Budget 2022: Ottawa creates a new tax-free savings account for first-time home buyers
Craig Wong, The Canadian Press
Posted Thursday, April 7, 2022 5:59 PM EDT
Last updated Thursday, April 7, 2022 5:59 PM EDT
OTTAWA – Canadians looking to save a down payment to buy their first home will have a new tax-free savings account to use starting next year.
The federal government on Thursday announced the Tax-Free Home Ownership Savings Account (FHSA) in the budget along with doubling the tax credit for first-time home buyers to $1,500 in a bid to make buying a home a little easier. .
Home prices in Canada have soared over the past year as Canadians flocked to the housing market during the pandemic, making it difficult for many to get a foothold.
According to the Canadian Real Estate Association, the national average house price hit a record high of $816,720 in February, up more than 20% from a year earlier.
“As house prices rise, so does the cost of a down payment,” the government says in the budget.
“This presents a major hurdle for many people wishing to become owners, especially young people.”
Contributions to the new accounts will be tax deductible, just like registered retirement savings plan (RRSP) contributions, and money in the accounts and any investment gains will not be taxed when withdrawn for buy a qualifying first home.
The accounts will have a lifetime limit of $40,000 on contributions and an annual contribution limit of $8,000. Unused annual contribution room will not be carried over.
In addition to the sharp rise in house prices, Canadians are feeling the brunt of inflation as rising prices for everything else put further strain on already stretched household budgets.
Borrowing costs are also rising as the Bank of Canada raises its key interest rate target, which has a direct impact on variable rate mortgages. Fixed-rate mortgage rates have also increased, increasing costs for first-time buyers opting for more certainty in their mortgage interest rate as well as for those who need to renew their mortgage.
Mathieu Laberge, advisory services partner and regional economic and political leader at KPMG, says the new savings account encourages people to save for a down payment on a first home.
“What first-time home buyers are struggling with right now is accumulating enough capital for a down payment,” says Laberge.
“I think it was designed to maximize savings incentives in the sense that it’s like an RRSP. The amounts you deposit in the account are in fact tax-free and when you withdraw them, unlike an RRSP, you are not taxed on them.
Laberge says some potential buyers could also use the accounts to save a bit longer than they otherwise would and accumulate a bit more before moving, which could dampen demand.
James Laird, co-founder of Ratehub.ca and president of mortgage brokerage CanWise Financial, was disappointed that the home value limit to qualify for mortgage loan insurance had not been raised by $1 million. dollars to $1.25 million, but praised the new savings accounts.
“It’s a very solid tax-free vehicle that will actually help Canadians who are trying to save for a down payment,” says Laird.
The new account is in addition to tax-free savings accounts that allow investments to grow tax-free, but do not generate a tax deduction when you make a contribution.
Homebuyers can also withdraw up to $35,000 from their RRSP accounts to help buy a home, but that money must be repaid.
The government says Canadians will still be allowed to access their RRSP savings through the Home Buyers’ Plan (HBP) under existing rules, but they won’t be allowed to make both an FHSA withdrawal and an HBP withdrawal to pay for the same qualifying home.
Individuals will also be allowed to transfer funds from an RRSP to an FHSA tax-free, subject to annual and lifetime contribution limits.
If an investor does not use their FHSA money for a first home purchase within 15 years of first opening the account, the account will need to be closed. Any unused savings can be transferred to an RRSP or RRIF or withdrawn on a taxable basis.
The new savings accounts are similar to a home ownership savings plan that Pierre Trudeau introduced in 1975 that research shows facilitated the transition from renting to home ownership, but was largely motivated by high-income households before the Mulroney government canceled the program in 1985.
Additionally, the budget includes a new multi-generational home renovation tax credit worth up to $7,500 that will help pay for renovations needed to build a secondary suite for a senior or adult with a disability. .
The budget also includes $475 million in 2022-23 for a one-time $500 payment to people facing housing affordability issues, but does not include specifics.
This report from The Canadian Press was first published on April 7, 2022.