First Home Buying Strategy : Accounts

by Jeffery A. Keill, CFP, CIM, FMA, FCSI, Portfolio Manager and Senior Wealth Advisor Keill & Associates- Advisory Team

As part of our series of First Time Home Buyers Strategy Discussion papers, we want to cover the common plans and accounts available to First Time Home Buyers to save for a down payment. There are several different accounts and plans to help potential first timers to acquire their first home but many of them include jargon and rules that are not part of everyday life. This document is meant to help simplify these terms and concepts to make the accessible and understandable.

Saving for the down payment much of the time requires a commitment to a longer-term approach as the size of a down payment on a home can be quite large. If you require a 10% down payment on a $500,000 home this will mean you will need to accumulate through savings and investment returns a total of $50,000. Let’s talk about the different plans and accounts that can help you save faster. It is important to note that each of these are simply Accounts or Plans. They are not investments in themselves. It is simply a basket that holds various investments much like a basket can hold different foods: be it fruits, meat, or vegetables. It is not the basket or account that provides the return… it is the underlying foods held in the basket. These accounts, before the investment decision is made, hold various benefits and limitations. I want to focus on the account and plan benefits and not the investment decision which is a separate discussion.

Common Plans and Accounts:

1) Non-Registered Investment Account or Cash Account

2) Tax-Free Savings Account (TFSA)

3) RRSP Home Buyers Plan (HBP)

4) First Homeowners Savings Account (FHSA)

1) Non-Registered Investment Account

The Non-Registered Investment Account is simply an account that, well, is not ‘registered’. This simply means that it is a regular investment account that has not been registered with CRA under any of the special circumstances or benefits such as the Tax-Free Savings Account, Registered Retirement Savings Plan (RRSP) or First Homeowner Savings Account. It is also known as a Cash Account.

Although this account, like the TFSA and the RRSP are most of the time used for other savings goals, they do form part of the choices for also buying a home. The Non-Registered Account is simply an account that can hold any number of financial assets without any real limitation of deposit or withdrawal. The income generated from investments held inside this type of account are fully taxable and it provides no sheltering from tax. Furthermore, this account also has no provisions under the Income Tax Act (ITA) to allow for tax deductible contributions or any simple estate planning. The only taxable benefits arise from the investment selection (interest vs dividends vs capital gains) and not part of this discussion. Given there are few tax benefits or strategies resulting from the tax benefits, this type of account is the least favorable for the purpose of saving for the purchase of a First Home. With that said, this is an account that anyone over 18 can open, deposit, and withdrawal from. Simply and easily.

2) Tax Free Savings Account

This account began in 2009 as a means to help Canadians save for various goals without the burden of tax being paid on investment income. The TFSA allows Canadians the ability to contribute to an account that can grow tax free. This can have a significant impact on savings when compared to the Non-Registered Investment Account which is fully taxable each year. The TFSA not only allows the tax-free income to be earned on assets held inside the account but also for the ultimate tax-free withdrawal when money is taken out. In other words, all money inside and when taken out are, you guessed it; tax-free. Of course, with any great program there is a limit. This limit is in the amount you are allowed to contribute. Currently (2023) the TFSA annual contribution limit is $6,500.This amount has fluctuated each year since the launch of the TFSA and if you had not contributed in any of the past years the annual amounts accumulate and are not lost. In 2023, your total contribution limit could be as high as $88,000.

3) RRSP Home Buyers Savings Plan

This RRSP Home Buyers Plan (HBP) was started in 1992 to help Canadians access their retirement savings for the purpose of owning a first home. As regular withdrawals from an RRSP are taxable in the year you withdraw funds, the HBP allows individuals to withdraw tax-free (meeting certain immediate and long-term conditions). The individual, the property, and the withdrawal have to qualify as eligible. The property basically is to be a property that will be the new home buyer’s residence and not a rental or investment property. The individual to qualify must meet the test of being a “new home buyer” which is to say they or their spouse have not owned a home in the past 4 years and be a Canadian Resident for tax. The withdrawal must also meet two basic tests: a) the withdrawal must be from RRSP contributions that have been inside the RRSP for a minimum of 90days prior to the withdrawal and b) the maximum withdrawal is $35,000 per individual prospective home buyer. Finally, there is an understanding and agreement that the RRSP withdrawal will be paid back over time. More on this below.

The RRSP prior to a withdrawal has the wonderful benefits of an RRSP: tax deductible contributions and tax-free growth on investment returns. These benefits can enhance the down payment accumulation as tax refunds from the deduction can be re-invested into the RRSP further accelerating the accumulation. Also, like the TFSA, the tax-free growth can also accelerate the savings toward the final down payment.

Once the HBP has been initiated and a qualifying home purchased, the Annuitant (person who is registered owner of the RRSP from where the funds came from) must begin to repay back to their RRSP two years following the withdrawal. The amount of the repayment is set at 1/15 of the withdrawn capital which is to say CRA expects the funds to be repaid over a 15-year period. If the Annuitant decides to not make the require 1/15th payment, the amount of the payment for that year will be considered taxable income. It is generally a good idea to repay these amounts, but proper tax advice is needed before such repayment is done.

These are the most common rules and eligibility requirements for the purpose of our discussion. More details of this Plan are available by speaking to one of our Advisors.

4) First Home Savings Account (FHSA)

The FHSA was first available to Canadians in 2023 and so far, most institutions have geared up and launched the FHSA for clients. In the coming year it is expected most institutions will have systems in place to accept applications and funds. The intent of the FHSA is as exactly and singularly promoted: a savings account for first home buyers.

The benefits of the FHSA are a combination of some of the benefits found in the TFSA and HBP. Like the TFSA the money is contributed based on certain annual limits set by CRA. Also like the TFSA, the money inside the account will grow tax-free until taken out and even when withdrawn for the purchase of a first home will not be taxable. The FHSA is also much like an RRSP as you can gain an income tax deduction for the contributions to the plan. The triple benefit of deductible contributions, tax-free growth, and tax-free withdrawals make this program very powerful for those who are intent on buying a home in the coming years.

Currently the maximum contribution amount is $8,000 with a lifetime contribution of $40,000.

The Combo Play: Mix and Match to Meet Your Goals

Of course, like many things in life people seem to wonder which is the best ONE for their situation. In truth, there may not be one Plan or Account that is more powerful than another given certain circumstances. The ability to fund a down payment may require a strategy made up of different options. It may be a mix between HBP and the FHSA. It may be a mix between FHSA, a TFSA, and a Non-Registered Investment Account. There is no one-size-fits-all.

We encourage individuals trying to build savings for the purpose of a first home, to contact our Advisor Team to create a plan and strategy that will help you successfully reach your goals. Our Home Buyers Strategy will path out a plan to help you achieve that first home that is right for you and your family. We are here to help you.

Disclaimer and Notice to Reader: This Discussion Paper should not be construed as legal or tax advice but rather only as a general statement and explanation of the topic matter. Professional tax and legal advice should be obtained for the readers own personal situation. For more information on this topic or how it applies to your family, please contact our Wealth Advisory team.

Last Edit Feb 11,2025