First Home Savings Account (FHSA)

The federal government is intorducing a new type of registered savings plan designed to assist Canadians in saving for their first home. A great idea that is long overdue in our opinion.  Works just like an RRSP but with greater flexibility.  

FHSAs - A Brief Overview

The FHSA (First Home Savings Account) presents a valuable opportunity for aspiring first-time home buyers to save up to $40,000 without incurring any taxes. Much like Registered Retirement Savings Plans (RRSPs), contributions made to an FHSA would be eligible for tax deduction. Additionally, similar to Tax-Free Savings Accounts (TFSAs), any income, profits, and withdrawals within an FHSA would remain entirely tax-free.

Eligibility Criteria:

To be eligible for an FHSA, you must meet the following requirements:

• Residency: You must be an individual residing in Canada.
• Age: You must be at least 18 years old.
• First-Time Home Buyer: This implies that neither you, nor your spouse or common-law partner, has previously owned a qualifying home as a principal place of residence at any time during the year when the FHSA is opened or in the four calendar years preceding the account opening.

Regarding the first-time home buyer's test, if your spouse owned a home during the relevant period in which you lived, it would only affect your eligibility if you are still married to that person when opening the FHSA.

The contribution limits for the FHSA are as follows:

1. Lifetime Limit: You can contribute a maximum of $40,000 over your lifetime to your FHSA.

2. Annual Limit: Within any given calendar year, including 2023 (even before the FHSA rules come into effect on April 1, 2023), you can contribute up to $8,000.

3. No Retroactive Attributions: Unlike RRSPs, contributions made within the first 60 days of a calendar year cannot be attributed to the previous tax year.

4. Carry-Forward Option: You have the option to carry forward up to $8,000 of your unused annual contribution amount to use in a later year, subject to the lifetime contribution limit. For example, if you open an FHSA in 2023 and contribute $5,000, you can contribute up to $11,000 in 2024. However, these carry-forward amounts start accumulating only after you open an FHSA.

5. Multiple FHSAs Allowed: You are permitted to have more than one FHSA, but the total contributions across all your FHSAs cannot exceed your annual and lifetime contribution limits for the FHSA.

6. Tax on Overcontributions: Similar to TFSAs and RRSPs, if you overcontribute to your FHSA, a tax will be applied for each month (or part-month) that the account exceeds the set limits. The tax rate is 1% and is based on the highest amount of the excess in that particular month.

Withdrawals

Qualifying withdrawals to buy a qualifying home purchase are not taxable.

To qualify, the withdrawal must meet these conditions: You must be a first-time home buyer when you make the withdrawal. There is an exception to allow individuals to make qualifying withdrawals within 30 days of moving into a qualifying home.

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 (or a share in a cooperative housing corporation that entitles the taxpayer to possess and have an equity interest in a housing unit located in Canada). Any funds left over after making a qualifying withdrawal can be transferred to an RRSP or registered retirement income fund (RRIF), penalty-free and tax deferred, as long as you transfer the remaining funds by December 31 of the following year, since the plan stops being an FHSA at that time.

Transfers do not reduce or limit your available RRSP room. If you take out FHSA savings as a non-qualifying withdrawal, you must include the amount in income for the year of the withdrawal and tax will be withheld. Finally, withdrawals and transfers do not replenish FHSA contribution limits. ChatGPT Withdrawals from the FHSA: Withdrawals made to purchase a qualifying home are not taxable, provided they meet certain conditions: First-Time Home Buyer: The account holder must be a first-time home buyer at the time of withdrawal. However, there is an exception that allows individuals to make qualifying withdrawals within 30 days of moving into a qualifying home.

Written Agreement for Purchase or Build: To qualify for the withdrawal, the account holder must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal. Additionally, the account holder must intend to occupy the home as their principal place of residence within one year after purchasing or building it.

Qualifying Home: A qualifying home is a housing unit located in Canada or a share in a cooperative housing corporation that entitles the taxpayer to possess and have an equity interest in a housing unit located in Canada.

Transferring Remaining Funds: If there are funds left in the FHSA after making a qualifying withdrawal, they can be transferred to an RRSP or registered retirement income fund (RRIF) without incurring penalties and with tax deferred. However, the transfer must take place by December 31 of the following year, as the FHSA stops being effective after that time. It's important to note that these transfers do not reduce or limit the individual's available RRSP room.

