Saving Options for First Time Home Buyers
If you are considering buying your first home sometime in the future, there are 3 types of accounts that you can use to save for down payment.
1. FHSA account – this is new starting this year. As a first time home buyer, you can be eligible to open a First Home Savings Account (FHSA) and contribute up to $8,000 per year to a maximum limit of $40,000 over 15 years or until you buy your first home, whichever comes first. It is similar to an RRSP account in that it is tax deductible and you can carry forward unused contribution room. Any investment income or gains within the account are non-taxable. Withdrawal is non-taxable if it is used to buy your first home. A couple, each with maximized FHSA accounts, could potentially have a combined $80,000 plus accumulated income and gains saved 5 years after opening the accounts.
See link for more details: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account.html
2. RRSP account – The maximum you can withdraw from your RRSP account under the Home Buyers Plan when you purchase your first home is $35,000 (that means $70,000 for a couple). So, if you do not have an RRSP account, then you should open one for yourself and one for your spouse. You could each contribute RRSP of at least $35,000 over the next few years before purchase of home. The contributions are tax deductible. But you will have to repay the RRSP withdrawals by making RRSP contributions over 15 years (so, $2,333 per year for 15 years).
See link for more details: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan.html
3. TFSA account – contributions are not tax deductible and likewise, withdrawals are non-taxable. The advantage of this account is that income or gains from investments in this account are not taxable and so they grow tax-free. You have log into your CRA My Account and check your available TFSA contribution limit.
Note: TFSA accounts are not recommended for those who are US citizens as they are subject to additional US tax filings and potential penalties if not filed on time.
Within the above 3 accounts, you can invest in GICs, mutual funds, ETFs or individual stocks.
Note: US citizens should avoid investing in Canadian mutual funds, Canadian REITs and Canadian ETFs as these are considered to be Passive Foreign Investments Companies (PFICs) by the IRS and are subject to additional/complex US taxes).
When you open the accounts, you must decide whether to open a Self-Directed account where you manage the account yourself, buy and sell investments yourself. Or you could have a financial advisor managing the account. Care should be taken that you do not contribute more than your available limit as there is a 1% per month penalty on over contributions to a TFSA account.
The above information is of a general nature only and should not be relied upon for specific situations. Call Marlies Y Hendricks, CPA at 416-766-3941 or submit email enquiry form below to set up a consultation.
