Understanding the First Home Savings Account (FHSA) in Canada

The First Home Savings Account (FHSA) represents a significant registered plan designed to assist first-time home buyers in Canada. This account facilitates saving towards the purchase or construction of a qualifying first home on a tax-free basis, subject to specified limits. Introduced by the Government of Canada, the FHSA is a tool that can potentially yield substantial savings for prospective home owners.

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Eligibility Criteria

To be eligible to open an FHSA, an individual must meet several conditions at the time the account is established. These conditions include:

  • Being a resident of Canada. Residency status is a key factor in determining eligibility. If an individual becomes a non-resident after opening an FHSA, they can still contribute, but withdrawals not used for a qualifying home purchase would not be tax-free. Individuals who have just moved to Canada can open an FHSA if they are residents and meet all other criteria.

  • Meeting the age requirement. An individual must be at least 18 years old, or the legal age in their province or territory if it is 19, to enter into a contract such as opening an FHSA.

  • Qualifying as a first-time home buyer for the purpose of opening an FHSA. This condition is met if the individual, or their spouse or common-law partner, did not own a qualifying home that they lived in as a principal place of residence at any time in the year the account is opened or during the preceding four calendar years. For this purpose, a home owned by a spouse where the individual lived would only render them ineligible if that person remains their spouse when the FHSA is opened. Owning property in another country within the last four years would generally make an individual ineligible as a first-time home buyer.

Meeting all of these conditions is mandatory to be considered a qualifying individual eligible to open an FHSA.

Contribution Limits and Mechanics

The FHSA has both annual and lifetime contribution limits.

  • The annual contribution limit is $8,000 per calendar year. This limit applies from the year the account is opened.

  • The lifetime contribution limit is $40,000.

It is important to note that FHSA contribution room differs from RRSPs or TFSAs as it only begins to accumulate after the account is opened. Therefore, opening an account promptly is beneficial even if contributions are delayed.

Unused annual contribution room can be carried forward to the next calendar year. However, there are limitations to this carry-forward. The maximum amount of unused FHSA participation room that can be carried forward is $8,000. This carry-forward is added to the current year's $8,000 limit to determine the total participation room for the year. For example, if $3,000 is contributed in the first year (with an $8,000 limit), $5,000 of unused room can be carried forward, resulting in a $13,000 participation room in the second year ($8,000 + $5,000).

Individuals can open more than one FHSA, but the total amount contributed across all accounts cannot exceed the yearly and lifetime contribution limits. The FHSA participation room for the year applies to all FHSAs held by the individual.

Contributions made within the first 60 days of the year cannot be attributed to the previous year, unlike RRSPs.

Income earned within the FHSA (such as investment income or capital gains) does not count towards the FHSA participation room or the lifetime limit.

Excess Contributions

If contributions and transfers to FHSAs in a year exceed the individual's FHSA participation room, this creates an excess FHSA amount. A tax of 1% per month is generally levied on the highest excess FHSA amount in the month until the excess is eliminated. Exceeding the limit may also impact the FHSA participation room for the following year. Methods to reduce or eliminate an excess FHSA amount include making a designated withdrawal or a taxable withdrawal.

Tax Benefits

The FHSA offers significant tax advantages.

      • Tax-Deductible Contributions: Contributions made to an FHSA are generally deductible and can be used to reduce taxable income in the year they are made. This provides an immediate tax benefit, similar to RRSPs. Only the FHSA holder can claim contributions as a tax deduction.

      • Tax-Free Growth: Investment income earned within the FHSA is not taxed while held in the account.

      • Tax-Free Withdrawals: Qualifying withdrawals made from the FHSA to purchase or build a qualifying first home are entirely tax-free. This means both the contributions and any investment earnings can be withdrawn tax-free for this purpose.

