In the 2022 Budget, the Government of Canada proposed the introduction of the Tax-Free First Home Savings Account (FHSA), a new registered plan to help Canadians save towards their first home by allowing account holders to contribute up to $40,000 over the lifetime of the plan.
First Home Savings Account
Why consider opening a First Home Savings Account?
Withdrawals made to purchase a home are tax-free
Tax deduction benefits for the account holder by contributing to the account
Growth and compounding of income and capital gains are tax free
To open an FHSA, you must be at least 18 years of age or older, a resident of Canada, and a first-time home buyer, meaning you, your spouse or your common-law partner did not own a home in which you lived in as your principal residence at any time in the year your account was opened or in the preceding four calendar years.
The lifetime contribution limit is $40,000, and the annual contribution limit is $8,000. You may carry forward up to $8,000 of your unused annual contribution amount to use in a later year. For example, if you open an FHSA in 2023 and contribute $4,000, you can contribute up to $12,000 in 2024. You cannot carry forward amounts until after you open an FHSA.
It is possible to hold more than one FHSA, but the total contribution amount to all FHSAs cannot exceed the annual and lifetime contribution limits.
Annual contribution limits apply to contributions made within the calendar year. Unlike RRSPs, contributions made within the first 60 days of a given calendar year cannot be attributed to the previous tax year.
FHSA holders can carry forward undeducted contributions indefinitely. This means you can claim the deduction in a later year to reduce your tax bill.
Only the account holder can claim a deduction for contributing to their own FHSA. Although parents, spouses or common-law partners can contribute to your FHSA without attribution rules applied, they are not eligible to claim a deduction.
Permitted investments include mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates (GICs).
Qualifying withdrawals to purchase a house are not taxable. To qualify, the withdrawal must meet the following conditions:
- You must be a Canadian resident and a first-time home buyer at the time of the withdrawal. There is an exception to allow individuals to make qualifying withdrawals within 30 days of moving into a qualifying home.
- You must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal, and you must intend to occupy the home as a principal place of residence within one year after buying or building it.
- The qualifying home must be a housing unit located in Canada.
Any funds left over after making a qualifying withdrawal can be transferred to another FHSA or Registered Retirement Savings Plan ("RRSP"/ or Registered Retirement Income Fund ("RRIF"), penalty-free and tax deferred, as long as you transfer the remaining funds by December 31 of the year following the first withdrawal.
Withdrawals and transfers do not reinstate any contribution room in your FHSA.
Non-qualifying withdrawal must be included in the amount of income for the year of the withdrawal and tax will be withheld.
An individual can transfer funds directly from an FHSA to another FHSA, RRSP or RRIF on a tax-free basis. Funds transferred to an RRSP or RRIF will be subject to the usual rules applicable to these accounts, including taxability upon withdrawal.
A FHSA holder would also be allowed to transfer funds from an RRSP to an FHSA on a tax-free basis. Although such transfers would be subject to FHSA contribution limits, they would not be deductible and would also not replenish an individual's RRSP contribution room.
Closing the FHSA
A FHSA must be closed, by December 31 of the year in which the earliest of these events occurs:
- • The 15th anniversary of the individual first opening an FHSA
- • The account holder turns 71 years old
- • The year following the first withdrawal
On the breakdown of a marriage or a common-law partnership, if there is a written agreement relating to a division of property, it is proposed that an amount may be transferred directly from the FHSA of one party to the relationship to an FHSA, RRSP, or RRIF of the other. In such circumstances, transfers would not re-instate any contribution room of the transferor, and would not be counted against any contribution room of the transferee.
Treatment Upon Death
An individual may designate their spouse as the successor account holder and the account will maintain its tax-exempt status after the individual’s death.
If the surviving spouse is named as the successor holder and meets the FHSA eligibility criteria, they would become the new holder immediately on the original holder’s death. The transfer would not affect the spouse’s own FHSA contribution limits.
If the surviving spouse is not eligible to open an FHSA, amounts in the FHSA can be transferred on a tax-free basis to their RRSP or RRIF, or withdrawn on a taxable basis.
If the beneficiary of an FHSA is not the deceased account holder's spouse or common-law partner, the funds would need to be withdrawn and paid to the beneficiary.
Amounts designated to the beneficiary will need to be withdrawn and paid to the beneficiary subject to withholding tax and will have to be included in the beneficiary’s income for tax purposes.
FHSA, Home Buyers' Plan or TFSA
The Home Buyers’ Plan (HBP) is a program that allows first-time home buyers to withdraw up to $35,000 from their RRSP to purchase or build a qualifying home on a tax-free basis. The withdrawal is considered a loan and must be paid back within 15 years, starting the second year following the year of the withdrawal.
Individuals are allowed to withdraw funds from their FHSA and HBP simultaneously for the same qualifying home purchase. However, because of the requirement to repay HBP withdrawals, it appears to make more sense to contribute to an FHSA first.
When one has reached their contribution limit, they can consider opening a TFSA. Although TFSAs are not specifically designed for first-time home savings, these plans provide account holders with:
- • the ability to save money on a tax-free basis
- • the lack of any requirement to repay amounts withdrawn from a TFSA, as well as the restoration of an equal amount of contribution room in the TFSA in the year following the year of withdrawal
- • the ability to withdraw funds saved in a TFSA and deposit them into an FHSA to receive a tax deduction as FHSA room becomes available
In brief, if a first-time homebuyer client has a limited amount to contribute, they should favor the FHSA first, the RRSP with a view to using the HBP second, and third, the TFSA. Furthermore, a first-time homebuyer with a low income, might want to contribute to a TFSA before an RRSP as they are already in a low tax bracket.
Caldwell Securities Ltd. is member of the Canadian Investment Regulatory Organization (“CIRO”) and a member firm of the Canadian Investor Protection Fund (“CIPF”). Customers’ accounts are protected by the Canadian Investor Protection Fund within specified limits. A brochure describing the nature and limits of coverage is available upon request or at www.cipf.ca.
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