The First Time Home Savings Account (FHSA) received Royal Assent on December 15th, 2022. Below, we summarize the new type of savings account. The program becomes available on April 1, 2023, and can be started at most major financial institutions.
This information was sourced from the Government of Canada official site. However, we strongly urge you to check the updated government pages and work with your accountant before contributing to your FHSA.
What is the FHSA?
It’s a registered account for the purpose of saving for a first home purchase. First-time home buyers can save up to $40,000 on a tax-free basis and earn tax-free investment income within the account. Combining this with the RRSP Home Buyer’s Plan means an individual can get $75,000 plus the investment income from the FHSA toward a down payment! That’s enough to put a down payment on a home purchase. Any bank that provides RRSPs can provide an FHSA. However, work with your accountant to ensure you have sufficient room to make contributions. Banks don’t know about your tax situation or any other registered accounts (FHSA, TFSA, RRSP) that you may have at other financial institutions.
How Does FHSA Affect Your Tax Return?
Contributions are tax-deductible, just like Registered Retirement Savings Plan (RRSP) contributions. Withdrawals to make a first-home purchase are tax-free, just like a general Tax-Free Savings Account (TFSA).
Undeducted contributions can be carried forward until the expiry of the account. The account will remain open for 15 years from when the account was opened. Upon expiry, the funds can be transferred to an RRSP or RRIF. If you do not use all the funds to buy your first home, any funds remaining may be transferred to the RRSP or RRIF tax-free.
If funds are simply withdrawn, they become taxable income.
Contributions made after a qualifying withdrawal are not tax deductible. In addition, contributions can be carried forward, like an RRSP, and deducted in a later tax year. Although there is a contribution limit for each year, you can carry forward some or all of that contribution.
The most common way to use this is not to take the deduction in years where tax is low and take it for a year where tax payable is higher. However, it is more financially savvy to make the maximum contribution each year (for the first five years) and ensure this money is appropriately invested.
What Are the Limits?
Just like TFSAs and RRSPs have contribution limits, FHSAs have an annual contribution limit of $8,000 and a lifetime contribution limit of $40,000. Unused contributions carry forward year over year like a TFSA. Contributions made in the first 60 days of next year don’t qualify for the current year, unlike the RRSP.
Going over the limit carries a 1% monthly tax rate on amounts over the limit. This is similar to the RRSP and TFSA overcontribution rules.
More than one FHSA can be held, but the limits apply to the sum of all accounts, so having multiple accounts does not increase the contribution limit. Your financial institution will not know your specific tax situation or any FHSA held at another financial institution. Do not take tax advice from bank sales staff.
Unlike RRSPs, FHSAs contributions can only be claimed by the account holder. There is no such thing as a “spousal FHSA contribution.” You can provide funds to your spouse for them to contribute, but they would need to claim the contribution. If a spouse dies, the transfer to the beneficiary is not taxable as long as they qualify for an FHSA. That is, the survivor would assume ownership of the FHSA tax-free. Inheriting the FHSA from your spouse would not affect your contribution limits.
Another issue regarding the death of an FHSA holder is if the beneficiary is not a spouse (usually kin). The transfer is taxable for the beneficiary, including withholding tax.
An FHSA can’t be held forever. A TFSA is better for that purpose than an FHSA. An FHSA is good for 15 years or the day a person turns 71. After that, it becomes a regular, taxable savings account. Any savings not used can be transferred to an RRSP (for those under 71) or an RRIF (for those over 71.)
How to Open and Close an FHSA
Qualifications
To open an FHSA, you must be:
- A resident of Canada
- Over 18 years old and under 71
- Be a first-time home buyer as defined by the legislation
- Has not owned a home in the four years prior to the year the account is opened (Note other items may be specific to your situation)
Types of Supported Investments
- Cash
- Mutual funds
- Publicly-traded securities
- Bonds
- GICs
Unsupported Investments
- Non-arm’s length transactions
- Land
- Shares of private corporations
- General partnership units
Proof of Home-Buyer
All FHSA applicants would need a purchase agreement to prove home-buyership. They also need intent to occupy the home in that purchase agreement as their principal residence for at least one year following the withdrawal. The Government of Canada can cross-reference the address filed as the taxpayer’s principal residence on their T1 and apply tax based on that.
Non-qualifying withdrawals from an FHSA are taxable. But the odds are financial institutions would only allow that with proof of qualification.
Be sure to work with your accountant and financial institution to ensure you are properly withdrawing the funds.
Non-Residents
Those emigrating from Canada can still contribute but can only withdraw as a non-resident and pay withholding tax. The “tax-free” aspect is for Canadian residents only.
Withdrawals
The holder must prove eligibility to their FHSA provider before funds can be withdrawn.
Is Interest Deductible?
Interest paid on money borrowed to finance an FHSA is not deductible.
Disclaimer
KATA Accounting Solutions Professional Corporation does not make up the tax rules. The Federal Government of Canada and the Canada Revenue Agency (CRA) do this based on tax legislation. We merely file information on people’s behalf and can’t change the tax rules.