Homeownership journey for Canadian couples

For young Canadian couples like Olivia and Ethan, buying their first home is an exciting milestone. It’s a symbol of independence, stability, and an investment in their future. However, the process of buying a house can be daunting, with numerous financial considerations and legal procedures to navigate. This article aims to guide first- time homebuyers like Olivia and Ethan through the process, highlighting key considerations and financial strategies.

Preparing to buy a house in Canada

Before Olivia and Ethan start house hunting, it’s important to ensure they’re financially prepared. This involves understanding the mortgage process, gathering necessary documents, and being aware of the closing costs and taxes associated with buying a house.

In Canada, eligibility criteria for buying a house include having a steady income, a good credit score, and a certain amount of savings for the down payment¹. It’s also important to consider the ongoing costs of homeownership such as property taxes, interest on a mortgage, home insurance, and maintenance costs.

There is an opportunity for Olivia and Ethan to take advantage of their financial toolkit by leveraging tax-efficient vehicles such as the First Home Savings Account (FHSA) and Registered Retirement Savings Plan (RRSP). Both investment accounts can help in saving towards their down payment, but also provide tax deductions, making the process more affordable. The Tax-Free Savings Account (TFSA) can also be useful in generating tax-free income to put towards the cost of a new home.

It is important to consider these great savings tools to minimize reliance on the “bank of mom and dad”, who may not have the means to assist.

Down payment options for first-time home buyers

There are several down payment financing options available to first-time home buyers like Olivia and Ethan in Canada. They can each borrow up to $60,000 ($120,000 total) tax- and interest-free from their Registered Retirement Savings Plan (RRSP) using the RRSP Homebuyers’ Plan. This is a great option in high tax and interest rate environments. They can also save up to $80,000 ($40,000 each) in contributions, plus investment growth in their new First Home Savings Accounts (FHSAs) if they are eligible to open an account.

The RRSP Homebuyers’ Plan² allows Canadians to withdraw up to $60,000 in a calendar year from their RRSPs to buy or build a qualifying home. For a couple, this can amount to $120,000. However, it’s important to note that RRSP contributions must remain in the RRSP for at least 90 days before they are withdrawn for the contributions to be tax-deductible. Once they withdraw the funds, individuals have up to 15 years to re-contribute them back into the plan starting two years after withdrawal. (Note, Federal Budget 2024 announced temporary relief that allows for the deferred start of the 15-year repayment period by an additional three years. Accordingly, the 15-year repayment period could start on the fifth year following the year in which a first withdrawal was made and would apply to Home Buyers’ Plan withdrawals that occur between January 1, 2022, and December 31, 2025.)

The conditions to qualify for the RRSP Home Buyers’ Plan are:

• You must be a Canadian resident³ 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 be considered a first-time home buyer⁴. This means you did not live in a qualifying home as your principal place of residence that either you or a spouse or common-law partner owned or jointly owned at any time in the current calendar year before the withdrawal (except the 30 days immediately before the withdrawal) or at any time in the preceding four calendar years.
• You must have a written agreement to buy or build a qualifying home⁵ for yourself or for a specified disabled person.
• You must intend to occupy the qualifying home as your principal place of residence within one year⁶ after buying or building it.

Prior to making this HBP withdrawal, Olivia and Ethan will be able to take advantage of the tax savings opportunities offered by contributing to their RRSPs.

• Deductibility of the contributions to an RRSP⁷
• Tax-deferred accumulation of investment income and gains

They can set up an RRSP with different types of qualified investments and make deposits whenever they like, subject to their available RRSP deduction room. Their annual contributions can be deducted from their taxable income, thereby reducing their overall tax bill.

