Tax Efficient Strategies to Save for Your First Home Down Payment
Dec 30, 2024
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Saving for a down payment on your first home in Canada can feel like a daunting task, but with careful planning and the use of tax-efficient strategies, it can be more attainable than you might think. Leveraging programs like the First Home Savings Account (FHSA), RRSP Home Buyers’ Plan (HBP), and other government incentives not only helps you grow your savings but also minimizes your tax burden along the way. In this blog post, we’ll explore practical tax approaches to building your down payment fund, allowing you to take confident steps toward homeownership while maximizing every dollar saved.
First Home Savings Account (FHSA)
The FHSA should be the first choice for any Canadian resident looking to save for their first home, offering a tax-efficient and straightforward way to build your down payment. With the unique benefits of tax-deductible contributions (like an RRSP) and tax-free withdrawals for qualifying home purchases (like a TFSA), it’s a no-brainer for home savers and offers the best value out of all the available programs. You can contribute up to $8,000 annually (unused contribution room can be carried forward), with a lifetime limit of $40,000. Just like any registered account the investment income earned inside a FHSA is not taxable.
The FHSA combines flexibility and tax savings, making it an essential tool for anyone planning their first step into homeownership. Even if you plan to buy a house tomorrow, contributing to an FHSA right away is a smart move because there’s no minimum time requirement for how long the money needs to stay in the account before it can be withdrawn (unlike HBP, more on that below) for a purchase of a qualifying home. This allows you to benefit from an immediate tax deduction while keeping your funds readily accessible for your purchase.
Additionally FHSA allows both you and your spouse or common-law partner to contribute separately, even if you're purchasing the same home together. Each individual is eligible to open their own FHSA, contributing up to the annual limit of $ 8,000 per person and a combined lifetime limit of $80,000 between both accounts ($ 40,000 each). This means that as a couple, you can double the tax benefits and savings , accelerating your ability to afford a down payment while enjoying the perks of tax deductible contributions and tax-free withdrawals.
Pro Tip: If you do not own a home, consider opening an FHSA account so that your contribution room start accumulating, even if you do not fund the account. Remember to let your tax preparer know that you opened an FHSA account (if you did not contribute), so that they fill out Schedule 15 (Box 68930) correctly.
You can use the CRA's tool to see if you are meeting the eligibility criteria to open FHSA here: Opening your FHSAs - Canada.ca
Home Buyers Plan (HBP)
The HBP is a valuable tool for first-time homebuyers in Canada, allowing you to withdraw up to $60,000 tax-free from your Registered Retirement Savings Plan (RRSP) to help fund your qualifying home purchase. Keep in mind that the money needs to stay for 90 days in your account before it can be withdrawn. While the withdrawal itself is tax-free, the program requires you to repay the amount into your RRSP over a 15-year period, starting the second year after the withdrawal. Any missed repayment amounts are added to your taxable income for that year. The HBP is ideal for individuals who have built up savings in their RRSP and want to use those funds to make homeownership more affordable.
The HBP withdrawal can be viewed as a loan from the government because it allows you to leverage the tax refund from your RRSP contributions:
When you contribute to your RRSP, you receive an upfront tax refund (once the tax return is filed) based on your marginal tax rate.
After 90 days, you can withdraw funds under the HBP to buy your first home without paying tax on the withdrawal, effectively keeping the tax refund from your initial contribution.
Although you are required to repay the withdrawn amount into your RRSP over 15 years, these repayments do not generate additional tax deductions, unlike regular RRSP contributions.
This plan allows you to enjoy the immediate tax savings and use the funds for a home purchase, while repaying the amount over time without additional tax benefits, mimicking the effect of an interest-free government loan. This is beneficial because money you repay in the future is worth less in real terms than the upfront tax savings you received and the value of the withdrawal. The HBP allows you to maximize the value of today’s dollars for immediate use (purchasing a home), while spreading out the financial impact of repayment over many years.
For those who take advantage of the HBP withdrawal between January 1, 2022 and December 31, 2025, there is an additional benefit thanks to a temporary relief measure introduced by the federal government. This temporary measure allows you to extend the repayment period by an additional three years, meaning you won't need to start repaying the withdrawn amount until 5 years after the initial withdrawal, instead of the standard two-year timeline. This extension provides extra benefit, giving you more time to focus on settling into your new home and managing other financial priorities before starting repayment. It’s a valuable opportunity for first-time homebuyers to ease the transition into homeownership without immediate repayment pressure.
