The Tax-Free First Home Savings Account (FHSA) offers prospective first-time home buyers to save $40,000 tax-free to purchase a primary residence. Like registered retirement savings plans (RRSP), contributions to a FHSA would be tax deductible. Like tax-free savings accounts (TFSA), income and gains inside the FHSA as well as withdrawals would be tax-free. Qualifying individuals should be able to open an FHSA and start contributing on April 1, 2023.
Who is eligible?
To open a FHSA, you must:
- be an individual resident of Canada
- be at least 18 years of age
- be a first-time home buyer, which means you, or your spouse or common-law partner (“spouse”) did not own a qualifying home that you lived in as a principal place of residence at any time in the year the account is opened or the preceding four calendar years
How much can you contribute?
You can contribute up to $40,000 over your lifetime and up to $8,000 in any one year, including 2023 even though the rules don’t come into effect until April 1, 2023.
The annual contribution limit applies to contributions made within a particular calendar year. Unlike RRSP’s, contributions made within the first 60 days of a given calendar year cannot be attributed to the previous tax year.
You can carry forward unused portions of your annual contribution limit up to a maximum of $8,000 (subject to the lifetime contribution limit). For example, if you open a FHSA in 2023 and contribute $5,000, you can contribute up to $11,000 in 2024 (i.e., $8,000 plus the remaining $3,000 from 2023). Carry-forward amounts only start accumulating after you open a FHSA for the first time.
You can hold more than one FHSA, but the total amount you can contribute to all of your FHSAs cannot exceed your annual and lifetime FHSA contribution limits.
Life TFSA’s and RRSP’s, a tax on overcontributions to FHSA would apply for each month (or part-month) that the account is over the limits. The tax applies at the rate of 1% to the highest amount of the excess that existed in that month.
An over contribution can be dealt with in a few different ways. First, the account holder can wait until the following year, and then the additional annual contribution room that arises may absorb the excess contribution. Alternatively, it is possible to request that a “designated amount”, not exceeding the overcontribution, can be returned to the account holder as a tax-free withdrawal or a transfer to an RRSP. If a tax-free withdrawal is received, the original contribution giving rise to the over contribution is not deductible. Finally, a taxable withdrawal would also reduce an over contribution to an FHSA.
You are not required to claim a deduction for the tax year in which you make a contribution. Like RRSP deductions, such amounts could be carried forward indefinitely and deducted in a later tax year. You may want to defer claiming the deduction if you expect your income to rise in the future.
Who can contribute?
The FHSA holder is the only taxpayer permitted to deduct contributions made to their FHSA. You cannot contribute to your spouse’s FHSA and claim a deduction.
That said, the legislation allows an individual to make FHSA contributions with funds provided by their spouse without the attribution rules applying to the income earned in the FHSA from these contributions. Similarly, no attribution arises if you give cash to an adult child to contribute to their FHSA.
What types of investments can an FHSA hold?
An FHSA is permitted to hold the same qualified investments that are currently allowed to be held in a TFSA. These include mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates.
The prohibited investment rules and non-qualified investment rules applicable to other registered plans will also apply to FHSAs. These rules are intended to disallow non-arm’s length investments and investments in assets such as land, shares of private corporations and general partnership units.
Qualifying withdrawals to buy a qualifying home purchase are not taxable. To qualify, the withdrawal must meet these conditions:
- You must be a first-time home buyer when you make 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.
- A qualifying home is a housing unit located in Canada. A share in a cooperative housing corporation that entitles the taxpayer to possess and have an equity interest in a housing unit located in Canada, would also qualify.
If you take out FHSA savings as a non-qualifying withdrawal, you must include the amount in income for the year of the withdrawal and tax will be withheld. Non-qualifying withdrawals would not re-instate either the annual contribution limit or the lifetime contribution limit.
Any funds left over after making a purchase of a qualifying home can be transferred to an RRSP or RRIF, penalty-free and tax deferred or would otherwise have to be withdrawn on a taxable basis. If you make a qualifying withdrawal, you can transfer any unwithdrawn savings on a tax-free basis to an RRSP or RIFF until December 31 of the following year of the first qualifying withdrawal. Transfers do not reduce or limit your available RRSP room.
Finally, withdrawals and transfers do not replenish FHSA contribution limits.
You can transfer funds from a FHSA to another FHSA, an RRSP or a 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. These transfers would not reduce, or be limited by, an individual’s available RRSP contribution room. These transfers would not reinstate your FHSA lifetime contribution limit.
You can also transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits and the qualified investment rules. Although such transfers would be subject to FHSA contribution limits, they would not be deductible and would also not reinstate your RRSP contribution room.
What happens if the FHSA funds are not used to purchase a first home?
If you do not use the funds in your FHSA for a qualifying home purchase by the earlier of:
- the end of the 15th year after the plan was opened, or
- the end of the year you turn 71 years old,
your FHSA will cease to be an FHSA and you must close the plan. Any unused balance in the plan can be transferred into an RRSP or RRIF or withdrawn on a taxable basis.
If you have any questions or need clarification on the information above, please connect with a Lott & Company team member.