The FHSA offers prospective first-time home buyers the ability to save $40,000 tax-free. Like registered retirement savings plans (RRSP), contributions to an FHSA would be tax deductible. Like tax-free savings accounts (TFSA), income and gains inside an FHSA as well as withdrawals would be tax-free.
Who is eligible?
To open an FHSA, you must:
- be an individual resident of Canada
- be at least 18 years of age
- be 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.
How much can you contribute?
You can contribute up to $40,000 over your lifetime and up to $8,000 in any one year, including 2023 even though the rules don’t come into effect until April 1, 2023.
The annual contribution limit applies to contributions made within the calendar year. Unlike RRSPs, contributions made within the first 60 days of a given calendar year cannot be attributed to the previous tax year.
You may 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. Carry-forward amounts do not start accumulating until after you open an FHSA.
You can hold more than one FHSA, but the total amount you can contribute to all of your FHSAs cannot exceed your annual and lifetime FHSA contribution limits.
Like TFSAs and RRSPs, a tax on overcontributions to an FHSA would apply for each month (or part-month) that the account is over the limits. The tax applies at the rate of 1% to the highest amount of the excess that existed in that month.
An overcontribution can be dealt with in few different ways. First, the account holder can wait until the following year, and then the additional annual contribution room that arises may absorb the excess contribution. Alternatively, it is possible to request that a “designated amount”, not exceeding the overcontribution, be returned to the account holder as a tax-free withdrawal or a transfer to an RRSP. If a tax-free withdrawal is received, the original contribution giving rise to the overcontribution is not deductible. Finally, a taxable withdrawal would also reduce an over-contribution to an FHSA.
Finally, like RRSPs, you can make a contribution but defer the deduction until a later year.
What types of investments can an FHSA hold?
Permitted investments for FHSAs are the same as for TFSAs. These include mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates.
The prohibited investment rules and non-qualified investment rules applicable to other registered plans will also apply to FHSAs. These rules are intended to disallow non-arm’s length investments and investments in assets such as land, shares of private corporations and general partnership units.
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.
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.