The First Home Savings Account (FHSA)⁸ allows qualifying individuals⁹ like Ethan and Olivia to contribute up to $40,000 tax-free, each, to buy a home, with an annual contribution limit of $8,000. This could provide an extra $80,000 (plus growth) of tax-free savings for a couple’s first home. They can open an FHSA¹⁰, make contributions or transfers to their FHSAs¹¹ (subject to conditions), and hold a variety of securities, cash, mutual funds, or exchange-traded funds to provide investment growth for a larger tax-free amount.

Once Ethan and Olivia have accumulated the desired amount, they can make a tax-free FHSA qualifying withdrawal for their down payment. The conditions to qualify for an FHSA qualifying withdrawal¹² are:

• You must be an individual resident of Canada.
• You must be a first-time home buyer⁹, which means, at the time of withdrawal, you did not own or jointly own a qualifying home that you lived in as a principal place of residence in the current year or the preceding four calendar years.
• You must have a written agreement to buy or build a qualifying home¹³ with the acquisition or construction completion date of the qualifying home before October 1st of the year following the date of the withdrawal.
• You must occupy or intend to occupy the qualifying home as your principal place of residence within one year after buying or building it.

Like RRSPs, Ethan and Olivia’s FHSA contributions can be deducted from taxable income, thereby reducing their overall tax bill.

• Deductibility of the contributions to an FHSA¹⁴

Similar to RRSP contributions, tax deductions from FHSA contributions can be claimed in the year of contribution or carried forward indefinitely to be claimed in a future year. The carryforward option may be helpful if taxable income is expected to rise in future years. However, the first 60 days of contributions cannot be deducted against the previous year’s income like RRSP contributions.

Using the FHSA and RRSP together can amplify tax savings

For illustration purposes^†, Ethan, a Registered Physiotherapist in Ontario, earns around $95,000 annually. His wife, Olivia, an Insurance Specialist, earns around $80,000.

If both Ethan and Olivia contribute to their RRSP and FHSA to the maximum amount, they will achieve a substantial tax saving.

TAX SAVINGS OPPORTUNITIES WITH CONTRIBUTIONS TO RRSP & FHSA OVER FIVE YEARS^†

Note: We are assuming Ethan and Olivia’s annual income correspond to earned income as defined by the CRA for calculation of the RRSP deduction limit. Also, the annual income for each does not change between the year before the first contribution to the FHSA and the five following years. The calculations consider the basic personal amount for a resident of Ontario.

If Ethan can use around 26.4% of his income to contribute to both his RRSP and his FHSA, the combined contributions would represent $25,100 per year, which may end up as $7,523 in tax savings per year. After five years, it can lead to approximately $37,615 in tax savings.

If Olivia can use 28% of her income to contribute to both her RRSP and her FHSA, the combined contributions would represent around $22,400 per year, which may end up as $6,642 in tax savings. After five years, it can lead to approximately $33,210 in tax savings.

CONTRIBUTIONS AVAILABLE TOWARDS THEIR DOWN PAYMENT^†

After five years of contributions and investment growth, assuming an increase in market values, Olivia and Ethan will have accumulated enough to draw a combined $120,000 interest-free from their RRSPs and at least $80,000 in qualified withdrawals from their FHSAs (plus any investment growth). This provides an encouraging $200,000 (minimum) down payment towards their dream first house, all while saving around $70,825 in taxes.

Saving approximately one-third of their income might seem substantial given the living expenses they need to cover. Although this example presents an optimistic scenario, a real couple can adjust their savings rate according to their circumstances and enhance their financial outcomes by selecting appropriate investment vehicles.

The Tax-Free Savings Account (TFSA)¹⁵ is another great tool that lets Olivia and Ethan invest their money tax-free. Contributions to TFSAs are made with after-tax dollars, so any investment growth and withdrawals are, generally, tax- free. This allows them to save tax-efficiently to buy a home or provide for other expenses associated with the home buying process.

