Saving for a Down Payment: Navigating Canada’s Investment Savings Accounts


The alphabet soup of investment savings accounts for Canadians looking to buy their first home can seem daunting. Experts say that each has its advantages and limits.

The Tax-Free First Home Savings Account (FHSA), introduced by the federal government in its budget earlier this month, offers a new way for aspiring homeowners to make a down payment on your first property.

Available from next year, it aims to combine the advantages of the existing tax-free savings account (TFSA) and the registered retirement savings plan (RRSP).

Contributions to an FHSA will be tax deductible, as with an RRSP. Withdrawals from an FHSA, including capital gains, to purchase a home will not be taxed, similar to a tax-free savings account.

“It’s almost like a hybrid between the two, but on steroids,” said Tim Cestnick, a tax and personal finance expert and CEO of Our Family Office Inc.

First-time homebuyers can save up to $8,000 in that savings account annually (unused contribution space cannot be carried over to the next year) with a lifetime limit of $40,000.

“The first home savings account is going to be the best plan for most people,” Cestnick said.

By contrast, the RRSP homebuyers plan allows first-time buyers to put no more than $35,000 toward a down payment, and the withdrawal must be “paid back” within 15 years.

“You really have nothing to lose by opening one of these first home savings accounts. Either you are going to buy a house and you will get the benefit of the tax-free withdrawal and deduction you got when you invested the money, and the growth over the years, or you are not going to use it and you are going to transfer it to your RRSP free of charge. taxes,” Cestnick said.

That last allocation also goes the other way, as RRSP holders can transfer cash to the FHSA without paying taxes on the withdrawal.

While $40,000 is the maximum contribution to the FHSA, that investment is likely to gain value. The account can store everything from stocks and bonds to cash and exchange-traded funds.

However, even if that $40,000 doubles in value, the boosted buying power may still not be enough to compete in hot real estate markets like Vancouver or Toronto. Also, since taxpayers can only add $8,000 a year, an FHSA would not substantially fill the pocket for several years.

But that might fit in with younger Canadians who aren’t planning on entering the market yet.

“Someone who is even 18 or 19 years old who starts a job in construction or something where they can go right into the workforce…those Canadians can effectively save more money, because they may still be living with mom and Dad, they could be renting cheap,” said Leah Zlatkin, mortgage expert at

The first home account also makes sense for properties that fall well below the median home price in Metro Vancouver or the Greater Toronto Area: $1.36 million and $1.30 million respectively in March, says Sung Lee, an expert. in Ratesdotca mortgages.

“Where home values ​​are typically over a million dollars, it’s going to be difficult,” he said, noting that they require a 20 percent down payment.

“But for someone who is looking at a property for, say, $650,000 or less, this would benefit them, because essentially they have to put down five percent of the first $500,000 ($25,000) and then 10 percent on the balance ($15,000). ). So if you take $40,000, the maximum amount you could contribute to this account, that would equate to a purchase price of $650,000.”

The FHSA homebuyers plan and the RRSP cannot be used simultaneously, he noted.

For current owners looking to upsize, neither the FHSA nor the RRSP apply. Cestnick says they should consider the more flexible, multipurpose tax-free savings account, which allows annual contributions of up to $6,000, with unused space that rolls over.

An alternative route is to renovate the residence to increase its value, especially since the proceeds from the sale are tax-free, he noted.

The tax-free savings account can also come into play for those with more than $8,000 to invest, with any excesses of that FHSA limit flowing into a TFSA.

“It is a matter of priority. If your long-term goal is to ensure you have these savings for retirement, you’ll put your extra savings into an RRSP. But if your short-term goal is to own your first home, then you’ll want to take advantage of the new savings account,” Lee said.

Prospective buyers should resist any urge to pour money into these tax havens by taking on debt, Zlatkin said.

“Maybe you really want to pay off those credit card bills, try to spend a little less on consumer goods and restaurants … and build a family budget,” he said.

“Then think about the houses.”

This report from The Canadian Press was first published on April 21, 2022.


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