Non-Qualifying Withdrawals: If FHSA savings are withdrawn for reasons other than a qualifying home purchase, the amount withdrawn must be included in the individual's income for the year of withdrawal, and tax will be withheld. No Replenishment of FHSA Contribution Limits: Withdrawals and transfers from the FHSA do not replenish the contribution limits of the FHSA.

Dealing with Overcontributions:

When faced with an overcontribution, there are several ways to address it:

Wait for Additional Contribution Room: The account holder can wait until the following year, where the excess contribution may be absorbed by the additional annual contribution room.

Request a "Designated Amount" Return: Another option is to request the return of a "designated amount" not exceeding the overcontribution. This amount can be returned to the account holder as a tax-free withdrawal or transferred to an RRSP. If a tax-free withdrawal is chosen, the original contribution that led to the overcontribution would not be eligible for a deduction. Alternatively, a taxable withdrawal would also reduce the overcontribution in the FHSA.

Deferred Deduction, like RRSPs: Similar to RRSPs, it is possible to make a contribution to the FHSA but defer the deduction until a later year.

Types of Permitted Investments: FHSAs can hold a variety of permitted investments, which are the same as those allowed for TFSAs. These investments include mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates. Prohibited and Non-Qualified Investments: FHSAs are subject to the same prohibited investment and non-qualified investment rules as other registered plans. These rules aim to prevent non-arm's length investments and the inclusion of assets like land, shares of private corporations, and general partnership units in the FHSA portfolio.

Withdrawals

Qualifying withdrawals to buy a qualifying home purchase are not taxable.

To qualify, the withdrawal must meet these conditions: You must be a first-time home buyer when you make the withdrawal. There is an exception to allow individuals to make qualifying withdrawals within 30 days of moving into a qualifying home.

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 (or a share in a cooperative housing corporation that entitles the taxpayer to possess and have an equity interest in a housing unit located in Canada). Any funds left over after making a qualifying withdrawal can be transferred to an RRSP or registered retirement income fund (RRIF), penalty-free and tax deferred, as long as you transfer the remaining funds by December 31 of the following year, since the plan stops being an FHSA at that time.

Transfers do not reduce or limit your available RRSP room. If you take out FHSA savings as a non-qualifying withdrawal, you must include the amount in income for the year of the withdrawal and tax will be withheld. Finally, withdrawals and transfers do not replenish FHSA contribution limits. ChatGPT Withdrawals from the FHSA: Withdrawals made to purchase a qualifying home are not taxable, provided they meet certain conditions: First-Time Home Buyer: The account holder must be a first-time home buyer at the time of withdrawal. However, there is an exception that allows individuals to make qualifying withdrawals within 30 days of moving into a qualifying home.

Written Agreement for Purchase or Build: To qualify for the withdrawal, the account holder must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal. Additionally, the account holder must intend to occupy the home as their principal place of residence within one year after purchasing or building it.

Qualifying Home: A qualifying home is a housing unit located in Canada or a share in a cooperative housing corporation that entitles the taxpayer to possess and have an equity interest in a housing unit located in Canada.

Transferring Remaining Funds: If there are funds left in the FHSA after making a qualifying withdrawal, they can be transferred to an RRSP or registered retirement income fund (RRIF) without incurring penalties and with tax deferred. However, the transfer must take place by December 31 of the following year, as the FHSA stops being effective after that time. It's important to note that these transfers do not reduce or limit the individual's available RRSP room.

Non-Qualifying Withdrawals: If FHSA savings are withdrawn for reasons other than a qualifying home purchase, the amount withdrawn must be included in the individual's income for the year of withdrawal, and tax will be withheld. No Replenishment of FHSA Contribution Limits: Withdrawals and transfers from the FHSA do not replenish the contribution limits of the FHSA.

Administration

To open an FHSA, you will first need to confirm your eligibility to an eligible issuer. Financial institutions will have to file annual information returns with the Canada Revenue Agency (CRA) for each FHSA they administer. The CRA will use this information to administer the plans and provide basic FHSA information to taxpayers to help them determine how much they can contribute each year.

Taxpayers will still need to monitor the limits to avoid overcontributions. To make a qualifying withdrawal, you will need to submit a request to your FHSA issuer confirming your eligibility. Issuers will not withhold taxes on qualifying withdrawals. When any withdrawals are made – qualifying or non-qualifying – the FHSA issuer must prepare an information slip stating the amount of the withdrawal and for non-qualifying withdrawals, the amount of income tax withheld.

