Tax-Free First Home Savings Account (FHSA)
In Budget 2022, the government proposed the introduction of the Tax-Free First Home Savings Account (FHSA). This new registered plan would give prospective first-time home buyers the ability to save $40,000 on a tax-free basis. Like a Registered Retirement Savings Plan (RRSP), contributions would be tax-deductible, and withdrawals to purchase a first home—including from investment income—would be non-taxable, like a Tax-Free Savings Account (TFSA).
Budget 2022 announced the key design features of the FHSA, including an $8,000 annual contribution limit in addition to a $40,000 lifetime contribution limit. Today, the Department of Finance is releasing for public comment draft legislative proposals that provide additional details on the design of the FHSA. This backgrounder offers a summary of these details.
The government expects that Canadians will be able to open and contribute to an FHSA at some point in 2023. No matter when this happens in 2023, Canadians would be allowed to contribute the full $8,000 annual limit in that year.
Who can open a FHSA?
An individual must be a resident of Canada and at least 18 years of age. In addition, an individual must be a first-time home buyer, meaning that they have not owned a home in which they lived at any time during the part of the calendar year before the account is opened or at any time in the preceding four calendar years. For this purpose, ownership is defined broadly and includes beneficial ownership, but excludes a right to acquire less than 10% of a qualifying home.
An FHSA of an individual would cease to be an FHSA, and the individual would not be permitted to open an FHSA, after December 31 the year in which the earliest of these events occurs:
The fifteenth anniversary of the individual first opening an FHSA; or
The individual turns 71 years old.
Any savings not used to purchase a qualifying home could be transferred on a tax-free basis into an RRSP or Registered Retirement Income Fund (RRIF) or would otherwise have to be withdrawn on a taxable basis. Individuals that make a qualifying withdrawal could transfer any unwithdrawn savings on a tax-free basis to an RRSP or RRIF until December 31 of the year following the year of their first qualifying withdrawal.
Qualified Investments
An FHSA would be permitted to hold the same qualified investments that are currently allowed to be held in a TFSA. In particular, taxpayers would be able to hold a broad range of investments, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates.
The prohibited investment rules and non-qualified investment rules applicable to other registered plans would apply, including the potential tax consequences described below. These rules are intended to disallow investments in entities with which the account holder does not deal at arm's length, as well as investments in certain assets such as land, shares of private corporations and general partnership units.
Contributions
The lifetime limit on contributions would be $40,000, with an annual contribution limit of $8,000. In other words, individuals would be subject to the lesser of their annual limit and remaining lifetime limit. The full annual limit would be available starting in 2023.
The annual contribution limit would apply to contributions made within a particular calendar year. Individuals would be able to claim an income tax deduction for contributions made in a particular taxation year. Unlike RRSPs, contributions made within the first 60 days of a given calendar year could not be attributed to the previous tax year.
An individual would be allowed to carry forward unused portions of their annual contribution limit up to a maximum of $8,000. This means that an individual contributing less than $8,000 in a given year could contribute the unused amount (i.e., $8,000 less their contribution in that year) in a subsequent year on top of their annual contribution limit of $8,000 (subject to their lifetime contribution limit). 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.
An individual would be permitted to hold more than one FHSA, but the total amount that an individual contributes to all of their FHSAs could not exceed their annual and lifetime contribution limits. Taxpayers would generally be responsible for ensuring they do not exceed their limit in a given year. The Canada Revenue Agency (CRA) would provide basic FHSA information to support taxpayers in determining how much they can contribute in a given year.
Contributions made to an FHSA following a qualifying withdrawal being made (i.e., when buying a first home) would not be deductible from net income.
Undeducted Contributions
An individual 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.
Qualifying Withdrawals
In order for an FHSA withdrawal to be a qualifying (i.e., non-taxable) withdrawal, certain conditions must be met.
First, a taxpayer must be a first-time home buyer at the time a withdrawal is made. Specifically, the taxpayer could not have owned a home in which they lived at any time during the part of the calendar year before the withdrawal is made or at any time in the preceding four calendar years. There is an exception to allow individuals to make qualifying withdrawals within 30 days of moving into their home.
The taxpayer must also have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal and intend to occupy the qualifying home as their principal place of residence within one year after buying or building it.
A qualifying home would be a housing unit located in Canada. A share in a co-operative housing corporation that entitles the taxpayer to possess, and have an equity interest in a housing unit located in Canada, would also qualify. However, a share that only provides a right to tenancy in the housing unit would not qualify.
Provided the taxpayer meets 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.
Non-qualifying Withdrawals
Withdrawals that are not qualifying withdrawals would be included in the income of the individual making the withdrawal. Financial institutions would be required to collect and remit withholding tax on non-qualifying withdrawals, consistent with the treatment applicable to taxable RRSP withdrawals.
Non-qualifying withdrawals would not re-instate either the annual contribution limit or the lifetime contribution limit.
Transfers
An individual could transfer funds from an FHSA to another FHSA, an RRSP or a RRIF on a tax-free basis.
Funds transferred to an RRSP or RRIF will be subject to the usual rules applicable to these accounts, including taxability upon withdrawal. These transfers would not reduce, or be limited by, an individual's available RRSP contribution room. These transfers would not reinstate an individual's FHSA lifetime contribution limit.
Individuals would also be allowed to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits and the qualified investment rules. Although such transfers would be subject to FHSA contribution limits, they would not be deductible and would also not reinstate an individual's RRSP contribution room.
