Home Buyers Plan (HBP) vs. First Home Savings Account (FHSA): Comparison

In this video, we will explore the benefits and differences between the Home Buyers Plan and the First Home Savings Account.Both plans are designed to help Canadians save for the purchase of their first home.

Home Buyers Plan – Eligibility

Let’s start with the Home Buyers Plan. To be eligible to participate in the HBP, you must not have lived in a home as your principal residence that you owned, your spouse owned, or your common law partner owned in the previous 4 years.

For example, suppose that Sunny, a Canadian tax resident, is currently living in a rental apartment in Ontario, where he works. Sunny used to live in a house in British Columbia, which was his primary residence up until June 2019, when he relocated to Ontario. Sunny qualifies as a first time home buyer in 2024, because he did not live in a principal residence that he owned in the previous 4 years.

How does a Home Buyers Plan help me save for a home?

To answer this, let’s look at an example. Ritika, a 35 year old woman, is a Canadian tax resident. For the last 7 years, she lived in her parents’ house in Toronto, Ontario. In each of those 7 years, she made a contribution to her RRSP in the amount of $4,000 and she now has $50,000 saved in her RRSP account, thanks to some smart investing decisions. In 2024, Ritika decides to purchase her first home. According to her accountant, Ritika can withdraw up to $35,000 from her RRSP on a tax-free basis to put toward the purchase of her first home. The remaining amount can be withdrawn, subject to income tax, or can continue to be invested in her RRSP account.

Do I have to repay the amounts I withdraw with the Home Buyers Plan?

The short answer is ‘yes’. The amount withdrawn with the Home Buyers Plan is a tax-free loan from your RRSP to you. Your RRSP is the lender and you are the borrower. However, you do not have to pay interest on the amount borrowed, and the total repayment period is 15 years, with the minimum repayment amount equal to 1/15th of the original amount borrowed. In the year of the withdrawal and in the 1st subsequent year, you do not have to make any repayments to your RRSP, in effect giving you a grace period of 2 years.

How is an RRSP taxed?

Contributions made to an RRSP are tax deductible. Funds invested in an RRSP grow tax-free. Personal income tax is only payable on withdrawals, with an exception for amounts withdrawn pursuant to the Home Buyers Plan.

First Home Savings Account – Eligibility

The eligibility requirements for the First Home Savings Account account are the same as for the Home Buyers Plan. You must not have lived in a home as your principal residence that you owned, your spouse owned, or your common law partner owned in the previous 4 years.

How does an FHSA help me save for a home?

Much like an RRSP, contributions to an FHSA are tax-deductible and the income earned on those contributions is tax-free. Let’s take the example of Ritika. Ritika contributed $4,000 each year for 7 years, for a total of $28,000, to her FHSA. By making wise investment decisions, her investments grew from $28,000 to $50,000 in those 7 years, which represents a tax-free profit of $22,000.

In Addition, Ritika’s annual contributions of $4,000 netted her a tax refund of $2,000 per year, because (a) the contributions are tax-deductible and (b) her marginal tax rate is 50%. Within 7 years, she saved $14,000 in taxes. Ritika has now saved a total of $64,000 to purchase her first home.

Savings Chart with FHSA

How are withdrawals from an FHSA taxed?

Like an RRSP, withdrawals from an FHSA are completely tax-free. But, with an FHSA, there’s no requirement to repay the amounts withdrawn.

The annual contribution limit for an FHSA is $8,000 and the maximum lifetime amount that a Canadian resident can contribute to her FHSA is capped to $40,000.

Combining the Home Buyers Plan and FHSA

You can take advantage of both the Home Buyers Plan and the FHSA at the same time. An eligible individual can save up to $35,000 with the Home Buyers Plan and $40,000 with the FHSA, for a grand total of $75,000. For an eligible couple, the total is multiplied by 2, resulting in $150,000 of savings! If you factor in potential tax refunds, the savings is even more.

Conclusion

In conclusion, take advantage of both the RRSP and the FHSA. Make sure you consult with your account and financial adviser before making investment decisions.

I hope that you enjoyed this video and thank you for watching. Please like this video and subscribe to my channel. See you next time.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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