FREQUENTLY ASKED QUESTIONS ABOUT THE PLAN

What happens if you don't use the FHSA funds to purchase a first home?

If you don't utilize the funds in your First Home Savings Account (FHSA) to buy a qualifying first home by either the end of the 15th year after opening the account or by the time you reach 71 years old, the FHSA will lose its special status as a homebuyer's savings account.

Consequently, you will be required to close the FHSA. At this point, you have two options for the unused balance:

1. Transfer to an RRSP or RRIF: The remaining balance can be transferred into a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF). This transfer can be done without affecting your RRSP contribution limit, allowing you to continue tax-deferred growth on the funds. Withdrawal on a taxable basis:

2. Alternatively, you can choose to withdraw the unused balance from the FHSA. However, be aware that this withdrawal will be considered taxable income in the year it is withdrawn.

If the FHSA is not closed before its "cessation date" (as mentioned earlier) or if it loses its status for other reasons, you will be subject to a deemed income inclusion. This means you will need to report the fair market value of all FHSA assets at the time it loses its FHSA status as taxable income, potentially leading to tax implications.

For those who rent their homes, an FHSA may still be attractive since it allows them to qualify as a first-time homebuyer and accumulate savings on a tax-deferred basis. Moreover, the possibility of transferring the funds to an RRSP or RRIF if they do not eventually buy a qualifying home adds to its appeal. Nevertheless, it's essential to consider individual financial circumstances and seek advice from a financial advisor to make the best decision regarding the FHSA.

What happens to my FHSA at the time of Death of the Account Holder?

Upon the death of the FHSA holder, the fate of the FHSA depends on who is designated as the successor account holder and the eligibility of the successor to hold the FHSA. Here's what happens: Spouse as the Successor Account Holder: Similar to Tax-Free Savings Accounts (TFSAs), an individual may designate their spouse as the successor account holder for the FHSA. If the surviving spouse is named as the successor holder and meets the FHSA eligibility criteria, they will become the new FHSA holder immediately upon the original holder's death.

This transfer will not affect the spouse's own FHSA contribution limits. Treatment of Overcontribution: If the deceased FHSA holder had an overcontribution in their account immediately before death, the successor holder (i.e., the spouse) may be treated as having made a FHSA contribution at the beginning of the month following the death. The deemed contribution amount is the value of the overcontribution, but it will be reduced by the fair market value of FHSA assets that do not remain in the spouse's FHSA.

This deemed contribution may reduce the spouse's FHSA contribution room or potentially result in their own overcontribution situation, depending on the circumstances. Alternative Options for Non-Spouse Beneficiaries: If the FHSA beneficiary is not the deceased account holder's spouse, the funds will need to be withdrawn and paid to the beneficiary. In this case, the payment will be taxable to the beneficiary.

Taxation and Withholding: Unlike RRSPs or RRIFs, where the value of the plan is usually included as income in the account holder's final tax return, the payment of the FHSA balance to beneficiaries will be taxable income to the respective beneficiaries. If the plan proceeds are paid to the deceased's estate and the surviving spouse is an estate beneficiary, the estate can pay the plan proceeds to the spouse, and with a joint designation, the spouse will be treated as if they received the payment directly. This may allow for a transfer to the spouse's FHSA, RRSP, or RRIF, with taxation based on the spouse's income.

Deemed Income Inclusion: If an FHSA is not closed by its cessation date (usually the end of the year following the FHSA holder's death), each beneficiary or estate, if there are no named beneficiaries, will have a deemed income inclusion equal to the fair market value of all FHSA assets immediately before the cessation of FHSA status. This amount will not be included in the deceased holder's terminal tax return. It's important to note that the rules and implications regarding FHSA and beneficiary designations may vary, so it is advisable to seek guidance from a financial advisor or tax professional to understand the specific implications based on individual circumstances.

Regarding emigration from Canada:

Continued Contributions: After emigrating from Canada, you can continue contributing to your existing FHSA. However, as a non-resident, you cannot make a qualifying withdrawal from the FHSA. To be eligible for a withdrawal, an individual must be a resident of Canada at the time of withdrawal and up to the time a qualifying home is bought or built. Withdrawals by non-residents would be subject to withholding tax.

For new immigrants to Canada:

Opening an FHSA: Once you become a Canadian resident, you can open an FHSA if you meet the eligibility criteria. To determine if you qualify as a first-time home buyer, you need to consider any foreign home you owned that would be considered a qualifying property if it were located in Canada. You cannot open an FHSA in a year that you owned such a home or in the four previous years.

