Tax Tip Thursday

The First Home Savings Account

Good news this week! In August this year, the government released draft legislation to implement the new Tax-Free First Home Savings Account (FHSA). It’s expected to launch at some point in 2023, so to get you prepared here’s a guide to what we know so far.

The basics are that this brand new registered plan gives prospective first-time home buyers 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 withdrawals of any investment income or growth earned in the account, would be non-taxable (as long as you follow the rules), like in a Tax-Free Savings Account (TFSA).

Conditions to Open an FHSA

  1. You must be a resident of Canada and be at least 18 years of age.
  2. You must be a first-time home buyer, meaning that you have not owned a home in which you lived as your principal residence 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.

Closing an FHSA

  • If you make a qualifying withdrawal to buy a home, the FHSA can remain open until the end of the following year;
  • If no withdrawal, the FHSA can remain open fur up to 15 years or until the end of the year when you turn 71 years old, whichever comes first;
  • Any savings in the FHSA not used to buy a qualifying home before closing an FHSA could be transferred on a tax-free basis into an RRSP or Registered Retirement Income Fund (RRIF);
  • Once withdrawn, you are not permitted to have another FHSA in your lifetime;
  • Funds can also be withdrawn on a taxable basis.

Contributions & Deductions

An FHSA is permitted to hold the same types of qualified investments that are currently allowed to be held in a TFSA or RRSP, including:

  • Mutual funds,
  • Publicly traded securities,
  • Government and corporate bonds, and
  • Guaranteed investment certificates.

Withdrawals

  • You must be a first-time homebuyer at the time of the withdrawal.
  • You cannot have acquired the home more than 30 days prior to the withdrawal.
  • You must have signed a written agreement to buy or build the home before October 1 of the year following the year of the withdrawal.
  • You must intend to occupy that home as your principal place of residence, and
  • It must be in Canada.

If you meet the conditions, the entire balance in the FHSA can be withdrawn tax-free in a single withdrawal or a series of withdrawals.

IMPORTANT: All FHSAs must be closed by the end of the year following the first qualifying withdrawal.

Transfers

  • You will be able to transfer funds from one FHSA to another or to an RRSP or 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 your RRSP contribution room or the FHSA deduction limit.
  • You will be permitted to transfer funds from an RRSP to an FHSA on a tax-free basis up to your FHSA deduction limit. These transfers will not be tax deductible and will not reinstate your RRSP contribution room.

Home Buyers’ Plan (HBP)

The HBP, which allows first time home buyers to withdraw up to $35,000 from an RRSP to buy a first home, will continue to be available but you won’t be allowed to make both an FHSA withdrawal and an HBP withdrawal for the same home purchase.

Spousal Plans

Unlike an RRSP, the FHSA holder is the only taxpayer permitted to claim deductions for contributions made. In other words, you can’t contribute to your spouse or common-law partner’s FHSA and claim a deduction. That said, the government will permit you to give your spouse or common-law partner the funds to make their own FHSA contribution without the normal spousal attribution rules applying.

Death

Just like 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. Your surviving spouse or common-law partner would then become the new holder of the FHSA following your death. Inheriting an FHSA in this way won’t affect the survivor’s own FHSA contribution limits.

Funds from your FHSA can also be transferred on a tax-deferred basis to your surviving spouse’s or common-law partner’s RRSP or RRIF by the end of the year following your death, even if you have not designated that person as a successor. If the beneficiary of an FHSA is not the deceased account holder’s spouse or common-law partner, the funds would generally need to be withdrawn and paid to the beneficiary, who would be taxed on them.

That’s all we know for now

This new registered savings plan seems like an excellent step to help people save up for their first home and give them a break on investment taxes. Hopefully it gets passed the way it is! With or without the new FHSA, make sure you loop your accountant into the conversation when you’re looking at purchasing a home. There are a lot of ways that you can save money on taxes, and a lot of implications on how you file in the years after the purchase! Call us today and we can help you plan your home purchase.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.