In February 2022, the price of the average Canadian home hit $817,2901 — an all-time record, as measured by the Canadian Real Estate Association (CREA) — and although that figure has come down over the past several months as the Bank of Canada started raising interest rates, housing affordability continues to be a significant roadblock for many Canadians.
In its 2022 Federal Budget, the Government of Canada proposed a new type of investment account designed to help Canadians save towards the purchase of their first home. The account is called the Tax-Free First Home Savings Account (FHSA) and combines the benefits of both the Registered Retirement Savings Plan (RRSP) with the Tax-Free Savings Account (TFSA). The government has not yet set a launch date for the FHSA but has indicated that individuals will be able to open and contribute to the account in 2023.
The FHSA will be available to all first-time home buyers who are Canadian residents and over the age of 18. To qualify as a first-time home buyer, you cannot have owned a home as your principal residence during any part of the calendar year prior to opening the account or at any time in the previous four calendar years. The FHSA can be open for a maximum of 15 years or until December 31 of the year the account holder turns 71; should either of this stipulations not be met, the account would no longer qualify as a FHSA. Annual contributions are limited to $8,000, with a lifetime maximum of $40,000. Similar to an RRSP, contributions to the FHSA will be tax-deductible in the year of contribution or can be claimed in a future year. Only the individual making the contribution will be able to claim the deduction, but funds can be provided by a spouse without triggering attribution rules. If the full $8,000 annual limit is not contributed in the current year, any unused “room” can be carried forward to future years. Note that carry-forward room starts to accrue only after the account has been opened. Individuals can have multiple FHSAs, but the total amount contributed across all accounts cannot exceed the annual or lifetime limits, with any over-contributions subject to a monthly penalty of 1%. Similar to a TFSA, investment income and growth within the account is tax-free.
As its name indicates, the FHSA is intended to be used for the purchase of a first home, and as such, there are specific requirements that must be met in order to withdraw the funds tax-free. First, you must be a first-time home buyer, as described above. Second, you will need to have a written agreement to buy or build a qualifying home before October 1 of the year following the year of the first withdrawal. Third, it must be your intention to occupy the home as your principal residence within one year after buying or building it. And lastly, the property must be located in Canada. If all of these requirements are met, funds can be withdrawn tax-free in either a lump sum or a series or withdrawals.
As mentioned, individuals can have multiple FHSAs and transfers from one FHSA to another FHSA are permitted and can be done tax-free. Individuals will also be able to transfer funds from an RRSP to a FHSA on a tax-free basis. These transfers would be subject to the annual and lifetime contribution limits of the FHSA, would not be deductible, and would not restore any RRSP contribution room. Any funds remaining in the FHSA that do not get used to purchase a first home can be transferred to an RRSP or RRIF, or withdrawn on a taxable basis. Funds transferred from a FHSA to an RRSP or RRIF would be subject to the same rules applied to these accounts and would not be limited by available RRSP contribution room or restore the FHSA lifetime contribution limit.
The FHSA will permit beneficiary designations similar to TFSAs, allowing spouses or common-law partners to become the successor account holder upon the death of the original FHSA holder. In order to become the new account holder, the surviving spouse will still need to qualify under the eligibility requirements to open a FHSA. If eligibility requirements cannot be met, funds in the FHSA can be transferred to the surviving spouse’s RRSP or RRIF, or withdrawn subject to tax. If the beneficiary of the FHSA is not the surviving spouse or common-law partner of the account holder, funds will be paid to that person on a taxable basis.
This description of the Tax-Free First Home Savings Account does not cover every facet in detail, but instead sets out to provide a general overview of the new account’s main feature. A more in-depth explanation of the guidelines can be found on the Government of Canada’s website2 or by contacting your Private Wealth Counsellor.
1 The Canadian Real Estate Association. https://stats.crea.ca/en-CA/ 2 Department of Finance Canada.
The Winnipeg Team