If you or a family member are thinking of buying your first home, there are three tax-advantaged savings programs that can help you come up with that initial down payment, reducing the amount you will need to borrow as a mortgage and potentially saving you thousands of dollars in interest costs. The three sources of tax-free down payment cash are, in my order of preference, the first home savings account (

FHSA ), the tax-free savings account ( TFSA ) and your registered retirement savings account ( RRSP ), accessed via the federal Home Buyers’ Plan ( HBP ). A recent tax case, decided last month, may provide first-time home buyers with more flexibility should they wish to use the HBP. But, before delving into the details of this case, let’s briefly run through how you can use these three plans to help fund your down payment.

Launched in 2023, the FHSA is a new registered plan that gives prospective homebuyers the ability to save $8,000 per year, up to a $40,000 lifetime limit, on a tax-free basis toward the purchase of a first home in Canada. The FHSA combines the best feature of the RRSP, being a tax-deductible contribution, with the most attractive feature of the TFSA, the tax-free withdrawal of all contributions, investment income and growth earned in the account when used to buy a first home.

The FHSA can remain open for up to 15 years or until the end of the year you turn 71, whichever comes first. Any funds in the FHSA not used to buy a qualifying home by this time can be transferred on a tax-deferred basis into an RRSP or registered retirement income fund (

RRIF ), without needing to have any RRSP contribution room available, or the funds can be withdrawn on a taxable basis.

The next best method of funding your down payment is a withdrawal of funds from your TFSA. The TFSA limit for 2025 is $7,000 and your cumulative TFSA limit could be as high as $102,000, depending on your age. You can withdraw the entire balance of your TFSA for a down payment, tax-free, and then recontribute the amount withdrawn in any future year.

But for most first-time homebuyers, FHSA and TFSA savings alone may be insufficient to fund a large enough down payment, so many Canadians continue to tap into their RRSPs, via the HBP, to help come up with additional funds. The HBP allows a first-time homebuyer to withdraw up to $60,000 from their RRSP to buy or build a new home without having to pay tax on that withdrawal.

Amounts withdrawn under the HBP must be repaid over a maximum of 15 years, starting in the second calendar year after the withdrawal; otherwise, the amount that was required to be repaid but which was not repaid in a particular calendar year is added to the participant’s income for that year.

Unlike the FHSA, however, the borrowed funds to be withdrawn under the HBP must have been in your RRSP for at least 90 days before they are taken out, or the RRSP contribution may not be deductible.

But the HBP rules can be tricky and, if you’re not careful, can land you in trouble, as one couple recently found out in a tax court decision released last month. The taxpayers “dreamt the Canadian dream of homeownership … (and) took the outstretched helping hand of the HBP” when they purchased a pre-construction home in December 2020, the decision read. Unavoidable delays by the builder resulted in them only moving into their home in 2023, where they still live to this day. The couple first withdrew funds from their RRSPs under the HBP in 2021. Then, in 2022, each of them withdrew additional funds.

While, generally, all HBP withdrawals must be made in the same calendar year, there’s a special interpretive rule in the Income Tax Act which states that an amount received by an individual under the HBP in a particular calendar year (in our case, 2022) is deemed to have been received by the individual at the end of the preceding calendar year (2021), and not at any other time, if the amount is received in January of the particular year (2022) or “at such later time as is acceptable to the (

Canada Revenue Agency ).” This is known as a “deeming rule” and is designed to accommodate taxpayers who make withdrawals under the HBP over the span of more than one calendar year. It’s meant, in the words of the judge, “to cure a straddling problem and ensure that the later withdrawal qualifies.” Referring to a prior case, the judge noted that “life does not always fit tidily into a calendar year. The system recognizes that buying and selling houses can sometimes be chaotic, especially new builds. Deals fall through, deals close late and so on.”

The CRA, however, assessed both of these 2022 withdrawals as taxable RRSP income, rather than tax-free HBP withdrawals, refusing to apply this special deeming rule on the basis that there were insufficient funds in the taxpayer’s RRSPs on December 31, 2021.

Although not stated in the written decision, it would seem that the couple had hoped to take advantage of their ability to top up their RRSPs in 2022, claim tax deductions for the contributions, and then, after waiting the requisite 90 days, withdraw the funds tax-free from their RRSPs using the HBP to help fund the closing of their new home.

The CRA’s “impulse” was that you can’t make an HBP withdrawal if there were no funds in the RRSP as of December 31, but that’s not what the Act says. As the judge explained, “a deeming rule creates a legal fiction and imposes an alternate reality for certain purposes.” The rule, as written in the Tax Act, “is unconstrained by reality,” including whether or not there were any funds in a taxpayer’s RRSP at the prior year-end.

The CRA’s view that there must be sufficient RRSP funds at year-end (which dates back to comments made by the CRA at a 2018 tax conference roundtable), “finds no purchase in the wording of (the law), which considers acceptable timing, not financial criteria.”

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Since the CRA never objected to the timing of the 2022 withdrawals, the judge found in favour of the taxpayers.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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