Permitted Investments 

Funds within an FHSA can be invested. The investing rules are similar to those for TFSAs. Permitted investments include:

      • Mutual funds

      • Publicly traded securities

      • Government and corporate bonds

      • Guaranteed Investment Certificates (GICs)

      • Stocks and ETFs

      • Savings accounts or high-interest savings portfolios

Examples of non-qualified investments include "non-arm’s length" investments and investments in assets such as land, shares of private corporations, and partnerships. Different types of FHSAs, such as depositary, trusteed, or insured FHSAs, can hold various qualified investments. A self-directed FHSA allows the holder to manage their own portfolio of qualified investments.

Withdrawals 

There are different types of withdrawals from an FHSA, each with specific tax implications.

      • Qualifying Withdrawals: These are withdrawals made to buy a qualifying home and are tax-free. To make a qualifying withdrawal, several conditions must be met. A key condition is that the individual must be considered a first-time home buyer for the purpose of making a qualifying withdrawal, which has a slightly different definition than for opening the account. If buying with a spouse or common-law partner, each individual can make a qualifying withdrawal from their own FHSA if they meet the conditions. There is no minimum period that funds must remain in the account before a qualifying withdrawal can be made. The individual must have a written agreement to buy or build a qualifying home before October 1st of the year following the withdrawal. The home must be located in Canada and must be made the individual's principal residence within one year of buying or building it. To make a qualifying withdrawal, Form RC725, Request to Make a Qualifying Withdrawal from your FHSA, must typically be filled out. A qualifying withdrawal cannot be cancelled once made.

      • Taxable Withdrawals: Any withdrawal that is not a qualifying withdrawal, designated amount, or otherwise included in income is a taxable withdrawal. These withdrawals must be included as income on the individual's income tax and benefit return for the year the withdrawal is received and are subject to income tax withholding. Withdrawals for purposes other than a qualifying home purchase, such as buying a car, fall into this category. Taxable withdrawals do not increase contribution limits.

There are also designated withdrawals, which can be made to help eliminate an excess FHSA amount and are not required to be included in income.

Transfers 

Funds can be transferred between an FHSA and other registered plans under certain conditions.

      • Transfers to RRSPs or RRIFs: Property can be transferred directly from an FHSA to an RRSP or RRIF where the individual is the annuitant without immediate tax consequences, provided there is no excess FHSA amount. Transfers from an FHSA to an RRSP or RRIF generally do not impact RRSP deduction room or FHSA participation room. An indirect transfer (withdrawing funds and then contributing them) is considered a taxable withdrawal from the FHSA and a new contribution to the RRSP/RRIF. If there is an excess FHSA amount, the maximum amount that can be transferred tax-free is the FHSA's fair market value minus the excess amount; any amount transferred above this limit is treated as a taxable withdrawal and a new RRSP contribution. Form RC721 is typically used for direct transfers to RRSPs or RRIFs. A transfer of unused FHSA balance into a retirement account is explicitly mentioned as possible without tax implications, potentially offering a boost to savings.

      • Transfers to another FHSA: Property can be transferred directly from one FHSA to another FHSA held by the same individual without reducing FHSA participation room. Form RC721 may be used for this purpose.

      • Transfers to other registered plans (TFSA, etc.): Direct transfers from an FHSA are only permitted to RRSPs, RRIFs, or other FHSAs. Transferring property from an FHSA to other registered plans like a TFSA, RPP, RESP, RDSP, PRPP, or SPP is not possible via direct transfer. Such a transaction would require a taxable withdrawal from the FHSA and a new contribution to the other plan, with associated tax consequences and impact on contribution room for the receiving plan.

Any money left over in the FHSA after a qualifying home purchase can be transferred to an RRSP or RRIF by December 31st of the year following the qualifying withdrawal without penalties or taxes. These transfers do not reduce or limit available RRSP room.

There are also designated transfers, which can be made to help eliminate an excess FHSA amount and are not required to be included in income.

Comparison with Other Savings Accounts

The FHSA offers unique advantages when compared to Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs), especially for those saving for a first home.

