This post was first published on May 25, 2023, and was updated on October 11, 2023.
Thinking about purchasing your first home? You’re likely exploring all of the options available to maximize your affordability – and in Canada, there are several government-provided programs designed to do just that.
The latest on the scene, initially announced in the 2022 Federal Budget and launching just this April, is the First Home Savings Account, a new registered savings vehicle that combines the best features of an RRSP and a TFSA. The tax-sheltered benefits it offers – including getting a tax return on contributed funds – are likely to make it a popular method for first-time home buyers looking to build a nest egg.
However, newbie buyers would be remiss to overlook the OG down payment savings vehicle: The Home Buyers’ Plan (HBP), which allows savers to tap into their RRSPs without tax penalty for a first-home purchase. It has been quite popular since its launch in 1992; 650,000 Canadians have utilized it to pay for the purchase of (or to build) a first home, amounting to a total of $6.2 billion in RRSP savings.
The good news is that home buyers can use both the HBP and FHSA to accumulate their down payment – but while they’re both tax-sheltered, registered plans, each have specific features and restrictions to be aware of. Let’s break down their differences and similarities.
The HBP: An overview
Simply put, the RRSP Home Buyers’ Plan can be considered an interest-free loan from your RRSP; home buyers can pull out funds for a qualifying home purchase without having them be subject to tax at withdrawal.
But – like all loans – these funds must be paid back, starting in the year following the withdrawal. Those who use the program have 15 years to replace them in their RRSP, with a minimum payback amount of one fifteenth each calendar year; failing to do so will then earmark that portion as taxable income.
As of 2019, individual savers can pull up to $35,000 from their RRSP (meaning if you’re buying a home with a partner, you can access a total of $70,000 assuming you both max out your contribution room).
The FHSA: An overview
Unlike the HBP, which is a program that utilizes a Registered Retirement Savings Plan, the First Home Savings Account is itself a registered savings vehicle that you can use to grow your money without tax penalty.
Money put into the account is tax deductible, meaning savers will receive a return in the tax year when they make a contribution. Up to $8,000 can be deposited annually, up to a lifetime maximum of $40,000. Like the HBP, you can join forces with a partner to each save funds in an FHSA, with a combined lifetime total contributed funds of $80,000. However, while there’s a cap on how much can be deposited into an FHSA, there is no limit on how much can be withdrawn; any money earned within the account (such as GIC interest or other type of investment return) can be accessed in full, also without tax penalty.
Once the FHSA is opened, the account holder has 15 years to make their home purchase, or the funds are transferred to either an RRSP or RRIF (again, without tax penalty).
How the HBP and FHSA are similar
Contributions are tax deductible. Savers will receive a tax return on deposits made to their FHSA and RRSP during the tax year.
You must be a first-time home buyer. In order to open a FHSA, or arrange for money to be moved from your RRSP for a real estate transaction, you must fall within the definition of a first-time buyer as per Canada’s Income Tax Act. This is defined as having not, at any time in the current calendar year or preceding four calendar years, live in a home as your principal residence that you owned or jointly owned, or that your spouse or common-law partner owned or jointly owned.
However, as of 2020, if you are in a marriage or common-law relationship that breaks down, you can reclaim your status as first-time home buyer once again; the CRA has amended the Income Tax Act to state the following:
"Generally, you will not be prevented from participating in the HBP if you do not meet the first-time home buyer requirement, provided that you live separate and apart from your spouse or common-law partner for a period of at least 90 days as a result of a breakdown in your marriage or common-law partnership. You will be able to make a withdrawal under the HBP if you live separate and apart from your spouse or common-law partner at the time of the withdrawal and began to live separate and apart in the year in which the withdrawal is made, or any time in the four preceding years. However, in the case where your principal place of residence is a home owned and occupied by a new spouse or common-law partner, you will not be able to make an HBP withdrawal under these rules."
You must have an agreement to buy or build a qualifying home. In order to access funds from the HBP or FHSA, the account holder must have entered into an agreement of purchase and sale to buy a home before October 1st of the year following the year after the withdrawal, or build one. They must intend to occupy it as a principal residence within one year of buying or building it. Secondary or investment properties cannot be purchased using these programs.
You must be a resident of Canada when the funds are withdrawn.
Contribution room rolls over annually for both types of accounts.
You can have more than one FHSA or RRSP open, assuming the total held does not exceed the maximums allowed under each program.
You can house various types of investments in each, such as mutual funds, GICs, bonds, stocks and other publicly-traded securities, in addition to just cash. Returns on these investments are also tax-sheltered.
How the FHSA and HBP are different
With an FHSA:
- There is no repayment of funds required
- You are not capped on how much money you can withdraw from the account; only deposits are limited to a $40,000 lifetime total
- There is no minimum holding period for deposited funds – you can pull them out at any time after you’ve deposited them, as long as you’re making a qualifying home purchase or transferring to an RRSP or RRIF
- There is no minimum holding period for deposits to be tax-deductible
- The deadline for FHSA contributions is December 31st.
- You can contribute up to $8,000 annually
- To set up an FHSA, you must first contact your financial institution of choice, and provide them with your SIN, date of birth, and any requested documents to prove your status as a first-time home buyer. The issuer will then open an account on your behalf
- It should be noted that as this product is new, the process for withdrawals, and how long it takes, is still unprecedented, and it’s currently unclear how much time buyers should account for when accessing their funds for a purchase
With the Home Buyers’ Plan:
- You must repay the funds removed from your RRSP within a 15-year period, or the money will be considered taxable income
- Withdrawals must be made within the same calendar year, and within 30 days of your home purchase’s closing date
- You can withdraw a maximum of $35,000 total from the account
- Annual contributions are limited to 18% of your previous year’s income (or the fixed contribution limit for the year, whichever is higher)
- You must keep the funds in your RRSP for a minimum of 90 days before they can be withdrawn for HBP use
- The deadline to contribute to your RRSP is 60 days after the end of the calendar year
- To use the Home Buyers’ Plan, you must first have an RRSP open at your issuer of choice, ensuring the funds are available for withdrawal (for example, they’re not currently tied up in a term vehicle like a GIC, or investments that need to be sold). You must then fill out Form T1036, Home Buyers' Plan (HBP) Request to Withdraw Funds from an RRSP any time you’d like to make an eligible withdrawal
The bottom line
Both the FHSA and HBP are great options for boosting your down payment savings, with each offering tax-sheltering benefits, including at the withdrawal stage. It’s a great idea to connect with a financial advisor when saving for your real estate down payment to determine if either, or both, of these tools is the right fit for you, and make a plan for making homeownership a reality, based on your own financial circumstances.