The Tax-Free First Home Savings Account (FHSA) is a new plan, but it’s not too early to consider the tax and estate implications of someone dying while holding an account.
An FHSA can remain an FHSA until the end of the year of its 15th anniversary, the FHSA holder reaches age 71, or the end of the year after the FHSA holder makes their first qualifying withdrawal.
Carol Bezaire, vice-president of tax and estate planning with Mackenzie Investments in Toronto, said that while clients “are really starting to be interested in putting money in [FHSAs],” she doesn’t think they “quite understand the consequences when someone passes away holding an FHSA.”
Here are the key points to remember regarding FHSA beneficiary designations and the tax treatment of an FHSA on death.
Survivor as successor holder
As with a TFSA, an FHSA holder may designate a spouse or common-law partner — a “survivor” — to be a successor holder of the FHSA, either on the FHSA contract or in a will.
Only a spouse or common-law partner can be a successor holder. (The provinces and territories have yet to update their laws to recognize FHSA beneficiary designations outside of a will. Quebec doesn’t recognize beneficiary designations on registered plans, only in wills.)
If a successor holder is also a “qualifying individual” at the time of the FHSA holder’s death, they can effectively step into the deceased’s shoes as the new holder of the FHSA. (A qualifying individual is someone who is eligible to open an FHSA: at least 18, a resident of Canada and a first-time home buyer.) The normal FHSA rules will continue to apply.
“Make sure [clients] name a successor holder wherever they can,” Bezaire said. “A beneficiary designation has different tax consequences.”
If the successor holder is a qualifying individual who already has an FHSA, becoming successor holder of the deceased’s FHSA will not affect their FHSA contribution room. However, the transferred FHSA will be subject to the survivor’s existing maximum FHSA participation period.
If the qualified successor holder didn’t have an FHSA, they will be considered to have opened an FHSA on the day their spouse died.
A qualified successor holder can choose not to take over the deceased’s FHSA and instead transfer it to their RRSP or RRIF on a tax-deferred basis. This must be done by the end of the exempt period, which is the end of the year following the year of death.
The successor holder also has the choice of receiving the deceased’s FHSA directly as a taxable distribution by the end of the exempt period. The FHSA’s issuer must withhold tax on the withdrawal, which the survivor may claim against any tax owing for the year the withdrawal was made. The withholding tax rate is the same as on lump-sum payments from an RRSP.
If the successor holder isn’t a qualifying individual when their spouse dies, they can’t become the new holder of the FHSA. Instead, they must either transfer all of the property of the FHSA on a tax-deferred basis to their RRSP or RRIF, or receive it on a taxable basis, by the end of the exempt period.
Survivor as beneficiary
If a survivor is designated as a beneficiary, not as a successor holder, they can’t become the new holder of the FHSA. Instead, they can make a direct transfer of their portion of the property on a tax-deferred basis directly to their FHSA, RRSP or RRIF, or receive the property as a taxable distribution, anytime during the exempt period.
At an event held by the Investment Funds Institute of Canada (IFIC) on May 30, Josée Baillargeon, IFIC’s senior policy advisor, taxation, noted that guidance on the CRA’s website is silent on whether a survivor who is a beneficiary of the FHSA, but not a successor holder, needs to be a qualifying individual to make the transfer to their FHSA. Baillargeon said that IFIC has asked the CRA for clarity on the matter.
If the FHSA holder did not designate a beneficiary either on the FHSA contract or in their will, the property in the FHSA will be distributed to the deceased’s estate and be taxable as income to the estate.
However, if a survivor is a beneficiary of that estate, they and the executor can jointly elect to deem the transfer be made from the deceased’s FHSA (not the estate) to their survivor’s FHSA, but only if they’re a qualifying individual. Otherwise, the transfer must go to their RRSP or RRIF on a tax-deferred basis.
Alternatively, the survivor and the executor can jointly elect to have the property deemed to be paid from the FHSA (not the estate) to the survivor on a taxable basis.
As of press time, the joint election form isn’t yet available.
Beneficiary who isn’t the survivor
If the FHSA holder designated anyone other than their survivor as their FHSA’s beneficiary, the beneficiary must include any property they receive from the FHSA during the exempt period in their income for the year they received it.
At the end of the exempt period, and after
An FHSA must be closed by the end of the exempt period; otherwise, it ceases to be an FHSA.
The fair market value of any property remaining in an FHSA at the end of the exempt period must be included in a beneficiary’s income for the year. No tax-deferred transfers can occur after the exempt period.
The tax treatment of income earned in the deceased’s account after the exempt period will depend on the type of FHSA it was. For example, a trusteed FHSA will become a regular inter vivos trust and be treated that way for tax and reporting purposes.
Probate and the FHSA
The proceeds of an FHSA that has a designated successor holder or beneficiary other than the estate will not form part of the estate. That means the proceeds will not be subject to probate tax.
Excess FHSA amounts (over-contributions) at death
If the deceased holder dies with an excess FHSA amount in their account, special rules will apply. However, as of press time, the CRA has yet to make these rules available.