FHSA: Are You Saving for Your First Home?

2 min read

Brought to you by Sound Choices - AGF Education for Investors and Advisors


The First Home Savings Account (FHSA), announced in the 2022 federal budget, is a new registered plan that will allow investors to save on a tax-free basis for their first homes.

Final details to be confirmed, including when the AGF FHSA will be available. Here's what we know so far.

 

Key Reasons to Invest in an FHSA

  1. Contributions are tax deductible.
  2. Withdrawals to purchase a first home, including investment income and growth, are non-taxable.
  3. Funds from an FHSA and the Home Buyers’ Plan (HBP) can be combined – $75,000 in capital for a down payment, plus any growth in the FHSA
  4. Remaining amount can be transferred to an RRSP or RRIF penalty-free and tax-deferred with no impact to RRSP contribution limit


Who is Eligible

To open an FHSA, you must be:

  • An individual resident of Canada
  • At least 18 years of age
  • A first-time home buyer, which means you, or your spouse or common-law partner ("spouse")* did not own a qualifying home that you lived in as a principal place of residence at any time in the year the account is opened or the preceding four calendar years** 
*For the purposes of the first-time home buyer's test, a home owned by your spouse in which you lived during the relevant period will only put you offside of the test if that person is still your spouse when the FHSA is opened.
**The principal residence in the current year or preceding four years need not be in Canada. An immigrant to Canada may have to wait five years if they sold their principal residence before coming to Canada.

Contributions

Deadline

  • December 31, 2023
  • Unlike RRSPs, contributions made within the first 60 days of a calendar year cannot be applied to the previous tax year

Limit

  • Homebuyers can save up to $40,000 tax-free with an annual contribution limit of $8,000
    • Investors will be allowed to contribute the full $8,000 annual limit in 2023, regardless of when the account is opened that year
  • Multiple FHSA accounts can be opened by one person individually, but the combined contributions may not exceed the annual or lifetime contribution limits
  • NOTE: Non-qualifying withdrawals or transfers to an RRSP would not re-instate either the annual or lifetime contribution limits of either plan

Carryforward

  • Unused contribution room can be carried forward to a maximum of $8,000
  • Like RRSP deductions, contributions don’t have to be claimed for the tax year in which the contribution is made.
  • Contribution room starts accumulating once the FHSA has been opened. Carryforward amounts accumulate from the year after the year the FHSA was opened.

Over-Contributions

  • Penalty tax of 1% per month on the over-contribution amounts
  • When the investor’s annual contribution limit resets at the beginning of each calendar year, over-contributions from a previous year may be absorbed. Alternatively, the overage can be withdrawn tax-free as a "designated amount"

Withdrawals

  • Must have written agreement to buy or build a qualifying home before October 1st of the year following the withdrawal
  • Property purchased must be in Canada and used as the principal residence
    • Investor must be a Canadian resident at the time of the withdrawal and when the qualifying home is bought or built – if not, the withdrawal would be subject to withholding tax
  • Funds from an FHSA and Home Buyers’ Plan (HBP) can be used together for the same purpose – up to $75,000 in capital for a down payment, plus any growth in the FHSA
  • Provides greater flexibility than HBP withdrawals which are required to be repaid (See "Two less-traditional ways to use RRSPs") 

Tax Features

  • Like an RRSP, contributions are tax-deductible.
    • Unlike an RRSP, there isn’t a spousal plan and contributions made within the first 60 days of a calendar year cannot be applied to the previous tax year
    • NOTE: Contributions made to an FHSA following a qualifying withdrawal would not be tax-deductible
  • Like a TFSA:
    • The attribution rules do not apply if you gift your spouse funds to invest in their FHSA
    • Withdrawals to purchase a first home will be non-taxable and are not taken into accounts in determining eligibility for income-tested benefits or credits (for example, the Canada Child Benefit, GST Tax Credit)
    • NOTE: Non-qualifying withdrawals would be included in the investor’s income for that year
  • Funds can be transferred tax-free from an RRSP to an FHSA or from an FHSA to an RRSP with no impact to the investor's RRSP contribution room
    • NOTE: Non-qualifying withdrawals from an FHSA or transfers to an RRSP would not re-instate either the annual or lifetime contribution limits of either plan

How Long the Plan Can Stay Open

  • The FHSA timeframe focuses on the individual and not the account
  • Maximum participation period for a qualifying individual (see "Who is Eligible" above) ends at the earliest of the following events:
    • The end of the 15th year since the investor’s first FHSA was opened OR
    • The end of the year the investor turns 71 years old OR
    • The end of the year after the year a qualifying withdrawal was made OR
    • The end of the year after the year of the investor’s death
  • Once any of these events take place, the individual would not be able to open another FHSA, regardless of whether they otherwise fit the criteria for a qualifying individual

What Happens to Unused FHSA Money

  • Any savings not used to buy a home can be transferred tax-free to an RRSP or RRIF or withdrawn on a taxable basis 
  • If the FHSA remains open past any of the deadlines mentioned above, the FHSA becomes taxable

Upon Death

  • Like TFSAs, investors can designate their spouse as the successor account holder, in which case the account could maintain its tax-exempt status.
    • The surviving spouse would immediately become the new holder of the FHSA provided they are a "qualifying individual", i.e., meet the eligibility criteria to open an FHSA (see "Who is Eligible" section above)
    • Inherited FHSAs would not impact the surviving spouse's contribution limits and would assume the surviving spouse's maximum participation period (see "How Long the Plan Can Stay Open" section above)
    • If the surviving spouse is not a qualifying individual, amounts in the FHSA could instead be transferred to an RRSP or RRIF of the surviving spouse, or withdrawn on a taxable basis.
  • If the beneficiary of an FHSA is not the deceased account holder's spouse or common-law partner:
    • The funds would need to be withdrawn and paid to the beneficiary.
    • These amounts would be included in the beneficiary’s income for tax purposes and subject to withholding tax. 

As mentioned above, there are still details to be sorted out before the FHSA becomes available sometime in 2023. Stay tuned – we'll keep you posted as we get closer to launching the plan.


 

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RO 2652786 / 2733343
Originally published December 28, 2022 / Updated February 10, 2023

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