Introducing the Tax-Free First Home Savings Account
On August 9, 2022, draft legislation was released to implement the proposals introduced in the 2022 Federal Budget, including the new Tax-Free First Home Savings Account (TFHSA). This exciting new plan borrows elements from both the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA), and is designed to help first-time home buyers fund their purchase of their first home.
Below are some of the key features of this new plan that you should know.
Highlights of the TFHSA
The main features of the new plan include:
- An annual contribution limit of $8,000 and lifetime contribution limit of $40,000.
- With a spouse or partner that is also eligible to contribute, total contributions could be doubled to an annual contribution of $16,000 for 5 years and a lifetime contribution limit of $80,000.
- Unused contribution room can be carried forward to future years (to a maximum of $8,000)
- Contributions are tax deductible (similar to an RRSP)
- Contributions can be made up to the earlier of:
- 15 years from account opening; or,
- In the year the individual reaches age 71
- Withdrawals, including investment income, are tax-free if used to purchase a qualifying home
- Ineligible withdrawals are included in income (similar to an RRSP and Registered Retirement Income Fund (RRIF))
- TFHSA funds can be transferred to RRSPs or RRIFs on a tax-deferred basis. These transfers are not limited to the individuals RRSP contribution limits.
First time home buyer criteria
The definition for of a first-time home buyer is a person who does not own a home that they lived in during the year of purchase or in the preceding four years. The qualifying home purchase must be a “housing unit” located in Canada, or a share in a qualifying housing co-op.
Unfortunately, TFHSA withdrawals cannot be combined with RRSP Home Buyer Plan withdrawals on the same purchase.
Other key details
Other important points that have been revealed include:
- Overcontributions to TFHSAs will be subject to a penalty tax (similar to a TFSA)
- There is no spousal contribution–type arrangements (unlike RRSPs); however, one spouse could transfer funds to their spouse to fund their own TFHSA account
- The TFHSA is expected to be in place during 2023; however, no matter when it is in place in 2023, you will be able to contribute up to the full $8,000 limit for that year
While we are still awaiting the full details of the TFHSA to be released, contact your DMCL advisor if you would like more information on how the plan will work and if you qualify.