For U.S. citizens:

Tax Considerations: U.S. citizens are generally subject to tax on their worldwide income under U.S. tax rules. Income earned in Canadian registered accounts is generally taxed as it is earned, except for retirement plans like RRSPs and RRIFs, which qualify for relief under the Canada-U.S. income tax treaty. However, other Canadian registered accounts like TFSAs and RESPs can create double tax problems and additional U.S. reporting requirements. FHSA accounts could potentially create similar issues for U.S. citizens, so seeking specific advice before opening an FHSA is essential. As tax laws and regulations can be complex and subject to change, individuals should consult with a financial advisor or tax professional to understand their specific situation and make informed decisions accordingly.

In the case of a marital breakdown:

Transfer of Funds: On the breakdown of a marriage or common-law partnership, an amount may be transferred directly from the FHSA of one spouse to an FHSA, RRSP, or RRIF of the other spouse. These transfers do not restore any contribution room for the transferor and do not count against the contribution room of the transferee. However, if the transferor's spouse has overcontributed to their FHSA, the amount eligible for transfer will be reduced.

Can I transfer amounts from my RRSP to an FHSA?

You can transfer funds from an RRSP to an FHSA tax-free, up to the $40,000 lifetime and $8,000 annual contribution limits. These transfers would not restore your RRSP contribution room or generate a tax deduction. However, a subsequent qualifying withdrawal from the FHSA would be tax-free, essentially making it a tax-free RRSP withdrawal. To maximize RRSP room, it appears that making contributions to an FHSA is the preferred approach. If money is tight, however, the ability to use transfers from an RRSP will help you maximize your FHSA’s potential tax-free withdrawal.

Deciding between an FHSA, Home Buyers' Plan (HBP), or TFSA?

That depends on various factors, such as timing, potential savings, and individual financial goals.

Here are some considerations for each option:

FHSA: The FHSA allows first-time home buyers to save money for a home on a tax-deferred basis. Withdrawals for a qualifying home purchase are tax-free. It may make sense to contribute to an FHSA first since withdrawals are tax-free, and there's no requirement to repay the withdrawn amount.

Home Buyers' Plan (HBP): The HBP allows first-time home buyers to withdraw up to $35,000 from their RRSP to purchase a home without immediate tax consequences. However, the withdrawn amount must be repaid to the RRSP over 15 years. If there are insufficient funds in the RRSP for a full HBP withdrawal, contributing to an FHSA first may be a preferred option.

TFSA: While TFSAs are not specifically designed for first-time home savings, they offer tax-free growth and withdrawals. Contributions to a TFSA do not need to be repaid, and the withdrawn amount restores contribution room the following year. TFSAs can be used in conjunction with an FHSA to maximize tax-free savings. Prospective first-time home buyers should review the details of each plan to determine the best approach for their individual circumstances. It's also worth considering other housing-related incentives, such as the Multigenerational Home Renovation Tax Credit, First-Time Home Buyers' Tax Credit, and Home Accessibility Tax Credit.

It's important to note that as of the time of writing, the enabling legislation for FHSAs is still pending, and the rules may change. It's advisable to wait for the final rules to be enacted before making significant decisions on how to best save for a home purchase. Consulting with a financial advisor can also provide personalized guidance in choosing the most suitable approach.

Transferring from RRSP to FHSA?

As of my last update in September 2021, there was no provision for transferring funds from an RRSP (Registered Retirement Savings Plan) to an FHSA (First Home Savings Account) in Canada. RRSP and FHSA are distinct types of savings accounts with different purposes and regulations. RRSPs are designed primarily for retirement savings, allowing individuals to contribute a portion of their income on a tax-deferred basis. However, there are conditions and tax implications associated with withdrawing funds from an RRSP before retirement.

On the other hand, FHSAs are intended specifically for saving for a first home purchase and offer tax-deferred growth on contributions, along with the potential for tax-free withdrawals when used for a qualifying home purchase. Given that FHSAs and RRSPs serve different purposes and have different tax treatments, there is no mechanism in place to transfer funds directly from an RRSP to an FHSA. It's essential to consult with a financial advisor or tax professional for the most up-to-date information on financial products and their suitability for individual financial goals. As regulations and policies may change, always rely on the latest information when making financial decisions.