Saving for a home? The Tax-Free First Home Savings Account may help you

If you are saving towards purchasing your first home, you may benefit from the new Tax-Free First Home Savings Account (FHSA). The FHSA allows eligible home buyers to save up to $40,000 tax-free toward their first home, provided conditions are met. Under the FHSA, both earnings and withdrawals won’t be taxable. This measure, which is effective April 1, 2023, was introduced in Budget 2022 and enacted as part of Bill-C32.

Who is eligible?

To open an FHSA, the individual must:

• be a Canadian resident
• be at least 18 years of age and not turning 72 or older in the year (however be mindful of the time limits explained further below)
• be a first-time home buyer, which means the individual hasn’t lived in a home owned (whether jointly with another person or otherwise) by either the individual or their current spouse or common-law partner at any time in the past four calendar years or in the current year up to when the FHSA is opened
• not have participated in the program for a previous home purchase.

Contributing to an FHSA

Contributions to an FHSA are tax deductible during the calendar year they’re made in and can be carried forward to be deducted in a future year.

An individual can:

• contribute up to $8,000 per year starting in 2023, up to a lifetime contribution limit of $40,000.
• set up more than one FHSA, however, the total amount contributed can’t exceed the limits; keep in mind that excess contributions are subject to a tax of 1% per month and is calculated on the highest excess amount each month.
• carry forward up to $8,000 of unused annual contributions to a future year, but only on a go-forward basis once an individual opens their first FHSA.
  • For example, if you wait until 2024 to open an FHSA, you’re only eligible to contribute up to the $8,000 limit for 2024, because you won’t be allowed to carry over an amount from 2023 (i.e., before the account was opened).   

Note that individuals can’t contribute to their spouse or common-law partner’s FHSA and claim a deduction — only the FHSA account holder is eligible. However, it may be beneficial to gift funds to a spouse or common-law partner to contribute to their FHSA.

• No tax deduction is permitted for interest on money borrowed to contribute to an FHSA or for services relating to the FHSA, such as administration fees or investment counselling fees.
  
  
  

Withdrawing from an FHSA

In order for a withdrawal to qualify as tax-free, it must be deemed as a qualifying withdrawal used to buy a qualifying home. Specifically, the individual must:

• be a first-time home buyer at the time the withdrawal is made; occupying the qualifying home prior to the withdrawal would not disqualify the individual from being a first-time home buyer if the withdrawal is made within 30 days of moving in (and the other conditions are met)
• have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal and prior to making the withdrawal
• intend to occupy the new home as their principal residence within one year of buying or building
• be a resident in Canada throughout the time the withdrawal is made until the acquisition of the new home
• not have acquired the new home more than 30 days before the withdrawal is made
• make the withdrawal using the prescribed form that sets out the location of the new home.

A qualifying home is a housing unit located in Canada or a share in a co-operative housing corporation where the holder is entitled to a housing unit located in Canada.

Non-qualifying withdrawals must be included in the individual’s income for tax purposes and don’t reinstate the FHSA contribution limits. They’re also subject to withholding tax.  

How long can a FHSA remain open?

Funds can’t remain in an FHSA indefinitely. An FHSA ceases being an FHSA when the earlier of the following events occur:

• the end of the fifteenth year after the year the individual opened their first FHSA
• the end of the year an individual turns 71 years old, or
• the end of the year after the year the individual first makes a qualifying FHSA withdrawal.

When this occurs, the FHSA must be closed and the individual will be taxed on the fair market value of the account, unless the funds are transferred to a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) prior to the cessation date.  

Upon an individual's death, the following rules apply:  

• Where a spouse or common-law partner is designated as the successor account holder and where the eligibility criteria are met, the FHSA may maintain its tax-exempt status. Alternatively, the surviving spouse or common-law partner may be eligible to transfer the FHSA to their RRSP or RRIF. Otherwise, the funds must be withdrawn and paid to the beneficiary, who must include the amount in their taxable income.
• In a circumstance where the FHSA is paid to the estate, generally the estate is taxed, however a joint election may be available to consider a beneficiary of the estate to be the recipient instead, provided certain conditions are met.

Transfers between FHSAs and RRSP accounts

Transfers can generally be made from an RRSP to an FHSA on a tax-free basis, subject to the FHSA contribution limits.

• For example, if you transfer $5,000 from your RRSP account to an FHSA in 2023, only $3,000 of the $8,000 limit for 2023 would remain.

The transferred amount wouldn’t be deductible and wouldn’t reinstate the individual’s RRSP contribution room. 

Be sure to pay close attention where spousal contributions have been made to an individual’s RRSP in the current year or two preceding years, as the individual cannot transfer such amounts tax-free to their FHSA.

Transfers from an individual’s FHSA to their RRSP or RRIF will also generally be permitted on a tax-free basis, without impacting the individual’s RRSP contribution room. However, the individual’s FHSA contribution limit wouldn’t be reinstated and withdrawals from the RRSP or RRIF would be taxable.

In the event of a marital or common-law partnership breakdown, an individual may transfer an amount directly from their FHSA to the FHSA, RRSP, or RRIF of their spouse or common-law partner if they are entitled to the amount under a division of property and certain conditions are met. The transfer would not reinstate any contribution room of the transferor, nor would it reduce the contribution room of the transferee.

Other important considerations

• There are restrictions on the types of investments that can be held in the FHSA and there are significant penalties if non-qualifying investments are made.
• No tax deduction is permitted for interest on money borrowed to contribute to an FHSA or for services relating to the FHSA, such as administration fees or investment counselling fees.
• Income in a FHSA could be subject to tax if the Canada Revenue Agency determines that the individual is carrying on a business in their FHSA (e.g., where there is a high volume of trading in the account or other factors).
• Before opening an FHSA, ensure you plan to make an eligible withdrawal before the account must be closed.
  
  

Don’t forget about the Home Buyers’ Plan

First-time home buyers may be eligible to withdraw up to $35,000 from their RRSPs towards their first home under the Home Buyers’ Plan (HBP). Be aware that in order to avoid being taxed, the funds must be repaid to an RRSP account over a 15-year period, which starts the second year after the year of withdrawal.   

Takeaway

The FHSA may be a tax-efficient  way to save towards your first home, depending on your situation. If you need help navigating the new rules or have any questions, contact your local advisor, or reach out to us here.

Additionally, if you're a US citizen residing in Canada, it’s critical to discuss the potential US tax implications before opening a FHSA.

Disclaimer

The information contained herein is prepared by Doane Grant Thornton LLP for information only and is not intended to be either a complete description of any tax issue or the opinion of our firm. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein. You should consult your Doane Grant Thornton LLP advisor to obtain additional details and to discuss whether the information in this article applies to your specific situation.