During the 2021 federal election, the Liberal Party of Canada proposed introducing a new form of tax favoured account: the First Home Savings Account (FHSA). As the name suggests, this account is intended to provide tax incentives for Canadians saving for a down payment on their first home.
Basic Features – Proposed First Home Savings Account
The First Home Savings Account is intended to combine features of the Registered Retirement Savings Plan (RRSP) and the Tax Free Savings Account (TFSA). As with an RRSP, when a Canadian individual makes a contribution to the FHSA, he or she will be entitled to a corresponding deduction from his or her income for that year. Income earned in the First Home Savings Account will not be taxed. Unlike a Registered Retirement Savings Plan, it is possible for the holder of the First Home Savings Account to withdraw funds without a corresponding income inclusion so long as those funds are applied towards the purchase of the holder’s first home. This means that contributions that are eventually withdrawn and used for the purchase of the holder’s first home will effectively receive the tax benefits typically associated with both an RRSP (a deduction at contribution time) and a TFSA (tax free investment income).
Only Canadian individuals under the age of 40 will be able to use a First Home Savings Account. If the funds in the First Home Savings Account are not used by the time the holder reaches the age of 40, those funds will convert into Registered Retirement Savings Plan funds.
The existing descriptions of the FHSA imply that individuals eligible will have a lifetime threshold of $40,000 for which the tax-free withdrawal treatment applies. To date, there has been no indication that this threshold is contingent on income (like a RRSP contribution room) or builds up on an annual basis (like TFSA contribution room).