Earlier this year, the federal government introduced the creation of a new savings vehicle for first time homebuyers: the First Home Savings Account (FHSA).
Although approved for use on April 1st, 2023, financial institutions are working towards building the infrastructure needed to provide these accounts to prospective home savers by this fall. Some institutions (RBC, CIBC) have already begun to roll out. Our back office should have these accounts available to our clients by July 2023.
Below, I will outline the ins and outs of the new FHSA and how it might impact/enhance your efforts towards buying your first home.
Who is eligible
To be eligible to open an FHSA, you must be an individual resident of Canada, at least 18 years of age, and not turning 72 or older in the year. You must be a first-time home buyer, meaning you, or your spouse or common-law partner did not own a qualifying home that you lived in as your principal residence at any part of the calendar year before the account is opened or the preceding four calendar years.
Your contributions
There is a lifetime contribution limit of $40,000, and an annual contribution limit of $8,000 in any year, including 2023.
You can carry forward up to $8,000 of your unused annual contribution amounts to use in a later year (subject to the lifetime contribution limit of $40,000).
For example, if you open an FHSA in 2023 and contribute $5,000, you can contribute up to $11,000 in 2024. Carry-forward amounts do not start accumulating until after opening an FHSA, so it’s best to open one sooner rather than later if you plan on using it to purchase your first home within 15 years.
Annual contribution limits apply to contributions made within the calendar year. Unlike RRSPs, contributions made within the first 60 days of a calendar year cannot be attributed to the previous tax year.
FHSA contributions can be claimed as a deduction against all sources of taxable income, just like the RRSP. FHSA contributions do not reduce RRSP contribution room. The FHSA deduction reduces your taxable income for the year and, ultimately, your taxes owing. The tax savings depends on your marginal tax rate, much like the RRSP contribution.
If you contribute to your FHSA, you do not have to claim the deduction in the year of contribution. Like RRSP deductions, you can carry forward any undeducted contributions indefinitely and can deduct them in a later year when it may make more financial sense to do so.
Like with other registered accounts, a 1% penalty on overcontributions applies to the FHSA for each month or part-month the account exceeds the limit.
Tax treatment of investment income and gains within a FHSA
Investment 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 investment income and capital gains can continue to grow and compound in the FHSA on a tax-free basis.
Eligible investments to hold in a FHSA
Similar to investments held in RRSPs and TFSAs, FHSAs can hold mutual funds, exchange-traded funds (ETFs), publicly traded securities, government and corporate bonds, and guaranteed investment certificates (GICs).
The same prohibited investment rules and non-qualified investment rules that apply to other registered accounts (RRSP, RESP, TFSA, RDSP) will apply to the FHSA. These rules disallow non-arm’s length investments and investments in assets such as land, shares of private corporations and general partnership units.
Making withdrawals from the FHSA
Qualifying withdrawals to buy a home are tax-free. To qualify, a withdrawal needs to meet these conditions:
· You must be a resident of Canada from the time of the withdrawal to the closing date of the qualifying home, and a first-time home buyer when you make the withdrawal. There is an exception to permit individuals to make qualifying withdrawals within 30 days after moving into a qualifying home.
· You must have a written agreement to buy or build a qualifying home before October 1st of the year after the year of withdrawal and intend to occupy the home as a principal place of residence within one year after buying or building it.
· The qualifying home must be located in Canada.
Funds left over after making a qualifying withdrawal can be transferred to another FHSA or RRSP or registered retirement income fund (RRIF), on a tax-free basis, before the end of the year following the year that first qualifying withdrawal is made. Transfers do not reduce or limit your available RRSP contribution room. Once transferred, the funds are subject to the rules of the applicable accounts, including that the funds will be taxable when you withdraw them from the account.
Withdrawals and transfers do not replenish FHSA contribution limits.
Non-qualifying withdrawals will be included in your amount of income for the year of the withdrawal and taxes will be withheld.
Comparing the FHSA and RRSP HBP
FHSA withdrawals and withdrawals under the HBP can be made for the same qualifying home purchase.
HBP withdrawals are borrowed from your RRSP (interest-free) and must be paid back over 15 years, whereas qualifying FHSA withdrawals are tax-free and do not need to be repaid.
If you do not buy a home within the 15-year FHSA limit, the funds can be transferred to your RRSP tax-free before the end of the 15th year, where they can later be withdrawn under the HBP.
Because a transfer of funds from an FHSA to an RRSP will not reduce your available RRSP contribution room, you can effectively create more RRSP room by starting to contribute to your FHSA if you qualify as a first-time homebuyer.
Closing the FHSA
The FHSA must be closed by December 31st of the year you turn age 71, by December 31st of the 15th anniversary of first opening the account if the funds have not been used to purchase a qualifying home, or by December 31st of the year following the year of the qualifying withdrawal.
Unused funds in the FHSA can be transferred to an RRSP or RRIF on a tax-free basis before the FHSA closure or withdrawn, but the withdrawal will be taxable.
If a withdrawal was made to purchase a qualifying home, unused funds can be transferred to an RRSP or RRIF on a tax-free basis until December 31st of the year following the year of the qualifying withdrawal.
As a planning tactic, for those who qualify as a first-time homebuyer, this is an opportunity to effectively create more RRSP room than otherwise by making a contribution to the FHSA and then rolling it into your RRSP (which does not deplete your RRSP contribution room).
Spousal treatment
Only the FHSA holder can claim a deduction for contributions made to their own FHSA. You cannot contribute to your spouse’s FHSA and claim a deduction to your income; however, you can gift funds to your spouse so that they can claim a deduction on their own FHSA contribution.
Normally, attribution rules would apply if you gift funds to your spouse, and all income earned and capital gains realized on those funds will be attributed back to you and taxed in your hands. But an exception applies to the FHSA that attribution rules will not apply to income earned and capital gains generated within an FHSA derived from these contributions.
When the spouse withdraws amounts from the FHSA, only the spouse will need to include the amounts withdrawn in income. No portion of your gifted funds to your spouse’s FHSA would be attributed back to you. Similarly, no attribution arises if you give cash to an adult child to contribute to their FHSA.
In the event of a marriage or common-law breakdown, you may transfer funds from your FHSA to your former spouse’s FHSA, RRSP or RRIF. This will not reinstate an FHSA contribution room for you and would not use any contribution room of your former spouse. If your spouse has overcontributed, the amount eligible for transfer will be reduced.
On death
You may designate your spouse as a successor account holder. The surviving spouse then would become the new holder immediately on death, so long as they meet the eligibility criteria to open an FHSA. Inheriting an FHSA in this way would not impact their FHSA contribution limits and would assume the surviving spouse’s closure deadlines. If the surviving spouse is not eligible to open an FHSA, amounts can be transferred on a tax-deferred basis to their RRSP or RRIF or withdrawn on a taxable basis.
If the beneficiary is anyone other than a spouse, the funds will need to be withdrawn immediately following death and paid to the beneficiary. Amounts paid will be included in the beneficiary’s income and subject to withholding tax.
Non-resident
You can continue to make contributions to your existing FHSA after moving from Canada but will not be able to make a qualifying withdrawal as a non-resident. To make a qualifying withdrawal, you must be a resident of Canada at the time of the withdrawal and up until the time the home is bought or built.
Non-qualifying withdrawals as a non-resident are subject to withholding tax.
If you have any questions about the First Home Savings Account (FHSA) or would like to discuss all the planning opportunities available to you for the purchase of your first home, please reach out. We are available and accessible to you any time through email, phone, and video. For additional information, related website links, and upcoming seminars, please visit my website at www.adamschacter.com.
Be well and be safe,
Adam