The federal government recently revised draft legislation for the Tax-Free First Home Savings Account (FHSA), which is expected to launch sometime in 2023. The draft legislation is currently before Parliament for approval as part of Bill C-32, but here is what we know to date to help get you prepared.
This new registered plan gives qualifying prospective first-time homebuyers the ability to save $40,000 on a tax-free basis towards the purchase of a first home in Canada. The FHSA can remain open for up to 15 years or until the end of the year when you turn 71 years old.
Qualifications
You may qualify to open an FHSA if you are resident in Canada, you are at least 18 years old, and you are a first-time home buyer. A first-time home buyer is defined as someone who has not inhabited, in the current or any of the four prior calendar years, a qualifying home that was owned by the individual or a person who is the spouse or common law partner (partner) of the individual. This mirrors the definition of a first-time home buyer for the purposes of the home buyers’ plan (HBP).
Contribution limits and rules
You may be able to contribute up to $8,000 annually and up to a $40,000 lifetime contribution limit to an FHSA. The full $8,000 limit will be available in 2023, despite when an FHSA may become available to be opened under the proposed legislation. Unlike a Registered Retirement Savings Plan (RRSP)1, contributions you make within the first 60 days of a subsequent year cannot be deducted in the previous tax year.
Like an RRSP, contributions to an FHSA will be tax deductible, but all withdrawals to purchase a first home would be non-taxable, like a Tax-Free Savings Account (TFSA)2. Indeed, an FHSA essentially combines the benefits of an RRSP and a TFSA in one account.
You will be allowed to carry forward unused portions of your 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 may then contribute any unused amount in a future year, in addition to your annual contribution limit of $8,000 for that year, subject to the $40,000 lifetime contribution limit.
Note that carry-forward amounts only start accumulating after you open an FHSA for the first time. So even if you are unable to contribute the first year, you may consider opening an FHSA as soon as you are eligible and the accounts are available, in order to begin accumulating carryforward contribution room.
Like RRSP contributions3, you will not 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 an RRSP and TFSA, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates
Over-contributions
A 1% penalty tax on over-contributions to an FHSA will apply for each month (or a part of a month) to the highest amount of such excess that exists in that month.
When your annual contribution limit is reset at the beginning of each calendar year, over-contributions from a previous year may cease to be an over-contribution. You would be allowed to deduct an over-contributed amount for a given year in the tax year in which it ceases to be an over-contribution, but not earlier. However, if a qualifying withdrawal is made before an over-contribution ceases to be an over-contribution, no deduction would be provided for the over-contributed amount.
Withdrawing funds and transfers
Funds withdrawn to make a qualifying home purchase are not subject to tax if certain conditions are 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 October 1st of the year following the year of withdrawal, and you must intend to occupy that home as your principal place of residence within one year after buying or building it. The home must be located in Canada.
If you meet these 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.
Any funds not used towards a home purchase can be transferred to an RRSP or RRIF penalty-free and tax-deferred without impacting the taxpayer’s RRSP contribution room. Funds transferred to an RRSP or RRIF then become subject to those plans’ rules, respectively. Funds can also be withdrawn from an FHSA on a taxable basis if not required for a first home purchase. Withdrawals for other purposes will be taxable. These transfers will not affect RRSP contribution room, nor would they reinstate your $40,000 FHSA lifetime contribution limit.
You 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 your RRSP contribution room.
Unlike RRSPs, you cannot contribute to your partner’s FHSA and claim a deduction. However, the government will permit you to give your partner the funds to make their own FHSA contribution without the normal spousal attribution rules applying.
Other considerations
Based on the draft legislation, you may be able to use both the FHSA and the HBP toward the same qualifying home purchase. The HBP allows qualifying individuals to withdraw up to $35,000 from their RRSP to buy a first home. Combining the two programs, you may be able to access up to $75,000, plus plan growth in the FHSA, for use as a down payment on a qualifying home purchase.
As with TFSAs, you will be able to designate your partner as the successor account holder, in which case, the account can maintain its tax-exempt status after death. The surviving partner would then become the new holder of the FHSA following the death of the original holder. The surviving partner must meet the eligibility to open an FHSA.
Inheriting an FHSA in this way will not generally affect the surviving partner’s FHSA contribution limits. There is an exception if the deceased taxpayer was in an overcontributed position at their time of passing. In this case, the surviving partner is deemed to have contributed to the deceased’s FHSA, thereby reducing their contribution room and potentially putting the surviving partner in an overcontributed position. If the beneficiary of an FHSA is not the deceased account holder’s 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 will not be tax deductible, and you will not be able to pledge FHSA assets as collateral for a loan without punitive income tax implications. In addition, FHSAs will not be given creditor protection under the Bankruptcy and Insolvency Act.
Summary comparison: FHSA vs. HBP (RRSP)
| Feature | FHSA | HBP (RRSP) |
|---|---|---|
| Annual contribution limit | $8,000/year | 18% of prior year’s earned income to a max of $30,780 in 2023. |
| Maximum withdrawal | $40,000 plus accumulated growth | $35,000 |
| Tax-free eligibility | Yes, when used to purchase home | Yes, if yearly required repayments on withdrawals are made. |
| Repayment | None | Yes, annual minimum of 1/15 of the amount withdrawn (for repayment over 15 years starting the second year after the year of withdrawal). |
Planning
If you are eligible to contribute to an FHSA in 2023 and an RRSP, you may consider contributing to an FHSA first, up to the annual contribution limit of $8,000. Even if you have no intention of purchasing a home in the future, contributing to an FHSA rather than an RRSP maintains your RRSP room for future use. If you decide not to purchase a first home in the future, you may transfer your FHSA contributions plus growth to your RRSP without affecting your RRSP contribution room. Alternatively, if you contribute to your RRSP first, you can only transfer the RRSP contributions to an FHSA up to your available FHSA limit, and you do not get that RRSP contribution room back in the future. Based on draft legislation, the FHSA may be the preferred savings vehicle if you are eligible, even if you do not plan on purchasing a first home.
Speak with your own tax advisor about the new FHSA for further discussion and analysis prior to implementing any tax planning strategies.
Contact our office for more information.
1 https://richarddri.ca/a-toronto-wealth-advisor-answers-your-rrsp-questions/
2 https://richarddri.ca/taking-advantage-of-tfsas/
3 https://richarddri.ca/why-you-should-maximize-your-tfsa-and-rrsp-savings-plans/
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