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First Home Savings Account: More Details Released

The federal government recently introduced draft legislation on the new Tax-Free First Home Savings Account (FHSA). With a planned start of 2023, the FHSA will soon be offered by Canadian banks, credit unions, life insurance companies and trust companies, including CWB Trust Services.

Eligibility

The FHSA is open to individuals residing in Canada who are at least 18 years of age that are also first-time homebuyers; this means you cannot have owned a principal residence that you lived in 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.

 

Contribution Limits

The FHSA provides future first-time homebuyers the opportunity to contribute annually up to $8,000, subject to a lifetime contribution limit of $40,000, tax-free to purchase a first-time home in Canada. Individuals will be required to confirm their eligibility to the eligible issuer.

 

Like registered retirement savings plans (RRSPs), contributions to a FHSA will be tax deductible in the tax year that a contribution is made or in a later tax year. Unused portions of the annual contribution limit may be carried forward but carry-forward amounts will only start accumulating once an individual opens a FHSA.

 

The annual contribution limit will apply to contributions made within a calendar year only, so contributions made within the first 60 days of a subsequent year cannot be deducted in the current tax year, like with RRSPs.

 

Unlike the RRSP, no spousal contributions can be made to the FHSA. For clarity, you cannot contribute to your spouse’s or partner’s FHSA and claim a tax deduction. However, you can give your spouse or partner the funds to make their own FHSA contribution without the normal spousal attribution rules applying.

 

Any overcontribution amounts will be subject to a one-per-cent per-month penalty tax until withdrawn or when sufficient contribution room opens (e.g., Jan 1st), just like in a RRSP or TFSA.

 

Similarly, interest on money borrowed to invest in a FHSA will not be tax deductible.

 

Investments

Qualified investments for a FHSA will be the same as currently allowed in a RRSP and TFSA, including guaranteed investment certificates, government and corporate bonds, mutual funds, and publicly traded securities. The prohibited investment rules and non-qualified investment rules applicable to other registered plans will also apply.

 

The federal government has proposed to amend the Canada Deposit Insurance Corporation Act to create a new category of insured deposits for FHSAs.

 

Withdrawals

Eligible withdrawals from the FHSA, including from any investment income or growth earned in the account, are non-taxable, much like a tax-free savings account (TFSA).

 

To withdraw funds on a non-taxable basis, you must be a first-time homebuyer at the time of withdrawal, have a written agreement to buy or build a qualifying home in Canada before October 1st of the year following the year of withdrawal, and intend to occupy the home as your principal residence.

 

If you meet the conditions, the entire balance in the FHSA can be withdrawn tax-free in a single withdrawal or a series of withdrawals.

 

Any FHSA savings not used to buy a qualifying home by the plan closing date may be transferred tax-free into an RRSP or registered retirement income fund (RRIF) or withdrawn on a taxable basis.

 

Plan Terms

Multiple FHSAs can be held at the same time, but the total amount contributed to all the FHSAs combined cannot exceed annual and lifetime contribution limits.

 

The FHSA can remain open for up to 15 years or until the end of the year in which the planholder reaches 71 years old.

 

The FHSA must be closed by the end of the year following the first qualifying withdrawal and you cannot open another FHSA in your lifetime.

 

FHSAs will not have creditor protection under the Bankruptcy and Insolvency Act.

 

Transfers

Individuals can transfer funds from one FHSA to another FHSA, or to a RRSP or a RRIF tax-free, but if the funds are transferred to a RRSP or RRIF, they will be taxed upon withdrawal from the RRSP or RRIF. Transfers will have no affect on RRSP contribution room, nor will they reinstate the $40,000 FHSA lifetime contribution limit.

 

Individuals can also transfer funds from a RRSP to a FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits. These transfers would not be tax deductible and will not reinstate an individual’s RRSP contribution room.

 

Beneficiary Designations

Beneficiary designations will be permitted on FHSAs. As with TFSAs, you can designate your spouse or common-law partner as the successor account holder. The FHSA can remain tax-exempt after death if the spouse or common-law partner meets the eligibility criteria to have a FHSA.

 

A surviving spouse or partner who becomes the successor account holder will not have his or her contribution limits impacted. However, if the beneficiary is not account holder’s spouse or partner, the funds would need be taxable to the beneficiary.

 

Non-Residency

If you open a FHSA, you will not be required to close the plan upon becoming a non-resident and would be allowed to still contribute. However, you will not be able to make a tax-free withdrawal as a non-resident. Withdrawals by non-residents would be subject to withholding tax.

 

First Time Home Buyer's Plan (HBP)

While the HBP will continue to be available (allowing for a $35,000 tax-free loan from your RRSP), you will not be able to participate in both the HBP and make a tax-free FHSA withdrawal. As such, individuals will want to consider the time horizon expected before purchasing a home when deciding between options. Another consideration will be that the HBP requires repayments to avoid the amounts being taxable from the RRSP.

 

Reporting Requirements

Financial institutions will be required to send CRA annual information returns for each FHSA they administer. The FHSA issues will also be required to prepare an information slip with the withdrawal amount and, in the case of a non-qualifying withdrawal, any income tax withheld on the amount.

 

CWB Trust Services looks forward to offering the FHSA as soon as possible. More details regarding the FHSA are available on CRA’s website

As always, we'd love to hear from you. If you have any questions or would like to discuss your accounts with us, please feel free to contact us today.