The FHSA offers prospective first-time home buyers the ability to save $40,000 tax-free. An FHSA combines the features of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). Like an RRSP, contributions would be tax-deductible and qualifying withdrawals to purchase a
first home would be non-taxable, like a TFSA.
Who is Eligible:
To open an FHSA plan, you must:
-be an individual resident of Canada;
-be between the ages of 18 and 71;
-be a first-time home buyer, which means you or your spouse or common-law partner 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 4 calendar years.
The account can stay open for 15 years or until the end of the year you turn 71, or at the end of the year following the year in which you make a qualifying withdrawal from an FHSA for the first home purchase, whichever comes first.
Contributing to a FHSA:
You would be allowed to carry forward unused portions of your annual contribution limit up to a maximum of $8,000. You would not be required to claim a deduction for the tax year in which a contribution is made. Like RRSP deductions, such amounts could be carried forward indefinitely and deducted in a later tax year. For example, an individual contributing $5,000 to an FHSA in 2023 would be allowed to contribute $11,000 in 2024 (i.e., $8,000 plus the remaining $3,000 from 2023). Carry-forward amounts would only start accumulating after an individual opens an FHSA for the first time.
You can hold multiple FHSAs, but the total amount that you can contribute to all of your FHSAs could not exceed your annual and lifetime contribution limits. In order to help clients determine how much they can contribute, the Canada Revenue Agency (CRA) provides basic information about your FHSA.
Like other registered accounts, a 1% tax on overcontributions applies to the FHSA for each month or part-month the account exceeds the limit.
The lifetime limit on contributions would be $40,000, with an annual contribution limit of $8,000, where the full annual limit would be available starting in 2023. You would be able to claim an income tax deduction for contributions made in a particular year. Unlike RRSPs, contributions made within the first 60 days of a given calendar year could not be attributed to the previous tax year. Income as well as capital gains (and capital losses) earned in an FHSA are not included in your annual income (or deductible) for tax purposes. This means income and capital gains can continue to grow and compound in the FHSA on a tax-free basis.
You can make contributions to an FHSA in cash or in-kind through the transfer of securities to your FHSA from a non-registered account. For in-kind contributions, you will be treated as if you sold the securities at fair market value upon transfer, which may trigger a capital gain. If the in-kind transfer results in a loss, however, this loss cannot be claimed.
Similar to RRSP contributions, if you make FHSA contributions directly from your employment income, your employer won’t have to withhold income tax on the amount of those contributions.
FHSAs can hold qualified investments similar to those permitted in TFSAs or RRSPs, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates. A FHSA is also subject to prohibited investment rules that prohibit holding investments closely related to the holder.
Several conditions must be met in order to withdraw funds from an FHSA without being taxed:
-You cannot have lived in a home that you owned either in the 4 previous years or in the year of
withdrawal (other than 30 days prior to the withdrawal).
-You must also have signed a written agreement to buy or build a qualifying home before
October 1st of the year following the year of withdrawal.
-The home must be in Canada and you must intend to occupy it as your principal place of
residence within a year of acquisition.
-From the time the withdrawal occurs until the home is acquired, you must be a resident of
Provided you meet the qualifying withdrawal conditions, the entire amount of available FHSA funds may be withdrawn on a tax-free basis in a single withdrawal or a series of withdrawals. Withdrawals that are not
qualifying withdrawals would be included in the income of the individual making the withdrawal. Keybase
would be required to collect and remit withholding tax on the non-qualifying withdrawals, consistent with
the treatment applicable to taxable RRSP withdrawals.
Good to Know
If you choose not to use the FHSA to buy a first home, you always have the option (until age 71 or 15 years from account opening, whichever comes first) of transferring funds from an FHSA to your RRSP or a RRIF on a tax-free basis. Transferring funds from an FHSA to an RRSP does not reduce the amount
of RRSP contribution room you have available, so if you start contributing to your FHSA, you will have more RRSP contribution room.
No Spousal Plans
Unlike an RRSP, the FHSA holder is the only taxpayer permitted to claim deductions for contributions made to their FHSA. In other words, you can’t contribute to your spouse or common-law partner’s FHSA and claim a deduction. As a result, you can give your spouse or common-law partner the funds to contribute to their own FHSA without incurring spousal attribution penalties.
Like RRSPs and TFSAs, interest on money borrowed to invest in an FHSA would not be deductible in computing income for tax purposes.
Home Buyer’s Plan (HBP)
HBP withdrawals, which allow first-time homebuyers to withdraw up to $35000 from their RRSPs to purchase a first home, will remain available; therefore permitting you to withdraw from both the FHSA
and the HBP for the same qualified purchase.
Treatment Upon Death
Like TFSAs, you would be permitted to designate your spouse or common-law partner as the successor account holder, in which case the account could maintain its tax-exempt status. The surviving spouse would become the new holder of the FHSA immediately upon the death of the original holder provided the surviving spouse meets the eligibility criteria to open an FHSA. Inheriting an FHSA in this way would not impact the surviving spouse’s contribution limits, but the inherited FHSA would assume the surviving spouse’s closure deadlines. If the surviving spouse is not eligible to open an FHSA, account then the FHSA could instead be transferred to an RRSP or RRIF of the surviving spouse, 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 paid to the beneficiary would be included in the income of the beneficiary for tax purposes.
Non-residents cannot make qualified withdrawals from their FHSAs after moving from Canada, but they can continue to make contributions to the plan. Specifically, if you withdraw funds from an FHSA you must be a resident of Canada at the time of withdrawal and up to the time a qualifying home is bought or built. Withdrawals by non-residents would be subject to withholding tax.
With our advisors looking out for your best interests, we can help you choose investment options that will help you reach your home ownership goals. To find out if the FHSA is right for you, contact a Keybase Advisor.
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The opinions expressed within this article are those of Keybase Financial Group Inc. and/or its affiliates. Any data provided is for illustration purposes only. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither Keybase nor its affiliates accept any liability whatsoever for any loss arising from any use of this report or its contents. This report is not and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities. The securities or plans mentioned in this report may not be suitable for all clients. Clients and prospective clients should always read a product prospectus and fully understand all of the risks associated with the product before purchasing. Any information relating to the discussion of taxation issues is considered to be only general in nature. Clients should seek a qualified tax professional to discuss their specific tax requirements. Keybase Financial Group Inc. is a member of the MFDA and is a member of the MFDA IPC.