Over the summer, the government moved one step closer to launching the new Tax-Free First Home Savings Account (FHSA) with the introduction of draft legislation and a request for comments. The period for comments ends on Sept. 30, so if you or your clients have comments or suggestions about the FHSA proposals, you’re encouraged to send them to Consultation-Legislation@fin.gc.ca by the deadline.
Here’s the info you can share, proactively, with your clients based on the draft legislation.
The basics
The FHSA gives prospective first-time homebuyers the ability to save $40,000 on a tax-free basis towards the purchase of a first home in Canada. Like an RRSP, contributions to an FHSA will be tax-deductible, but withdrawals to purchase a first home, including from any investment income or growth earned in the account, would be non-taxable, like a TFSA.
To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. In addition, the individual must be a first-time homebuyer, meaning that they have not owned a principal residence in which they lived at any time during the part of the calendar year before the account is opened, or at any time in the preceding four calendar years.
The FHSA can remain open for up to 15 years or until the end of the year when the individual turns 71. Any savings in the FHSA not used to buy a qualifying home by this time could be transferred on a tax-free basis into an RRSP or RRIF, or could be withdrawn on a taxable basis.
Contributions
Eligible individuals will be able to contribute $8,000 annually, up to a $40,000 lifetime contribution limit. There’s a 1% per month penalty tax for any overcontributions. The annual contribution limit will apply to contributions made within a particular calendar year. Unlike RRSPs, contributions made within the first 60 days of a subsequent year can’t be deducted in the current tax year.
The draft legislation also increased the flexibility of the FHSA contributions by allowing an individual to carry forward the unused portion of their annual contribution limit, up to a maximum of $8,000. The $40,000 lifetime contribution maximum also applies.
Like RRSP contributions, individuals won’t be required to claim the FHSA deduction in the tax year in which a contribution is made. The amount can be carried forward indefinitely and deducted in a later tax year, which may make sense if your client expects to be in a higher tax bracket in a future year.
Withdrawals
To be able to withdraw funds from an FHSA on a non-taxable basis, certain conditions must be met. First, your client must be a first-time homebuyer at the time of withdrawal, as discussed above. They must also have a written agreement to buy or build a qualifying home before Oct. 1 of the year following the year of withdrawal, and must intend to occupy that home as their principal place. The home must be in Canada.
If your client meets the conditions, the entire balance in the FHSA can be withdrawn on a tax-free basis in a single withdrawal or a series of withdrawals. The FHSA must be closed by the end of the year following the first qualifying withdrawal, and the client is not permitted to have another FHSA in their lifetime.
Transfers
Clients will be able to transfer funds from one FHSA to another FHSA, or to an RRSP or a RRIF, all on a tax-free basis.
If funds are transferred to an RRSP or RRIF, they will be taxed upon ultimate withdrawal. These transfers won’t affect RRSP contribution room nor would they reinstate an individual’s $40,000 FHSA lifetime contribution limit.
Clients will also be permitted to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits. These transfers would not be tax-deductible and will not reinstate the client’s RRSP contribution room.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.