Tax-free first home savings accounts: What we know (and don’t know) so far
For the first time since 2009, a new registered plan is being introduced: the tax-free first home savings account (FHSA). With an anticipated launch date sometime in 2023, the FHSA is designed to help first-time homebuyers save for the purchase of a home. To do so, it will combine elements of tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs) to create a uniquely tax-advantaged savings environment. Contributions made to FHSAs will be tax deductible; investment income and growth inside the plan will accumulate tax free; and withdrawals made to purchase a first home will be non-taxable.
While some details about the upcoming FHSA have yet to be revealed, many of its key features are known:
To open an FHSA, individuals will have to meet all the following requirements:
- Must be 18 years of age or older
- Must reside in Canada
- Must not have lived in a home they owned at any time during the current year and the preceding four calendar years
The annual contribution limit (per calendar year) for FHSAs will be fixed at $8,000, with no ability to make a “catch up” contribution of unused room in a future year. For example, if someone makes a $1,000 contribution in 2023, they will still be limited to a maximum annual contribution of $8,000 in 2024. There will be a total lifetime contribution limit of $40,000 per person, which can be reached in a minimum of 5 calendar years if the maximum is contributed each year. Individuals will be allowed to open more than one FHSA account if they wish, but the annual and lifetime contribution limits must be shared among all accounts belonging to that individual.
While we know that contributions to an FHSA will be deductible against income in the year the contributions are made, it is not yet clear whether it will be possible to carry forward the deduction to a future year in the event an accountholder is unable to deduct the contribution against income in the current year.
To facilitate the funding of FHSAs, individuals will be permitted to transfer existing funds from their RRSPs or registered retirement income funds (RRIFs) to an FHSA on a tax-free basis. RRSP contribution room for the amount transferred from an RRSP or RRIF will not be restored to the individual.
Withdrawals and account closure options
While FHSAs are designed to allow for tax-free withdrawals to purchase a first home, it is important to note that FHSA withdrawals used for any purpose other than the purchase of a home will cause the amount withdrawn to be included in income and taxed in the year the withdrawal is made.
FHSAs can remain open for a maximum of 15 years, at which point they must be collapsed. When an FHSA is closed with unused funds remaining, those funds will be taxed in the year of the account closure. Alternatively, an FHSA can be collapsed by transferring the unused FHSA balance to an RRSP or RRIF account belonging to the individual without requiring the individual to have RRSP contribution room and without affecting their RRSP contribution limit.
FHSAs and the Home Buyers’ Plan
As it currently stands, the use of an FHSA and the current homebuyers’ plan (HBP) are mutually exclusive, meaning that one plan or the other can be utilized by an individual to purchase a first home, but not both. As a refresher, the HBP allows individuals to borrow up to $35,000 from their RRSPs tax-free to fund the purchase of a first home. HBP withdrawals must eventually be returned by the individual to their RRSP and no deduction is available for HBP repayments.
While FHSAs appear to offer some advantages over the HBP, individuals who plan to purchase a home in the near future may still find the HBP to be an attractive option. The annual limits on FHSA contributions, as well as the time needed to see those savings grow, mean that the FHSA will take some years for its full potential benefits to be realized.
In the coming months, we will know more about the inner workings of FHSAs, the practical considerations associated with opening an account, and details pertaining to various other matters. For now, the industry has started to consider a number of issues that will need to be addressed by various governing authorities, starting with the tax rules via the Ministry of Finance. A small sample of some outstanding industry questions have been listed below:
- Will the provinces and territories amend their legislation to permit beneficiary designations?
- Will there be an ability for individuals to pre-fund FHSA accounts (e.g., “Spousal FHSA”) for certain family members? What about the downstream impact such as the application of the tax attribution rules?
- What will be the allowable investments within the FHSA (e.g., will it be similar to “qualified investments” for RRSPs, RRIFs and TFSAs)?
- Will there be coordination between the Home Buyers Plan (HBP) and the FHSA for qualifying withdrawals and perhaps an expansion of the CRA Form T1036 currently used for HBP? Perhaps a new CRA form needs to be developed.
- Will there be an age maturity date for the FHSA?
- What are the downstream impacts (both tax and estate) as a result of death or non-residency of the FHSA planholder?
- What is the required location or situs of a qualifying home (i.e., must the home be located in Canada or can it be outside of Canada)?
- What happens to the plan in the event of a marriage breakdown or if the planholder becomes bankrupt or insolvent?
- What is the penalty for overcontributing to an FHSA?
- What are the tax slip filing and reporting obligations for both the FHSA holder and for financial institutions?
- Will there be limitations on the circumstances under which a tax-free transfer from an FHSA to an RRSP or RRIF may occur?
- Will the FHSA holder need “earned income” to contribute to a FHSA (as with RRSPs) or will contribution room be allotted annually (as with TFSAs)?
The Ministry of Finance expects to release Draft Regulations this summer with the likelihood of a 60-day comment period. Further adjustments may also be made to the known features of FHSAs as we approach 2023 as well, so stay tuned for updates as further information becomes available.