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First Home Savings Account (FHSA) - Tax-Free
Income Tax Act s. 146.6The legislation for the FHSA is included in Bill C-32, Fall Economic Statement Implementation Act, 2022 which received Royal Assent December 15, 2022.
The FHSA is a registered account to help individuals save for a home. The contributions are tax-deductible and earnings in the account grow tax-free. When the funds are withdrawn to buy a home, the withdrawal is tax-free, and the funds do not have to be repaid. Qualifying individuals could open an FHSA and start contributing on April 1, 2023. However, even at the end of July 2023 many of the major financial institutions do not offer self-directed FHSAs.
Not sure if you'll ever buy a home? Plan to never buy a home? Start an FHSA anyway at some point, if:
Funds gifted can be used as FHSA contributions, without attribution to the person doing the gifting.
The FHSA has a "maximum participation period" of 15 years from the time it is started, which means it must either be used to purchase a qualifying home, or the funds withdrawn or transferred, within 15 years, or by the end of the year in which the individual turns 71, whichever is earlier. If you don't think you'll be able to buy a home within 15 years, you may want to wait to open an FHSA.
- EVERYONE planning to EVENTUALLY buy a home should (also eventually) open a First Home Savings Account!
According to the Department of Finance August 2022 Design of the Tax-Free First Home Saving Account, for this purpose, "ownership is defined broadly and includes beneficial ownership, but excludes a right to acquire less than 10% of a qualifying home".
Tax Tip: If you own a home that you don't live in (e.g. you rent it out), you may still qualify to open an FHSA to save for a principal residence.
If an individual emigrates from Canada after opening their FHSA, there is no deemed disposition of the FHSA, and they would still be allowed to contribute. However, any withdrawal made while they are a non-resident would be subject to withholding tax.
The FHSA has a "maximum participation period" of 15 years from the time it is started, which means it must either be used to purchase a qualifying home, or the funds withdrawn or transferred, within 15 years, or by the end of the year in which the individual turns 71, whichever is earlier.
This means if you are quite sure you won't be able to purchase a home within 15 years, but think you will purchase a home eventually, you should probably delay opening an FHSA.
Contributions can include in kind contributions of securities. Securities transferred from a non-registered account will be considered a deemed disposition resulting in a capital gain. Losses will not be deductible.
Funds transferred from an RRSP to an FHSA will not be deductible, as the contribution to the RRSP was already deducted. This would be useful for someone who is confident that they will be buying their first home in the near future, but is not able to contribute to their FHSA otherwise. The funds will be tax-free when withdrawn to purchase the first home.
Income Tax Act Part XI.01 Taxes in Respect of Registered Plans
The treatment of excess contributions to an FHSA is the same as for a TFSA. If at any time your contributions exceed your annual FHSA limit in the calendar year, or exceed the lifetime limit of $40,000, you have overcontributed.
The tax payable for excess contributions to a First Home Savings Account is 1% per month, for any month in which there is an excess amount at any time in the month. This means there will be tax payable even if the excess amount is withdrawn in the same month in which it is contributed. You may also be charged a penalty of 100% of any income earned from the excess contribution.
Income Tax Act s. 207.06(3)
The Minister of National Revenue may waive or cancel all or part of the tax payable regarding excess amounts if:
Qualified and non-qualified investments are the same for a First Home Savings Account (FHSA) as they are for a Tax-Free Savings Account (TFSA).
Besides the tax on excess contributions, tax will also be payable if the FHSA carries on a business or holds non-qualified investments. See the article on Taxes Payable re TFSA, where we've noted which taxes also apply to the FHSA.
Withholding taxes will be deducted from foreign dividends received in an FHSA, and these taxes are not recoverable. The Canada-United States Tax Convention (Treaty) provides for US dividends and interest to be received free of tax when earned by a trust which is generally exempt from income taxation in Canada, and which is operated exclusively to administer or provide pension, retirement, or employee benefits. S. 146.2 of the Income Tax Act states that an FHSA is deemed not to be a retirement savings plan.
Qualifying withdrawals to purchase a home are non-taxable if:
- 2 people can each use their FHSA as well has their RRSP Home Buyers' Plans to jointly purchase their home.
- This is not just for FIRST homes.
As per Income Tax Act s. 146.01(2)(a.1), an owner shall be considered to have an owner-occupied home if the individual owns, whether jointly with another person or otherwise, a housing unit or a share of the capital stock of a cooperative housing corporation and
Although the draft legislation for the FHSA indicated that the HBP and the FHSA could not both be used for the same home purchase, this was revised in Bill C-32.
This means that individuals can each borrow up to $35,000 from their RRSP through the Home Buyers' Plan as well as withdraw funds from their FHSA in order to purchase a home. If $40,000 is contributed to the FHSA and earns a reasonable rate of return, then the FHSA may be worth considerably more than $40,000 by the time a home is purchased.
Tax Tip: If a home is purchased jointly, each of the joint buyers can use funds from their FHSA and borrow using the RRSP Home Buyers' Plan.
Withdrawals other than qualifying withdrawals are taxable to the holder of the FHSA, with no attribution to a spouse or common-law partner who may have gifted the funds for the FHSA contributions.
Withdrawals by a non-resident will be subject to withholding tax.Funds not used for a qualifying home purchase would have to be withdrawn (taxable) or transferred tax-free to an RRSP or RRIF by Dec 31 of the year following the year in which the earlier of these events occurs:
Transfers to an RRSP or RRIF will not be reduced, or be limited by, an individual's RRSP contribution limit.
T4FHSA - First Home Savings Account Statement - Reports contributions to and withdrawals from the FHSA, as well as transfers into and out of the FHSA.
RC720 - Transfer from your RRSP to your FHSA.
RC721 - Transfer from your FHSA to your FHSA, RRSP or RRIF.
RC722 - Transfer from an FHSA to an FHSA, RRSP or RRIF after the death of the holder.
RC723 - Transfer from an FHSA to another FHSA, RRSP or RRIF on breakdown of marriage or common-law partnership.
RC724 - Joint designation for a deemed transfer or distribution from an FHSA after the death of the holder.
RC725 - Request to make a qualifying withdrawal from your FHSA.
RC727 - Designate an excess FHSA amount as a withdrawal from your FHSA or as a transfer to your RRSP or RRIF.
Income Tax Folio S3-F10-C2 Prohibited Investments - will eventually be revised to include FHSAs
Income Tax Folio S3-F10-C1, Qualified Investments - Registered Accounts - Tax consequences - carrying on a business - will eventually be revised to include FHSAs
Revised: August 19, 2023
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