSA tax-free, subject to annual and lifetime contribution limits.

If a saver does not use the money in their FHSA for the purchase of a first home within 15 years of first opening the account, the account must be closed. Any unused savings can be rolled over to an RRSP or RRIF, or withdrawn on a taxable basis.

The new savings accounts are similar to a savings plan for homebuyers that Pierre Trudeau introduced in 1975 that research suggests helped move from renting to homeownership, but was largely fueled by higher-income households before the Mulroney administration ended the program in 1985.

In addition, the budget includes a new Multigenerational Housing Renovation Tax Credit worth up to $7,500 that will help pay for renovations to build a secondary suite for a senior or adult with a disability.

The budget also includes $475 million in 2022-23 for a $500 one-time payment to those facing housing affordability challenges, but does not include details.

This report from The Canadian Press was first published on April 7, 2022.

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