The federal government this week moved one step closer to launching the new Tax-Free First Home Savings Account (FHSA) with the introduction of draft legislation and a request for comments.
The FHSA is expected to launch at some point in 2023, so here’s a guide to what we know so far to help get you prepared.
This new registered plan gives prospective first-time homebuyers the ability to save $40,000 on a tax-free basis towards the purchase of a first home in Canada. Like a registered retirement savings plan (RRSP), contributions to an FHSA will be tax deductible, but withdrawals to purchase a first home, including from any investment income or growth earned in the account, would be non-taxable, like a tax-free savings account (TFSA).
To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. You must also be a first-time homebuyer, meaning you have not owned a principal residence in which you 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 years.
The FHSA can remain open for up to 15 years or until the end of the year when you turn 71 years old. Any savings in the FHSA not used to buy a qualifying home by this time could be transferred on a tax-free basis into an RRSP or registered retirement income fund (RRIF), or withdrawn on a taxable basis.
Eligible individuals will be able to contribute $8,000 annually, up to a $40,000 lifetime contribution limit. There’s a one-per-cent per-month penalty tax for any overcontributions. The annual contribution limit will apply to those made within a particular calendar year. Unlike RRSPs, contributions made within the first 60 days of a subsequent year can’t be deducted in the current tax year.
The draft legislation also increased the flexibility of FHSA contributions by allowing an individual to carry forward unused portions of their annual contribution limit up to a maximum of $8,000. This means that if you contribute less than $8,000 in a given year, you can then contribute any unused amount in a future year, in addition to your annual contribution limit of $8,000 (subject to the $40,000 lifetime limit).
For example, if you only contribute $5,000 to an FHSA in 2023, you’ll be able to contribute $11,000 in 2024 ($8,000 plus the unused $3,000 of room from 2023). Note that carry-forward amounts only start accumulating after an individual opens an FHSA for the first time.
You can have more than one FHSA, but the total amount you contribute to all your FHSAs can’t exceed your annual and lifetime contribution limits.
Like RRSP contributions, you won’t be required to claim the FHSA deduction in the tax year in which a contribution is made. The amount can be carried forward indefinitely and deducted in a later tax year, which may make sense if you expect to be in a higher tax bracket in a future year.
An FHSA is permitted to hold the same types of qualified investments that are currently allowed in a TFSA and RRSP, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates.
To withdraw funds from an FHSA on a non-taxable basis, certain conditions must be met. First, you must be a first-time homebuyer at the time of withdrawal, as discussed above. You must also have a written agreement to buy or build a qualifying home before Oct. 1 of the year following the year of withdrawal, and you must intend to occupy that home as your principal place. The home must be in Canada.
If you meet the conditions, the entire balance in the FHSA can be withdrawn on a tax-free basis in a single withdrawal or a series of withdrawals. The FHSA must be closed by the end of the year following the first qualifying withdrawal and you are not permitted to have another FHSA in your lifetime.
Individuals will be able to transfer funds from one FHSA to another FHSA, or to an RRSP or a RRIF, all on a tax-free basis.
If funds are transferred to an RRSP or RRIF, they will be taxed upon ultimate withdrawal. These transfers won’t affect RRSP contribution room, nor would they reinstate an individual’s $40,000 FHSA lifetime contribution limit.
Individuals will also be permitted to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits. These transfers would not be tax deductible and will not reinstate an individual’s RRSP contribution room.
Unlike the RRSP, the FHSA holder is the only taxpayer permitted to claim deductions for contributions made to their FHSA. In other words, you can’t contribute to your spouse’s or partner’s FHSA and claim a deduction. That said, the government will permit you to give your spouse or partner the funds to make their own FHSA contribution without the normal spousal attribution rules applying.
Death, taxes and other matters
As with TFSAs, you’ll be able to designate your spouse or common-law partner as the successor account holder, in which case, the account can maintain its tax-exempt status after death. The surviving spouse or partner would then become the new holder of the FHSA following the death of the original holder.
Inheriting an FHSA in this way won’t affect the surviving spouse’s FHSA contribution limits. If the beneficiary of an FHSA is not the deceased account holder’s spouse or partner, the funds would need to be withdrawn, paid to the beneficiary and be taxable to them.
Like RRSPs and TFSAs, interest on money borrowed to invest in an FHSA won’t be tax deductible, and you won’t be able to pledge FHSA assets as collateral for a loan. In addition, FHSAs will not be given creditor protection under the Bankruptcy and Insolvency Act.
As a final note, the Home Buyers’ Plan, which allows first-time homebuyers to withdraw up to $35,000 from an RRSP to buy a first home, will continue to be available, but you won’t be permitted to make both an FHSA withdrawal and an HBP withdrawal for the same home purchase.
Taxpayers with comments or suggestions about the FHSA proposals are encouraged to send them to Consultation-Legislation@fin.gc.ca by Sept. 30, 2022.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com
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