Tax-Free First Home Savings Account (“FHSA”)

Written by Mark R Servello CPA, CGA, Kenway Mack Slusarchuk Stewart LLP

The FHSA was introduced by the Federal government in Budget 2022.  The FHSA is a new registered plan that will give first-time home buyers the ability to save up to $40,000 (lifetime contribution limit) on a tax-free basis to purchase a qualifying home.  The annual contribution limit will be $8,000. Contributions to the FHSA will be tax deductible.  Income and capital gains earned within the FHSA will generally not be taxable.

A qualifying home is a housing unit located in Canada or a share of the capital stock of a cooperative housing corporation, the holder of which is entitled to possession of a housing unit located in Canada.

To open an FHSA an individual must:  be a resident of Canada, be at least 18 years of age, and have not at any prior time in the calendar year the FHSA is opened, or in the four preceding calendar years, lived in a qualifying home as a principal place of residence which was owned, jointly or otherwise, by the individual or their spouse or common-law partner.

It will be only the individual who holds the FHSA that can make and deduct contributions to the FHSA.  There are no provisions for spousal FHSA contributions; however, the attribution rules will not apply to income earned in an FHSA if you give your spouse the funds to make their own FHSA contribution.

Once an individual opens an FHSA, the individual will be permitted to carry forward any unused portions of the annual contribution limit up to a maximum of $8,000.  Unlike an RRSP, contributions made to an FHSA within the first 60 days of a calendar year cannot be attributed to the previous tax year.

Similar to TFSAs and RRSPs, a 1% tax on overcontributions to an FHSA will apply for each month (or part month) that the FHSA is over its contribution limits.

Qualifying withdrawals from an FHSA will not be taxable.

In order for an FHSA withdrawal to be a qualifying withdrawal, there are certain conditions which must be met:

• a prescribed form to request the withdrawal will need to be completed in which the individual will specify the location of the qualifying home and confirm the intent to occupy the home as a principal place of residence within one year after buying it or building it,
• the individual must be a resident of Canada throughout the period that begins at the time the withdrawal amount is received and ends at the time the individual acquires the qualifying home,
• the individual must be a first-time home buyer at the time the withdrawal is made (meaning the individual could not have owned, alone or jointly with another person, a home in which the individual 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, although there is an exception to allow an individual to make a qualifying withdrawal within 30 days of moving into the home),
• before making the withdrawal the individual must have entered into a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal, and
• the individual did not acquire the qualifying home more than 30 days before making the withdrawal

The Home Buyer’s Plan (“HBP”), which allows an individual to withdraw funds from an RRSP to buy or build a qualifying home for themselves or for a related person with a disability, will continue to be available under the existing rules.  An individual will be allowed to make both an FHSA withdrawal and an HBP withdrawal in respect of the same qualifying home purchase.

An FHSA of an individual will cease to be an FHSA at the end of the year following the year in which the earliest of the following events occurs:

• the 14th anniversary of the date the individual first opened the FHSA,
• the individual turns 70 years old, or
• the individual first makes a qualifying withdrawal from the FHSA.

Prior to the FHSA ceasing to be an FHSA, any amount remaining in the FHSA could be transferred on a tax-free basis into an RRSP or an RRIF without affecting the individual’s contribution room or, alternatively, the amount could be withdrawn from the FHSA on a taxable basis.  If the account has any assets when it ceases to be an FHSA then: the fair market value of those assets is included in the holder’s income, and any future income or gains in the account is taxable.

It is expected the ability to start contributing to an FHSA will begin on April 1, 2023.