Savings

The new first federal home savings account is the first truly tax-exempt

In a declining real estate market, Canadians who want to buy their first home have a new tool: the first home savings account (FHSA).

Unveiled in the 2022 federal budget, this new savings vehicle has made tax-savings history as Canada’s first truly tax-free savings program – a fact that has gone largely unnoticed.

Encourage savings

One of the ways governments around the world are encouraging and helping people save for things like buying a home or preparing for retirement is by incentivizing them with tax breaks. Depending on the policy objective, the government will give a tax advantage to certain streams of income in the savings process – whether in contributions, returns on invested assets and/or the net income generated by these savings at a given moment in the future.

In principle, money is always taxed at some point. But the “Tax-Free First Home Savings Account” Proposed in 2022 Federal Budget is Canada’s first truly tax-free savings program – ever.

Pay attention to your ‘e’s and ‘t’s

The use of taxation to encourage savings is so universal that there is an international rubric to compare and contrast savings patterns between and within countries. There are three conventional categories – TEE, EET and TTE – where “T” stands for “taxed” and “E” stands for “tax exempt” for contributions, investment income or withdrawals.

International savings tax classification



Last name Submissions investment income Withdrawals Canadian examples
eet Exempt Exempt Tax RRSP, CPP/QPP, Workplace Registered Pension Plan
TEE Tax Exempt Exempt TFSA, principal residence
TTE Tax Tax Exempt Other financial investments
EEE (new) Exempt Exempt Exempt FHSA

Source: Bonnie Jeanne MacDonald

In Canada, for example, Registered Retirement Savings Plans (RRSPs) and Registered Pension Plans (RPPs) exist “to encourage and assist Canadians to save for retirement. Contributions to these plans are deductible from income, investment income is not taxed as it accrues in the plan and withdrawals are included in income for tax purposes.

Otherwise known as “tax-deferred savings”, contributions and investment returns in these arrangements are tax-free while they remain in the plan, but the money is taxed as ordinary income when it is withdrawn – meaning they are “exempt-exempt-taxed” or “EET”.

On the other hand, contributions to tax-free savings accounts (TFSAs) are less “tax-free” than “prepaid”. Contributions are made with after-tax income, and there’s no tax deduction – like you get when you contribute to your RRSPs.

However, once made, TFSA contributions grow tax-free and withdrawals do not count as taxable income. This type of scheme therefore falls under the “tax-exempt-exempt” (TEE) category. Your primary residence also functions as a TEE program – finding out is often an “aha!” time, even for financial experts.

Presentation of the FHSA

What’s special about the FHSA is that it’s a way for new homeowners to save while avoiding taxes. still. As the budget explains, this program borrows the first “E” from RRSPs and the last from TFSAs, creating a new class of “EES” tax savings:

“Budget 2022 proposes to introduce the Tax-Free First Home Savings Account which would give potential first-time home buyers the opportunity to save up to $40,000. Like an RRSP, contributions would be tax deductible and withdrawals for the purchase of a first home, including investment income, would be non-taxable, like a TFSA. Tax refund on entry, tax refund on exit.

In this brave new “EEA” world, potential first-time home buyers would have the opportunity to save $8,000 per year for five years, or up to $40,000 per person or $80,000 per couple. Investment returns are not taxable, nor is the income used to purchase the home.

Beyond these savings on the purchase of the home, capital gains on the home are also exempt from tax, as are the proceeds from its subsequent sale, expanding this EEE program into a major long-term tax benefit. Think of it this way: even if the initial $80,000 reaches $800,000 at the time of the sale, there are no taxes on it at any point in the process.

Will this help?

The extent to which this new vehicle will contribute to Canada’s housing crisis is unclear. Tax breaks are just one way to support home ownership, and one of the worst in terms of equity, some argue. Other ways to support the same goal include grants and lower-cost new housing construction through special funding from Canada Mortgage and Housing Corporation (CMHC).

But for those looking to buy their first home, it’s a win-win solution and a great way to keep the taxman away from your front door.


Bonnie-Jeanne MacDonald is Director of Financial Security Research at National Institute on Aging (NIA) to Metropolitan University of Toronto (formerly Ryerson University), member of the Canadian Institute of Actuaries and resident researcher at Eckler Ltd.