Eligibility criteria for HBP:
To be eligible for the HBP:
you must be considered a first-time home buyer,
you must have a written agreement to buy or build a qualifying home,
you have to be a resident of Canada throughout the period that starts when you make your first eligible withdrawal from your RRSPs under the HBP and ends when you buy or build a qualifying home
you must intend to occupy the qualifying home as your principal place of residence within one year after buying or building it.
HBP Example:
The table below illustrates how the Home Buyers' Plan (HBP) might work in practice for an individual using RRSP savings to purchase a qualifying home. The following assumptions are made:
RRSP Contributions: The individual contributes $30,000 to their RRSP in both 2023 and 2024.
Marginal Tax Rate: The individual’s marginal tax rate is 33.25% in both years, resulting in a tax refund of $9,975 each year.
RRSP Withdrawal: The maximum allowable amount of $60,000 is withdrawn from the RRSP in 2025 under the HBP to fund a home purchase.
Repayment Period: Since the withdrawal occurs in 2025, the individual qualifies for extended repayment relief, requiring the $60,000 to be repaid over 15 years (2030–2044) starting the fifth year after the withdrawal.
Key Insights from the HBP table:
Tax Benefits: By contributing $30,000 to their RRSP in each of 2023 and 2024, the individual receives an upfront tax refund totaling $19,950. This provides immediate tax relief rather than spreading it out over future years.
HBP Withdrawal: The $60,000 withdrawal in 2025 allows the individual to leverage their RRSP savings to purchase a home while deferring the repayment obligation to a later date.
End Result: At the conclusion of the 15-year repayment period, the full $60,000 is repaid to the RRSP. However, the key advantage of the HBP is that the taxpayer receives the tax benefit of their RRSP contributions upfront, rather than incrementally over the repayment period.
How Much Your Down Payment Should Be:
Having a house down payment of at least 20% of the purchase price is ideal because it allows you to avoid the Canada Mortgage and Housing Corporation (CMHC) insurance premium. In Manitoba, CMHC premiums can range from 2.8% to 4% of the mortgage amount, depending on the size of your down payment. This premium is added directly to your mortgage balance, increasing the total amount you owe and, consequently, your monthly payments. For example, on a $400,000 home with only a 5% down payment, the CMHC premium could add up to $15,200 to your mortgage, significantly increasing the overall cost of homeownership. While CMHC insurance can theoretically result in a lower borrowing rate since it reduces risk for lenders, the added premium often outweighs the savings, making it financially beneficial to aim for a 20% down payment if possible.
First-Time Home Buyers’ Amount Tax Credit (HBTC):
The First-Time Home Buyers’ Tax Credit is a Canadian non-refundable tax credit designed to assist eligible individuals purchasing their first home. Introduced to help offset some of the closing costs associated with buying a home (such as legal fees and land transfer taxes), it provides a non-refundable tax credit of $1,500 (based on a $10,000 credit multiplied by the lowest Federal personal income tax rate of 15%). To qualify, you or your spouse/common-law partner must purchase a qualifying home, and neither of you should have owned a home in the preceding four years.
In conclusion, the First Home Savings Account (FHSA), Home Buyers' Plan (HBP), and First-Time Home Buyers’ Tax Credit each offer valuable opportunities to make homeownership more attainable for Canadians. The FHSA provides a powerful tax-advantaged way to save for a down payment, while the HBP allows you to leverage your RRSP savings without immediate tax implications. Meanwhile, the First-Time Home Buyers’ Tax Credit helps offset closing costs, reducing the financial burden of purchasing your first home. Together, these programs form a comprehensive toolkit for first-time buyers, enabling them to achieve their homeownership goals while maximizing their tax and financial benefits. With proper planning and strategic use of these programs, Canadians can take meaningful steps toward securing their dream home and building long-term financial stability.
Feel free to contact our office to see if you are eligible for the above programs or refer to the following links for eligibility criteria:
This blog has been prepared to provide general guidance and should not be considered specific advice. It may not address individual situations, and the information contained should not be used as a basis for action or inaction without seeking professional advice tailored to your circumstances. For personalized assistance, please contact Jenkyns Smith CPA's LLP.
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