      • FHSA vs. TFSA: Both are tax-sheltered accounts, but have different rules and tax implications for withdrawals. TFSA contributions do not reduce taxable income, but withdrawals are tax-free for any purpose. FHSA contributions are tax-deductible, and qualifying withdrawals for a first home are tax-free. FHSA contribution room starts accumulating only after opening the account, unlike TFSA contribution room which is based on age and residency. A TFSA offers more flexibility if the funds may not be used for a home.

 

      • FHSA vs. RRSP: Both allow tax deductions for contributions. The key difference for home buying is the Home Buyer's Plan (HBP) with RRSPs. The HBP allows withdrawal of up to $35,000 from an RRSP, tax-free, for a first home. However, the amount withdrawn under the HBP must be repaid to the RRSP within 15 years, starting the second year after withdrawal, or it becomes taxable income. The FHSA has no such repayment requirement for qualifying withdrawals. For saving specifically for a first home, the FHSA is often considered preferable due to the lack of a repayment obligation. It is possible to combine funds from both an FHSA and an RRSP (via the HBP) for the same qualifying home purchase, provided conditions for both are met. Transferring funds from an RRSP to an FHSA is possible, tax-free, up to FHSA limits, but this transfer does not provide a tax deduction and permanently reduces RRSP contribution room.

For individuals saving for a first home, maxing out FHSA contributions first and then saving additional funds in a TFSA is suggested as a strategy to gain tax advantages without the repayment requirements of an RRSP.

Maximum Participation Period and Closing

An FHSA has a maximum participation period. The account must be closed by the end of the 15th year after it was opened, or by the end of the year the holder turns 71 years old, whichever comes first. If the funds are not used for a qualifying home purchase by this time, the FHSA status ends. The unused balance can be transferred into the holder's RRSP or Registered Retirement Income Fund (RRIF) without tax consequences. If the funds are withdrawn for any other purpose, they are taxable as income.

After making the first qualifying withdrawal, all FHSAs must be closed on or before December 31 of the year following the year of the first qualifying withdrawal. This is because the maximum participation period ends at that time.

Administrative Considerations 

Opening an FHSA involves contacting an issuer (like a bank, credit union, or trust/insurance company) and providing necessary information, including a Social Insurance Number and date of birth. It is possible that providing incorrect information could lead to the revocation of the account's registration retroactively.

Upon opening the first FHSA, even if no contributions are made, individuals must file Schedule 15 - FHSA Contributions, Transfers and Activities with their income tax and benefit return for that year to inform the Canada Revenue Agency (CRA).

Information regarding FHSA participation room for the following year can be found on the latest notice of assessment or reassessment, or on Form T1028. This information can also be obtained by contacting the CRA directly.

FHSA issuers provide a T4FHSA slip detailing contributions, transfers, and withdrawals made during the year. These amounts must be reported on the individual's income tax and benefit return. Qualifying withdrawals and direct transfers to RRSPs/RRIFs or other FHSAs without an excess amount generally do not need to be reported on the income tax return itself, but the transactions are recorded via the T4FHSA and Schedule 15.

In the event of the FHSA holder's death, a successor account holder (typically a spouse who meets eligibility) can take over the account without impacting their own FHSA limits, unless there was an overcontribution. If the spouse is ineligible, or if the successor is not a spouse, the funds generally must be withdrawn (which is taxable) or transferred to an RRSP/RRIF. If not closed by the end of the year of death, the fair market value becomes deemed income to the beneficiaries or estate.

In the case of divorce or common-law partnership breakdown, funds can be transferred directly between partners' FHSAs, RRSPs, or RRIFs without impacting contribution limits, unless there was an overcontribution.

US citizens residing in Canada should consult a US tax expert before opening an FHSA, as Canadian tax-advantaged accounts like TFSAs can present complex tax issues (e.g., double taxation, reporting) under US tax rules, and FHSAs may have similar issues.

The FHSA became available on April 1, 2023. The eligibility conditions and rules are subject to the enabling legislation.

 

 

Posted by Cody Tritter on
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