Tax-Free First Home Savings Account (FHSA)

A new registered account has been created by the federal government to help individuals save in a tax-efficient manner for the down payment of the purchase of their first home. Let’s take a deep dive into this measure.

New registered account

The Tax-Free First Home Savings Account (FHSA) is a new registered account that gives prospective first-time home buyers the ability to save for the purchase of a home. Like a Registered Retirement Savings Plan (RRSP), contributions would be tax-deductible, and withdrawals to purchase a first home - including from investment income - would be non-taxable like a Tax-Free Savings Account (TFSA). Eligible individuals will be able to create an account as of 2023.

Qualifying individual

A qualifying individual is [ITA 146.6(1) “qualifying individual”]:

·        A resident of Canada

·        At least 18 years of age

·        Must be a first-time home buyer, meaning that neither they, nor their spouse have owned a home in which they lived at any time during the part of the calendar year before the account is opened or at any time in the preceding four calendar year.

Contributions

The annual limit for FHSA contributions is $8,000 [ITA 146.6(1) “annual FHSA limit”]. The lifetime limit is $40,000 [ITA 146.6(5)(b)]. The contribution limits start to accumulate once the account gets created [ITA 146.6(1) “annual FHSA limit”].

Contributions to the FHSA are tax deductible, similar to RRSP contributions [ITA 146.6(5)]. Unlike RRSPs, contributions made within the first 60 days of a given calendar year could not be attributed to the previous tax year. An individual would be allowed to carry forward unused portions of their annual contribution limit up to a maximum of $8,000 [ITA 146.6(1) “FHSA carryforward”]. The carry forward amounts can be claimed on top of the $8,000 limit in a subsequent year [ITA 146.6(1) “annual FHSA limit”].

There’s no requirement to deduct contributions in the year they were made; like RRSP deductions, such amounts could be carried forward indefinitely and deducted in a later tax year [ITA 146.6(5)].

Qualified Investments

An FHSA would be permitted to hold the same qualified investments that are currently allowed to be held in a TFSA [ITA 146.6(1) “qualified investments”]

Qualifying Withdrawals

Withdrawals from the account are non-taxable if conditions are met [ITA 146.6(1) “qualified withdrawals”]:

·        A taxpayer must be a first-time home buyer at the time a withdrawal is made. Specifically, the taxpayer, could not have owned a home in which they lived at any time during the part of the calendar year before the withdrawal is made or at any time in the preceding four calendar years.

·        The taxpayer must also have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal and intend to occupy the qualifying home as their principal place of residence within one year after buying or building it.

The entire amount of available FHSA funds may be withdrawn on a tax-free basis in a single withdrawal or a series of withdrawals [ITA 146.6(6)(a)].

Withdrawals that are not qualifying withdrawals would be included in the income of the individual making the withdrawal [ITA 146.6(6)].

Qualifying Home

A qualifying home would be a housing unit located in Canada [ITA 146.6(1) “Qualifying home”]. A share in a cooperative housing corporation that entitles the taxpayer to possess and have an equity interest in a housing unit located in Canada, would also qualify [ITA 146.6(1) “Qualifying home”].

Transfers

Transfers between an FHSA and RRSP or RRIF are tax-free [ITA 146.6(7)(b) & 146.6(8)(a)]. These transfers do not affect the RRSP contribution limit; however, they don’t restore the FHSA contribution limits (annual & lifetime).

Transfers between an RRSP and an FHSA are also tax-free [ITA 146.6(16)(a.2)]. However, these transfers are subject to the FHSA contribution limits (annual & lifetime) and would not be deductible on the tax return. They also would not reinstate the RRSP contribution limits.

Expiry of account

An FHSA of an individual would cease to be an FHSA, and the individual would not be permitted to open another FHSA, after December 31 of the year in which the earliest of these events occurs [ITA 146.6(1) “maximum participation period”]:

·        The fifteenth anniversary of the individual first opening an FHSA; or

·        The individual turns 71 years old.

·        The individual first makes a qualifying withdrawal from an FHSA

Any unused savings could be transferred into an RRSP or RRIF [ITA 146.6(7)(b) & 146.6(8)(a)] or would otherwise have to be withdrawn on a taxable basis [ITA 146.6(6)].

Interaction with the Home Buyer’s Plan (HBP)

Individuals will be permitted to make both an FHSA withdrawal and an HBP  withdrawal in respect of the same qualifying home purchase [Removal of exclusionary clause in ITA 146.01].

Spousal Contributions and Attribution Rules

Unlike RRSPs, an individual would not be permitted to contribute to their spouse’s FHSA account [ITA 146.6(5)]. However, attribution rules do not apply in cases where an individual provides funds to their spouse to contribute to their FHSA account [ITA 74.5(12)(d)].

Tax planning thoughts and other considerations

Having seen the structure of the FHSA above, some interesting tax planning ideas become evident.

For individuals who contribute their maximum RRSP contribution limit annually, are eligible to create the account (first-time home buyers), and have no intention of purchasing a home, it is still beneficial to create an account.  The reason for this is the fact that transfers can be done between an FHSA and RRSP on a tax-free basis (see above). Because of this, the FHSA becomes a de facto extension of the RRSP contribution limit. These individuals can create an account, contribute to it annually, and after 15 years (expiry of the FHSA), simply transfer the funds to their RRSP account.

For individuals about to purchase their first home with low amounts in their FHSA, it would be beneficial to transfer funds from their RRSP account to their FHSA, which they can do on a tax-free basis, and then withdraw the funds for the down payment tax-free. These same individuals could withdraw the funds directly from the RRSP instead under the Home Buyer’s Plan (HBP); however, they would have to pay back the HBP for 15 years starting in the second year after the withdrawal. By transferring the funds to the FHSA and withdrawing from that account, they get a tax-free withdrawal without the requirement of paying back the account.

Be mindful of the spousal contamination rule at the creation of the account; if one of the spouses doesn’t meet the criteria of being a first-time home buyer, then neither can create the account. However, this rule doesn’t apply when making a qualifying withdrawal from the account.

As mentioned, an individual can withdraw from both the HBP and the FHSA for the down payment of the purchase of their first home. The distinct advantage an FHSA provides vs an HBP (apart from not having to pay back the withdrawal - see above) is in the limitless potential of the qualifying withdrawal. The HBP withdrawal is capped at $35,000; the FHSA withdrawal is not capped and if invested right could represent a significant amount of funds.