Home Buyers Plan and Tax Free Savings Account

oday I’d like to go over smart ways to save for your down payment using the RRSP Home Buyers Plan (HBP) and the new Tax Free First Home Savings Account (FHSA).

The HBP and the FHSA were created to help first time home buyers save for their down payment. These are both excellent programs and by using them you could divert (save) thousands in taxes towards your down payment.

Tax-Free First Home Savings Account

The Tax-Free FHSA works in a similar way to the HBP (below). It’s new for 2023! I think that it’s better than the HBP because you don’t need to pay it back. 

Like an RRSP, the contributions are tax-deductible. And, like a TFSA, the money grows tax free and withdrawals are not taxable. Here are some key points:

• You must be considered a first time home buyer,
• $40,000 – lifetime contributions allowance,
• $8,000 – yearly contribution allowance,
• Can transfer money to and from RRSP
• 1 year carry forward allowed (only if an FHSA is open)
     – Meaning: if you are unable to contribute one year, you may contribute $16,000 the next year.

In my personal opinion, the FHSA is one of the best new accounts around. For buying a home, it’s the best strategy one can use!!

RRSP Home Buyers’ Plan

The HBP (video here or above) allows you to withdraw up to $35,000 from your RRSP, and use this money to buy or build a home (or to help a related person with a disability). Below are some points to consider:

• You must be considered a first time home buyer,
     – This means you cannot have lived in a home you/your spouse owned for the past 4 years.
• You must be a resident of Canada from the time you withdraw your money up until the home has been bought,
• You must intend to live in the home for at least 1 year after buying/building. 

Repayment: The HBP must start to be repaid beginning the second year after the withdrawal is complete, and the funds must be repaid over 15 years, at a minimum of 1/15 of the loan per year. HBP money that is not repaid is added to personal income and gets taxed.

Tax Savings: The reason why the HBP is smart for saving for your down payment is because investing in your RRSP gives you a tax benefit (refund) after you file your taxes, and the HBP allows you to use the invested RRSP money, as well as the tax refund, for your down payment.

The Refund works like this: Income in Canada is taxed on a percentage basis, and the more you make, the higher the percentage of tax you pay (this is called a graduated tax system using tax brackets).  

So, a $100,000 income might get taxed around $25,000 (25%), with take home pay at around $75,000. However, if you invested $10,000 into your RRSP, that $10,000 is taken off of your income for tax purposes, and you’re now only taxed 25% of $90,000, or $22,500. In this example, you will receive a $2,500 tax refund at the end of the year. The $2,500 refund, and the $10,000 you invested, can now both be used for a down payment on a home, providing you with more down payment, faster.

Please don’t hesitate to ask us if you have more questions on the above. We’re here for you!

Warmest Regards, 

Eitan Pinsky