On August 9, 2022, the Government of Canada introduced draft legislation for the tax-free First Home Savings Account (FHSA).1 The FHSA, which combines features of an RRSP and a TFSA, will provide Canadians under age 72 the ability to contribute up to $40,000 on a tax-free basis towards the purchase of a home.
Overview
A qualifying individual will be able to contribute up to $8,000 annually to a total of $40,000 to a FHSA, which may be offered by providers of other registered plans. Unused contribution room can be carried forward. Over-contributions will be subject to a tax at the rate of 1 per cent/month (or part month). Similar to an RRSP, contributions made in a calendar year are tax deductible in that year (unlike an RRSP contributions made in the first 60 days of a calendar year cannot be deducted in respect of the prior year). The individual may withdraw FHSA amounts on a tax-free basis to fund the purchase of a home that is a qualifying transaction. FHSAs must terminate at December 31st of the year following the year in which earliest of these events occurs:
- the first qualifying withdrawal from the FHSA;
- the holder turns 70; or
- the 14th anniversary of opening the holder's first FHSA account.
Unused FHSA funds can be withdrawn on a taxable basis or transferred, tax free and without reducing any available contribution room, to another FHSA or a RRSP or RRIF of the holder. Tax-free transfers are also available to a FHSA, RRSP or RRIF of a spouse or common law partner of the holder on death of the holder or pursuant to a court order or written agreement on the breakdown of a marriage or common-law relationship.
Similar to other registered plans, funds in a FHSA must be invested in qualified investments under the Income Tax Act in order to avoid penalty taxes. The prohibited investment and advantage tax rules that apply to other registered plans will also apply to FHSAs.
Qualifying individual
To open a FHSA, an individual must be a resident of Canada, be between the ages of 18 and 71 years of age and cannot, at any time during the year or the four preceding years, have owned or had an interest in a qualifying home (which for this purpose includes a home outside of Canada) inhabited by the individual as their principal place of residence. Interests as a beneficiary of a trust which owns a home are included.
It is likely that the individual will be required to self-certify eligibility when applying to open a FHSA.
Contributions
Contributions by the holder are tax-deductible. Contributions can also be made by way of transfers from the holder's RRSP, but no tax deduction is available. Contributions are limited to the deduction limit for the year.
Unlike an RRSP, spousal contributions are not permitted. In other words, one spouse or partner cannot contribute $16,000 to be split evenly between each holder's FHSA accounts and claim an equivalent deduction to taxable income. However, one spouse can gift the contribution amount to the another spouse tax-free for the recipient to contribute to a FHSA.
Qualifying withdrawal
A holder who is then resident in Canada and has not have an "owner-occupied home" (determined under the Home Buyer's Plan rules applicable to RRSPs) for the four preceding tax years will be able to request a withdrawal from the plan for the purchase of an qualifying home. The purchase arrangements must meet certain timing requirements. The FHSA cannot be used in conjunction with the Home Buyer's Plan (however, a holder can transfer funds to a FHSA from their RRSP as described above).
Death of a FHSA holder
The holder of a FHSA can designate a spouse or common-law partner as the successor holder. The surviving spouse or common-law partner can then receive the FHSA on a tax-free basis, without any impact on their own contribution limits. The inherited FHSA would assume the surviving spouse's termination date. Where there is no successor holder, there will be tax triggered on death. We note that provincial succession legislation will need to be amended to accommodate beneficiary designations on FHSAs in a similar manner as for other registered plans.
Availability
Subject to service providers and the Canada Revenue Agency being equipped to design and register these plans, the intention is that FHSAs will be available "at some point in 2023" so that "Canadians would be allowed to contribute the full $8,000 annual limit in that year". 2
Taxpayers with comments or suggestions on the draft legislation are encouraged to send them to Consultation-Legislation@fin.gc.ca by Sept. 30, 2022.
Footnotes
1. Government of Canada, "Legislative Proposals Relating to the Income Tax Act and Other Legislation and Explanatory Notes" (August 2022) online: https://fin.canada.ca/drleg-apl/2022/ita-lir-0822-eng.html.
2. Ibid.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
