Overview of the Tax-Free First Home Savings Account (FHSA)
As part of the 2022 Budget, the federal government introduced the Tax-Free First Home Savings Account (FHSA), a new measure to assist Canadian’s in buying their first home. After the initial introduction, the Department of Finance released the proposed legislation in August 2022 for review and comments. Many advisors and clients are excited about the FHSA as it combines aspects of both an RRSP and TFSA to create a new savings account vehicle with a lot of flexibility around contributions and deductions.
The FHSA is a registered plan that would allow first-time home buyers the ability to save $40,000 on a tax-free basis. Similar to an RRSP contributions to the plan are tax-deductible and withdrawals to purchase your first home would be non-taxable similar to a TFSA. This allows you to contribute up to $8,000 per annum to the FHSA to be invested until the time needed to purchase your first home, at which point you can withdraw the original contributions and accumulated growth in the account on a tax-free basis. The government anticipates Canadian’s can open and contribute to a FHSA early in 2023.
Opening and Closing an FHSA
To open an FHSA you must be at least 18 years of age and a resident of Canada. You must be a first-time home buyer, meaning you have not owned a home that you lived in at any time during the calendar year before the account is open and the preceding 4 years.
The FHSA would cease to be an FHSA at the earlier of the 15th anniversary of the individuals first opening of an FHSA or when the individual turns 71. Any savings within the account not used to purchase a qualifying home can be transferred on a tax-free basis into an RRSP or RRIF or would otherwise be withdrawn on a taxable basis.
Contributions & Withdrawals
Contributions to an FHSA are limited to an annual maximum of $8,000 and a lifetime maximum of $40,000. Contributions are tax deductible in the year in which they are made. Unlike an RRSP however, contributions made in the first 60 days of the following tax year cannot be attributed to the previous year. You can carry forward unused portions of your annual contribution limit up to a maximum of $8,000. For example, in 2023 if you only contributed $2,000 to your new FHSA, in 2024 you can contribute a total of $14,000 ($8,000 of your 2024 annual contribution limit plus your carried forward unused contribution amount of $6,000 from 2023). You are not required to claim a deduction for the tax year in which the contribution is made, but similarly to the RRSP it can be carried forward indefinitely and deducted in a later tax year. So, an 18 year-old can carry forward the deductions until they are earning more income.
Certain conditions need to be met for the withdrawal from the FHSA to be a qualifying withdrawal and therefore tax-free. First, the taxpayer must be a first-time home buyer at the time of withdrawal. They can’t have owned and lived in a home during any part of the calendar year before the withdrawal and in the preceding 4 years. Second, the account holder needs to have a written agreement to buy or build a qualifying home before October 1st of the year following the year of withdrawal, and needs to intend to live in the new home as their principal residence within 1-year after buying or building it. Provided you meet the criteria you can withdraw the funds in a single withdrawal, or a series of withdrawals, all on a tax-free basis. If the withdrawal does not qualify it would be included in income of the individual in the year of the withdrawal.
As mentioned above, at the earlier of the account holder turning 71 and the 15th anniversary of when the account holder first opened the FHSA, it will cease to be an FHSA. The proposed legislation includes two options at that time: the individual can withdraw the funds on a taxable basis or the individual can transfer the FHSA, including both the original contributions and accumulated growth, to either an RRSP or a RIF on a tax-free basis.
An interesting point about transferring your FHSA balance to an RRSP is that it would not reduce or be limited by an individual’s RRSP room. This would effectively create additional RRSP room for the individual. And vice-versa, you could transfer from an RRSP to your FHSA on a tax-free basis. However, this would be subject to your FHSA contribution limits, and you would not get a deduction (i.e. no double deduction is allowed).
Other Planning Considerations
There are some additional interesting planning considerations regarding the new FHSA. There are no attribution rules on gifts to adult children. Parents or grandparents have the option to gift their children and grandchildren an amount that the recipient can use to contribute towards their FHSA and begin the process of saving for their first home. The child or grandchild would get the deduction on their tax return, and if they did not require the deduction during the year (they were at school and not working full-time) they can carry forward the deduction to a future year when they start working full-time.
Even if you don’t intend to contribute the FHSA in the first year, it can be a good idea to open the account in 2023 when it becomes available, in order to carry forward the $8,000 annual contribution limit to the following year rather than having to wait until 2025 to contribute a second time.
Between a TFSA, RRSP, HBP, and the newly proposed FHSA there is more opportunity to effectively plan based on an individual’s unique situation. As all the different plans can be overwhelming your advisor would be happy to meet and discuss how you can optimize the different plans, and answer any questions you may have.