The tax-free first home savings account has been legally available since April 1, but only a few financial institutions have made the FHSA available to clients. That’s due in part to the many technicalities involved in launching the account.
The Investment Funds Institute of Canada (IFIC) has submitted hundreds of questions to the Canada Revenue Agency (CRA), said Josée Baillargeon, IFIC’s senior policy advisor, taxation. Baillargeon, who was speaking at IFIC’s operations day on Tuesday in Toronto, said there’s been “really good collaboration” with both the CRA and the Department of Finance.
For example, the CRA was going to require a new account number when a successor account holder takes over an FHSA after a death. But that’s different than what happens to TFSAs and RRIFs, and would have required a lot of programming from the offering institution, Baillargeon said. Fortunately, the CRA heard that information and changed its mind, she said.
For its part, the Department of Finance provided IFIC with a comfort letter earlier this year stating that the government is working with the U.S. Internal Revenue Service to put the FHSA on the list of exempted accounts for FATCA reporting purposes.
Baillargeon suggested the CRA was aiming to learn from its experience launching the TFSA and other registered plans.
For example, she said the agency is considering a consolidated FHSA receipt that will list the year’s contributions, withdrawals and withholding taxes, instead of the multiple slips issued for other registered plans.
“This is going to be all in one,” she said.
Baillargeon said the CRA told her all FHSA-related forms should be released by the end of June.
FHSA closures
Financial institutions need to think about the trigger points for closing an FHSA: the account holder turning 71, the last account holder’s death, the 15th anniversary of opening the first FHSA and the year after the account holder makes their first qualifying withdrawal.
If an account holder has FHSAs with multiple institutions and withdraws from just one account, the other institutions may not know about that qualifying withdrawal, Baillargeon said. That can be a problem since all of a person’s FHSAs must close by the end of the year after the person’s first withdrawal. The CRA will report qualifying withdrawals the following March, giving the other institutions only nine months (i.e., until Dec. 31) to ensure their FHSAs are closed.
Any un-withdrawn savings in a FHSA may be transferred on a tax-free basis to an RRSP or RRIF until Dec. 31 of the year following the year of their first qualifying withdrawal. And account holders who don’t purchase a home after 15 years can also move their FHSA assets into an RRSP or RRIF.
However, a client who misses the deadlines to perform these transfers are left with an account that ceases to be an FHSA. That account loses its tax-deferred status, and “it becomes a bit of a nightmare to administer,” Baillargeon said.
For example, if the account holder is still alive when the FHSA is no longer an FHSA, there will be a deemed income inclusion for the entire value of the account. If the account holder has died, the deceased’s estate or the beneficiary will bear the income inclusion.
“We’re still trying to clarify the whole withholding tax around the deemed inclusion [with the CRA],” she said.
Baillargeon added that a former FHSA would become a trust and need to file an annual T3 return. “With enhanced trust reporting, it’s a bit of a double whammy,” she said.
Even though the account has only been available since April, an FHSA closure situation will occur sooner rather than later. For example, Baillargeon said she recalled opening a TFSA for someone who died the same year.
Baillargeon said it’s easier to incorporate processes, checks and balances for a new account before rather than after it rolls out, and encouraged institutions not to leave crucial updates to a second phase.
The FHSA is currently available through institutions such as Questrade, Fidelity, National Bank of Canada and Royal Bank of Canada.