- Ryan Rawluk, CPA, CGA
Tax-Free First Home Savings Account (FHSA)
In Budget 2022, the federal government first announced a new program to help first-time home buyers buy their first home. Draft legislation was released on August 9, 2022 and was then revised again on November 4, 2022 with more changes. Assuming it passes as is, the FHSA will come into effect on April 1, 2023; here's what you need to know.
The FHSA offers first-time home buyers the ability to save $40,000 tax-free. Contributions to a FHSA would be tax deductible, just like an RRSP. And like a TFSA, income and gains inside the FHSA, as well as withdrawals, would also be tax-free.
Who is Eligible?
To open an FHSA, you must:
be an individual resident in Canada
be at least 18 years of age
be a first-time home buyer, which means you or your spouse of common-law partner has not owned a qualifying home that you lived in as a principal 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 in your lifetime and up to $8,000 in any one year, starting in 2023.
The contribution limit applies to contributions made in the calendar year (unlike RRSPs where contributions made within the first 60 days of the next calendar year can be claimed on the prior year tax return).
You can carry forward unused contribution room to a subsequent year (subject to the lifetime contribution limit). For example, if you open an FHSA in 2023 and contribute $5,000, your unused $3,000 will carry forward to 2024 and your contribution limit for 2024 will be $11,000. Carry forwards do not start until you open an FHSA.
You can hold more than 1 FHSA, but the contributions limits apply to all of your FHSAs.
Like TFSAs and RRSPs, a tax on over contributions to an FHSA will apply for each month (or part month) that the account is over contributed of 1% per month.
Also like RRSPs, you can make a contribution to an FHSA in a year but defer the deduction to a future year.
Qualifying withdrawals to purchase a qualifying home are not taxable. A qualifying withdrawal must meet these conditions:
You must be a first-time home buyer when you make the withdrawal.
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
If you withdraw funds as a non-qualifying withdrawal, the withdrawal will be included in your income in the year of the withdrawal. Withdrawals do not replenish FHSA contribution limits.
Once you open an FHSA, you have 15 years to use the funds to purchase a home. At the end of the 15th year after the plan was opened (or at the end of the year an individual turns 71), it will cease to be an FHSA and the plan must be closed. The unused balance can be transferred to an RRSP or RRIF without affecting your RRSP limit. If the plan is not closed by the end of the year described above, the plan loses its FHSA status and the holder will have an income inclusion equal to the fair market value of the plan. A transfer to an RRSP or RRIF should be strongly considered in this case.
Only the FHSA holder may claim deductions for contributions to their FHSA. You cannot contribute to a spouse's FHSA and claim a deduction like you can for an RRSP. You can give cash to a spouse to make a contribution to their FHSA without attribution or to an adult child, etc.
What's My Best Choice? FHSA, TFSA, or HBP?
The Home Buyers' Plan (HBP) allows a first-time home buyer to withdraw up to $35,000 from their RRSP to purchase or build a home without having to pay tax on the withdrawal. You must then repay the amount withdrawn over 15 years starting the second year after the withdrawal or have an income inclusion.
The HBP continues to be available and, therefore, you can make a FHSA withdrawal and a HBP withdrawal for the same qualifying home purchase.
While the best choice for first-time home buyers depends on many different factors. Considering you don't have to repay qualifying withdrawals from an FHSA, that may make it the better option to an HBP withdrawal. After contributions to an FHSA are maxed, contributions to an RRSP would make sense and finally to a TFSA, where contributions don't qualify for a deduction. Where a tax deduction is not warranted or desired, a TFSA may be the better option.
We'll Keep You Posted
As always, our office is here to help when faced with different challenges. There are always lots of questions on new programs and feel free to reach out to our office at 204-237-6053 if you have questions.