OTAWA – Canadians wanting to save upfront to buy their first home will have a new tax-free savings account for use from next year.
The federal government announced the tax-free First Housing Savings Account (FHSA) in the budget on Thursday, as well as doubling first-time homebuyer tax credit by up to $ 1,500 in an effort to make buying a home a little easier.
Housing prices in Canada have skyrocketed in the past year as Canadians flooded the housing market during the pandemic, making it difficult for many to find a foothold.
According to the Canadian Real Estate Association, the national average home price reached a record $ 816,720 in February, up more than 20 percent from a year earlier.
“As housing prices rise, so does the cost of an advance,” the government said in a statement.
“This represents a major obstacle for many who want to get a home – especially young people.”
Contributions to new accounts will be tax deductible, as will registered savings plan contributions (RRSPs), and money in accounts and any return on investment will not be taxed when deducted for the purchase of eligible first home.
Accounts will have a $ 40,000 contribution limit and an annual contribution limit of $ 8,000.  The unused annual contribution room will not be moved.
In addition to the sharp rise in house prices, Canadians are feeling the sting of inflation as rising prices for everything else affect households’ already tight budgets.
Borrowing costs are also rising as the Bank of Canada raises its key interest rate which has a direct impact on floating rate mortgages.  Fixed rate mortgage rates have also risen, raising costs for first-time buyers who choose to be more confident about their mortgage rates, as well as those who need to renew their mortgages.
Mathieu Laberge, consulting partner and regional finance and policy leader at KPMG, says the new savings account provides the right incentive for people to save on a down payment for their first home.
“What first-time homebuyers are struggling with right now is raising enough money for a down payment,” says Laberge.
“I think it was developed in a way to maximize savings incentives in the sense that it’s like an RRSP.  The amounts you put in the account are actually tax-free and when you withdraw them, unlike an RRSP, you are not taxed on them. “
Laberge says some potential home buyers may also use their bills to save money for a little more than they would otherwise do and accumulate a little more before moving in, which can reduce demand.
James Laird, co-founder of Ratehub.ca and president of CanWise Financial Real Estate Brokerage, was disappointed that the mortgage threshold to qualify for mortgage insurance did not rise from $ 1 million to $ 1.25 million, but boasted new savings accounts.
“It’s a very powerful tax-free vehicle that will really help Canadians trying to save on a down payment,” says Laird.
The new account is added to the Tax-Free Savings Accounts that allow investments to increase tax-free, but do not create a tax deduction when you make a contribution.
Home buyers can also withdraw up to $ 35,000 from their RRSP accounts to help purchase a home, but this money must be refunded.
The government says Canadians will still have access to their RRSP savings under the HBP under existing rules, but will not be allowed to make both FHSA and HBP withdrawals to pay for the same. eligible home.
Individuals will also be allowed to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to lifetime and annual contribution limits.
If a saver does not use the money in his FHSA to purchase a first home within 15 years of opening the account, the account must be closed.  Any unused savings can be transferred to RRSP or RRIF or withdrawn on a tax basis.
The new savings accounts are similar to a housing savings plan introduced by Pierre Trudeau in 1975, which research suggests helped move from rent to home ownership, but which was largely driven by higher-income households before the Mulroney government canceled the program in 1985.
In addition, the budget includes a new multi-generation home renovation tax credit of up to $ 7,500 to help pay for renovations to build a minor suite for seniors or adults with disabilities.
The budget also includes $ 475 million in 2022-23 for a $ 500 lump sum payment to those facing housing affordability challenges, but did not include details.
This Canadian Press report was first published on April 7, 2022.