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What is the tax-free First Home Savings Account (FHSA) and how does it work?

What is it?

In the 2022 Budget, the federal government proposed the launch of a new registered savings account to give Canadian potential first-time homebuyers the ability to save $40,000 toward their purchase tax-free, which, given Canada’s exceedingly high real estate prices, isn’t a bad thing.

This account is available to Canadian residents 18 years or older (and under the age of 71) who do not own a home in the year the account is opened or the preceding four calendar years.

The new account is called the First Home Savings Account (FHSA), and is anticipated to be launched sometime in 2023.

How it works

The FHSA features an annual tax-deductible contribution limit of $8,000 per year, to a lifetime maximum contribution of $40,000. Much like the RRSP, FHSA contributions generate a tax deduction on the individual’s tax return. Additionally, similar to the TFSA, income earned inside the account is also tax-free if it is used towards the purchase of a qualifying home (more on that below).

An FHSA can hold the same types of investments permitted in TFSAs and RRSPs, including mutual funds, publicly traded securities, government bonds, and GICs.

The account may remain open for up to 15 years, or until the end of the year the account holder turns 71. Any savings not used to buy a home within that time can then be transferred on a tax-free basis into an RRSP (without affecting contribution room), a RRIF, or can be withdrawn on a taxable basis.

As with RRSPs and TFSAs, any interest on money borrowed to invest in an FHSA would not be considered deductible for income tax purposes.

Contributions

A maximum of $8,000 can be contributed to the FHSA in any given year, with an option for a carryforward.

The current draft legislation allows for a carryforward of the account holder’s annual contribution limit up to a maximum of $8,000. For example, if one year an individual is only able to contribute $1,000, they may carryforward the remaining $7,000 to contribute the following year for a total contribution of as long as they do not exceed the total $40,000 lifetime limit.

Unlike the RRSP, contributions are only deductible in the calendar year in which they were made, i.e. contributions made in the first 60 days of the subsequent year are not eligible for deductions on the current tax year’s return.

However, like RRSPs, you are not required to claim the FHSA deduction in the tax year in which a contribution is made. The deduction can be carried forward indefinitely and applied in later tax years, which may make sense if you expect to be in a higher tax bracket in a future year.

Contributions may come from a variety of sources, including funds transferred from an RRSP. This type of transfer can be completed on a tax-free basis, but the contributions will not be deductible on the individual’s tax return (and will not ‘free up’ any RRSP contribution room).

Only the individual FHSA holder is allowed to claim the tax deduction, i.e. an individual cannot contribute to their spouse’s FHSA and claim the deduction for themselves. The individual could, however, give the spouse the funds for a contribution without triggering the ‘usual’ income attribution rules.

Like other registered accounts, a 1% penalty tax for overcontributions will apply.

As you can see, there are many elements of planning to think about when it comes to FHSA contributions, such as contributing to your RRSP in a given tax-year, with the intent to then transfer it into your FHSA when new contribution room becomes available. Talk to your Innova Wealth advisor for sound tax planning advice based on your unique financial picture.

Withdrawals

To avoid tax on withdrawals, the following conditions must be met:

  • The FHSA account holder must not have owned a home in the year the account is opened or the preceding four calendar years (with the exception that qualifying withdrawals can be made within 30 days of moving into the new home)
  • They must have a written agreement to buy or build a qualifying home
  • They must intend the home to be occupied as a principal residence
  • The home must be located in Canada
  • The home may be shared but the FHSA holder must be acquiring at least 10% of the property

Withdrawals for other purposes that do not meet the above criteria will be taxable.

FHSA funds may be withdrawn as a lump sum or done in multiple withdrawals, but the FSHA must be closed by the end of the year following the first withdrawal. Contributions made to an FHSA following a qualifying withdrawal to buy a first home would not be deductible from net income.

Additional FHSAs are not permitted after the original account is closed.

Beneficiaries & FHSAs at death

The FSHA is treated similarly to a TFSA, in that an individual can designate their spouse as a successor account holder which allows the account to maintain its tax-exempt status after death. The surviving spouse or partner would then become the new holder of the FHSA, without affecting their own FHSA contribution limits.

For a beneficiary or successor holder who is not a spouse, the funds would be withdrawn and paid to the beneficiary, and then included as taxable income on their income tax return.

What about the RRSP Home Buyer’s Plan?

A previous version of this article noted that you could not make an RRSP Home Buyers Plan (HBP) and FHSA withdrawals in the same year. CRA has now clarified that you can withdraw amounts from your RRSP under the HBP and make a qualifying withdrawal from your FHSA for the same qualifying home, as long as you meet all of the conditions at the time of each withdrawal. Talk to your Innova Wealth advisor about optimizing your withdrawal strategy.

Further reading:

Department of Finance Canada - ‘Design of the Tax-Free First Home Savings Account’

https://www.canada.ca/en/department-finance/news/2022/08/design-of-the-tax-free-first-home-savings-account.html

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