Ottawa’s new Tax-Free Home Ownership Savings Account is coming: What you need to know
This week, the federal government took a step closer to launching the new Tax-Free Home Savings Account (FHSA) with the introduction of a bill and a request for comment.
FHSA is set to launch sometime in 2023, so here’s a guide to what we know so far to help you prepare.
This new registered plan gives potential first-time home buyers the opportunity to save $40,000 tax-free when buying a first home in Canada. Like a Registered Retirement Savings Plan (RRSP), contributions to an FHSA will be tax deductible, but withdrawals to buy a first home, including any investment income or earned growth in the account, would be non-taxable, like a tax-free plan. savings account (TFSA).
To open an FHSA, a person must be a resident of Canada and at least 18 years of age. You must also be a first-time home buyer, meaning you did not own a principal residence in which you lived at any time during the part of the calendar year preceding the opening of the account, nor at any time during the four preceding calendar years.
FHSA can remain open until age 15 or until the end of the year when you reach age 71. Any savings in the FHSA not used to purchase a qualifying home at that time could be transferred tax-free to an RRSP or Registered Retirement Income Fund (RRIF), or withdrawn on a taxable basis.
Eligible individuals will be able to contribute $8,000 per year, up to a lifetime contribution limit of $40,000. There is a tax penalty of 1% per month for any excess contribution. The annual contribution limit will apply to contributions made in a given calendar year. Unlike RRSPs, contributions made within the first 60 days of a subsequent year cannot be deducted in the current tax year.
The bill also increased the flexibility of FHSA contributions by allowing an individual to carry over unused portions of their annual contribution limit up to a maximum of $8,000. This means that if you contribute less than $8,000 in a given year, you can then contribute any unused amount in a future year, in addition to your annual contribution limit of $8,000 (subject to the cumulative limit of $40,000).
For example, if you only contribute $5,000 to an FHSA in 2023, you can contribute $11,000 in 2024 ($8,000 plus unused room $3,000 from 2023). Note that the amounts carried over do not begin to accumulate
a person opens an FHSA for the first time.
You can have more than one FHSA, but the total amount you contribute to all your FHSAs cannot exceed your annual and lifetime contribution limits.
As with RRSP contributions, you will not be required to claim the FHSA deduction in the tax year in which a contribution is made. The amount can be carried forward indefinitely and deducted in a future tax year, which can be a good idea if you expect to be in a higher tax bracket in a future year.
An FHSA is permitted to hold the same types of qualified investments that are currently permitted in a TFSA and RRSP, including mutual funds, publicly traded securities, government and corporate bonds, and investment certificates guaranteed.
To withdraw funds from an FHSA on a tax-free basis, certain conditions must be met. First, you must be a first-time home buyer at the time of withdrawal, as stated above. You must also have a written agreement to buy or build a qualifying home by October 1 of the year following the year of withdrawal, and you must intend to occupy that home as your principal location. The home must be in Canada.
If you qualify, the entire FHSA balance can be withdrawn tax-free in a single withdrawal or in a series of withdrawals. The FHSA must be closed by the end of the year following the first qualifying withdrawal and you are not allowed to have another FHSA during your lifetime.
Individuals will be able to transfer funds from one FHSA to another FHSA, or to an RRSP or RRIF, all tax-free.
If funds are transferred to an RRSP or RRIF, they will be taxed upon final withdrawal. These transfers will not affect RRSP contribution room, nor will they restore an individual’s $40,000 FHSA lifetime contribution limit.
Individuals will also be permitted to transfer funds from an RRSP to an FHSA tax-free, subject to the FHSA’s annual and lifetime contribution limits. These transfers would not be tax deductible and would not restore an individual’s RRSP contribution room.
Unlike an RRSP, the FHSA holder is the only taxpayer allowed to claim deductions for contributions made to their FHSA. In other words, you cannot contribute to your spouse or partner’s FHSA and claim a deduction. That said, the government will allow you to give your spouse or partner the funds to make their own FHSA contribution without the normal spousal award rules applying.
Death, taxes and other matters
As with TFSAs, you will be able to designate your spouse or common-law partner as the successor holder of the account, in which case the account may retain its tax-exempt status after death. The surviving spouse or partner would then become the new holder of the FHSA after the death of the original holder.
Inheriting an FHSA in this manner will not affect the surviving spouse’s FHSA contribution limits. If the beneficiary of an FHSA is not the spouse or partner of the deceased account holder, the funds will need to be withdrawn, paid to the beneficiary, and be taxable to them.
As with RRSPs and TFSAs, interest on money borrowed to invest in an FHSA will not be tax deductible, and you will not be able to pledge FHSA assets as security for a loan. In addition, FHSAs will not enjoy creditor protection under the Bankruptcy and Insolvency Act.
Finally, the Home Buyers’ Plan, which allows first-time home buyers to withdraw up to $35,000 from an RRSP to buy a first home, will continue to be available, but you won’t be allowed to make both an FHSA withdrawal and a RAP withdrawal for the same home purchase.
Taxpayers with comments or suggestions about FHSA’s proposals are encouraged to send them to
by September 30, 2022.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is Managing Director, Tax and Estate Planning at CIBC Private Wealth Management in Toronto.
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