Eligible Canadians can now enjoy the benefits of the newly introduced First Home Savings Account (FHSA) to save for a home. FHSA’s are poised to become popular because these plans combine the benefits of tax-deductible contributions with tax-free qualified withdrawals. Income earned and gains realized in an FHSA are tax-free.
To be eligible to open an FHSA, an individual must be a resident of Canada, be at least 18 years old and not have occupied a home as their primary residence that they or their spouse or common-law partner owned or jointly owned with any person during the year or the previous four years. Because the look-back period for previous home ownership is only four years, FHSA’s are not necessarily restricted to first time home buyers.
Annual contributions to an FHSA are limited to $8,000 plus unused contribution room from the immediate prior year and total lifetime contributions cannot exceed $40,000. Contributions to an FHSA by an individual can be deducted from income or carried forward and deducted in a future year. Deductible contributions for a year must be made by December 31st of that year. FHSA contributions may also be made in whole or part by direct transfer from an individual’s RRSP. Contributions funded by RRSP transfers are not deductible by the individual. Spouses can open separate FHSA’s, which allows a couple to double their savings toward a future home purchase.
Excess contributions are subject to a 1 per cent per month penalty tax until the excess is withdrawn or new contribution room is created in the following year to absorb the overcontribution. If the excess contribution arose from a direct transfer to the FHSA from the RRSP, the excess contribution must be transferred back to the RRSP.
First Home Savings Account termination and withdrawal rules
The FHSA must terminate no later than December 31st of the year that the earliest of the following events occurs: (i) the 15th anniversary of opening the FHSA, (ii) the individual turns 71, or (iii) the year following the year in which the individual takes the first tax-free withdrawal to acquire a home. Assets remaining in an FHSA on termination date are included in the individual’s income for that year. FHSA assets can be transferred to the individual’s RRSP or RRIF prior to termination date to avoid the termination date income inclusion. Transfers from an FHSA to an RRSP do not impact an individual’s unused RRSP deduction room. Transfers to an individual’s FHSA can be made from a spousal RRSP if the individual did not make any spousal RRSP contributions in the year or the prior two calendar years.
Form RC725 is used by the individual to request a tax-free FHSA withdrawal from the financial institution. A qualifying tax-free withdrawal requires the individual to have a written agreement in place to acquire or construct a home in Canada before October 1st of the year following the year of withdrawal. The individual must intend to move into the home no later than one year after the home is acquired. The individual must be a resident of Canada from the time of the first withdrawal until the time the individual acquires the home (or the date of death if the individual dies before acquiring the home). The individual must not have occupied a home as a primary residence that the individual owned or jointly owned with any person in the current year (excluding the 30-day period immediately prior to the withdrawal) or the preceding four calendar years.
Tax-free withdrawals from an FHSA include only qualified withdrawals to acquire a home or withdrawals of excess contributions. All other withdrawals are taxable. A direct transfer from an FHSA to an RRSP or RRIF is not considered a taxable withdrawal.
How the First Home Savings Account can be used
FHSA withdrawals can be used in conjunction with the RRSP Home Buyers Plan (“HBP”) that has been around for many years. The HBP allows individuals to withdraw up to $35,000 from their RRSP toward the purchase of a home. The main difference between an FHSA and the HBP is that HBP withdrawals must be repaid to the individual’s RRSP over 15 years and missed repayments are included in the individual’s income.
On the breakdown of a marriage or common law relationship, a direct tax-free transfer of some or all of an individual’s FHSA assets to an FHSA, RRSP or RRIF owned by a current or former spouse or common law partner is permitted if the recipient is entitled to the amount under a decree, order or judgment of a competent tribunal or a written agreement relating to a division of property in settlement of rights arising on the breakdown of the relationship. The transferred amount does not affect the recipient’s lifetime FHSA contribution limit.
A non-resident cannot open an FHSA or withdraw funds tax-free to acquire a home. A non-resident may, however, own an FHSA and continue to make contributions to an FHSA, subject to the annual and lifetime limits. If a non-resident does not return to Canada, withdrawals from the FHSA are subject to a 25 per cent Canadian withholding tax, unless reduced by a tax treaty. Taxable distributions from an FHSA to a non-resident would appear to be characterized as trust distributions for purposes of treaty reduced withholding tax rates.
If an individual dies while owning an FHSA and there is a surviving spouse, the FHSA can be transferred tax-free to the spouse, assuming the spouse is eligible to open an FHSA, or the spouse’s RRSP or RRIF. If there is no surviving spouse, the FHSA assets are taxable to the beneficiary to whom the FHSA assets are distributed. If there is no beneficiary designated to inherit the FHSA, the FHSA assets will be distributed to the estate and the estate will pay the tax. If the distribution of the deceased’s FHSA assets has not been completed by December 31st of the year following the year of death, each beneficiary of the FHSA must include their share of the FHSA assets in their income for that year or, if there are no beneficiaries of the FHSA, the estate will include the amount in income. Thereafter, the FHSA rules cease to apply and the undistributed assets are deemed to be held in a trust that is subject to the normal taxation rules that apply to trusts.
Glen MacMillan, Partner
Domestic Tax Practice
For more information on the First Home Savings Account, contact a member of our team.
The above content is incomplete, does not address all scenarios and is intended for general information purposes only. This material should not be used or relied on as a substitute for consultation with your Adams + Miles professional advisor.