With a TFSA, you can contribute up to a certain limit each year (currently $7,000 for 2024), plus unused contribution room from prior years depending on the age of the account holder and how long they’ve had a valid social insurance number (SIN). Withdrawals are tax-free and are added back to contribution room for the following year. It’s a versatile account suitable for both short- and long-term financial goals. For more detailed information about the TFSA, the CRA has provided a good overview on the following page: Understanding the tax-free savings account (TFSA) - Canada.ca.

Tax credits and other assistance for home buyers

In some cases, there are tax credits and rebates available to home buyers such as the $1,500 First-Time Home Buyers’ Tax Credit (HBTC)¹⁶, the Land Transfer Tax Refund¹⁷, and the GST/HST New Housing Rebate¹⁸. Each of these credits or rebates have their own requirements. Additionally, provincial or territorial governments may offer other home buying programs and incentives.

The power of multiple accounts

The 2024 Federal Budget provides an illustration of how a couple can build a significant down payment using the tools above. Canadians can work with a financial advisor to determine which tools are available to them and how much to contribute to each account.

Conclusion

Buying their first home is a significant decision for Olivia and Ethan that requires careful thought, research, and planning. It’s important for them to consider all options and seek professional advice when necessary. A financial advisor can help navigate the options, assess suitability, and evaluate how registered plans like RRSPs, FHSAs, and TFSAs can help with this process. Remember, buying a home is both an emotional and financial decision, and being well prepared can make the process smoother and more rewarding for home buyers.

The 2024 Federal Budget illustrated the use of the First Home Savings Accounts as follows:

The combined value of federal-provincial tax relief offered by the Tax-Free First Home Savings Account, compared to a taxable account for a couple living in Ontario, earning about $80,000 and each contributing $8,000 annually is detailed in the chart below Also shown is the maximum down payment a couple could make when combining the Tax-Free First Home Savings Account, Home Buyers’ Plan, and the Home Buyers’ Tax Credit.

A PATHWAY TO A FIRST DOWN PAYMENT (FOR A COUPLE)^†

Note: Tax savings comprise both the tax relief received through deductions in a tax return and the non-taxation of investment income. The down payment is comprised of Tax-Free First Home Savings Account (FHSA), using the Home Buyers’ Plan (HBP) to each withdraw $60,000 from RRSP’s, and the maximum federal tax relief of $1,500 from the Home Buyers’ Tax Credit.
Source: https://www.budget.canada.ca/2024/home-accueil-en.html

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SOURCES:
1 How much you need for a down payment - Canada.ca
2 The Home Buyers’ Plan - Canada.ca
3 Definitions for Home Buyers’ Plan - Canada.ca – Resident of Canada
4 Definitions for Home Buyers’ Plan - Canada.ca – First-time home buyer
5 Definitions for Home Buyers’ Plan - Canada.ca – Qualifying home
6 How to participate in the Home Buyers’ Plan - Canada.ca
7 RRSP Tax Savings | CI Global Asset Management
8 First Home Savings Account (FHSA) - Canada.ca
9 Definitions for FHSAs - Canada.ca – First-time home buyer
10 Tax-free First Home Savings Account Client Guide EN (CI GAM)
11 First Home Savings Accounts and the role of your spouse or common-law partner (White Paper CI GAM)
12 Withdrawals and transfers out of your FHSAs - Canada.ca – Qualifying withdrawal
13 Definitions for FHSAs - Canada.ca – Qualifying home
14 Tax deductions for FHSA contributions - Canada.ca
15 The Tax-Free Savings Account - Canada.ca
16 First-Time Home Buyers’ Tax Credit (HBTC) - Canada.ca
17 Land Transfer Tax Refunds for First-Time Homebuyers | Land Transfer Tax | ontario.ca
18 GST/HST new housing rebate - Canada.ca
† The calculations provided herein are for illustrative purposes only, may not reflect the circumstances of all taxpayers, and should not be construed as tax or investment advice. Individuals should seek the advice of professionals, as appropriate, regarding their own investment, tax, retirement or estate planning.