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There’s a lot to like about the Tax-Free First Home Savings Account (FHSA). This article looks at the key features of an FHSA and answers some questions you may have.
Residential housing in Canada has risen a lot in value over the last decade. And this increase has benefitted many homeowners. But, it’s also cursed many Canadians who want to enter the real estate market. To help these potential buyers, the Federal Government created the Tax-Free First Home Savings Account (FHSA). This new investment vehicle allows a first-time home buyer to save up to $40,000 to buy their first home, tax-free, starting April 1, 2023. This article looks at the key features of an FHSA and answers some questions you may have.
To open an FHSA, you must be a resident of Canada and at least 18 years of age. As well you need to be a first-time home buyer. That means that you (or your spouse or common-law partner (CLP)) have not owned a qualifying home, or that you’ve lived in one as a principal residence, at any time in the calendar year leading up to opening your FHSA, or any time in the preceding four calendar years.
The lifetime limit is $40,000, and the annual maximum is $8,000 a year. If you contribute less than that, you can carry the difference forward and use up to $8,000 of unused contribution room in a future year. For example, your FHSA limit for 2023 is $8,000, but you contribute only $6,000 that year. This means the difference of $2,000 will go to your 2024 contribution limit of $8,000. It gives you a total contribution room of $10,000 for 2024.
Like Tax-Free Savings Accounts (TFSAs) and Registered Retirement Plans (RRSPs), a special tax will apply if you over-contribute to your FHSA. It equal to 1% of the highest excess amount each month until the situation is resolved.
If you over-contribute, here are some ways to correct it:
Want to know more about the different investment vehicles that exists in Canada? Read this article:
TFSAs, RRSPs, RESPs and non-registered accounts: A comparison
You can buy and hold qualified investments similar to those held in a TFSA or RRSP, such as:
If you purchase a non-qualified investment, your penalty will equal 50% of the fair market value of that investment.
You can make a tax-free withdrawal from your FHSA if:
If you meet these conditions, you can make a tax-free withdrawal or series of withdrawals from your FHSA.
A qualifying home is a housing unit that must be located in Canada. It can also be shares in a co-operative housing corporation that entitles you to possession or an equity interest in a housing unit.
Tax-free growth – like a TFSA, income earned in the FHSA will not be subject to tax, provided you meet the program’s conditions and use the FHSA to buy a qualifying home.
Tax deductibility – like an RRSP, contributions you make to your FHSA (in cash and in-kind) using your non-registered investments are tax-deductible in the calendar year they’re made. You can also fund your FHSA by making a direct transfer from your RRSP. However, you won’t get a tax deduction for the transfer.
Also like an RRSP, you aren’t required to deduct contributions in the calendar year they’re made. So, if you know you’ll soon be in a higher tax bracket, you may want to defer your tax deduction.
No. Only the holder of the FHSA can claim a tax deduction for contributions. You can, however, loan or gift money to your spouse or CLP. This way, they can contribute and get a tax deduction, without any income from their FHSA attributing back to you.
There is a maximum participation period (MPP) that an FHSA can remain open. It begins on the opening of your first FHSA, and ends on December 31 of the year in which the earliest of the following events occur:
For example, if a 21-year-old opens an FHSA in 2023, the MPP will end on December 31, 2038. However, if they make a qualifying withdrawal from their FHSA in 2028, the MPP will end on December 31, 2029. The account would then be closed.
When the MPP ends, income earned in the account is no longer tax exempt. You’ll then have to include the fair market value (FMV) of the FHSA property in your income that year.
To avoid including that income, you can transfer directly, on a tax-deferred basis, any savings not used to purchase a home into your RRSP or registered retirement income fund (RRIF) account, without requiring or using RRSP contribution room. You must do this before the end of the MPP.
If you made a qualifying withdrawal to buy a home, you can transfer directly, on a tax-deferred basis, any unused funds that remain in your FHSA into your RRIF or RRSP, without requiring or using RRSP contribution room. This must be completed before the end of the MPP. You can also withdraw these unused funds on a taxable basis.
Yes, you can have more than one FHSA. But you must stay within the annual and lifetime limits discussed above. You can make tax-free transfers between your various FHSA accounts.
In case a marriage or a common-law partnership breaks down, you can transfer amounts in your FHSA directly to your former spouse/CLP’s FHSA. Such transfers don’t re-instate your FHSA contribution room. Also, they are not counted against your former spouse/CLP's FHSA contribution room. You can also transfer funds to their RRIF or RRSP accounts on a tax-deferred basis, without requiring or using RRSP contribution room.
Have questions about marriage breakdown and removal of spousal designation? Read these insights:
Marriage breakdown and removal of spousal designation
Like a TFSA, you can designate your spouse/CLP as a successor holder to your FHSA. The surviving spouse/CLP becomes the new account holder immediately upon your death, provided they are eligible to open an FHSA. The account would assume the surviving spouse’s MPP. If they aren’t eligible, you can transfer the FHSA directly to their RRIF or RRSP account on a tax-deferred basis or make a taxable withdrawal. The FHSA assumes the surviving spouse's MPP. If the person is ineligible, then the amounts need to be transferred or paid out. You do not use the MPP in that case.
Like a TFSA and RRSP, you can name a beneficiary for your FHSA. If the beneficiary isn’t your spouse/CLP, your estate must close the account, withdraw the balance, and pay it to the beneficiary. A non-spouse recipient includes the fair market value of the FHSA in their income in the year received. They pay tax at their marginal tax rate. Withholding tax applies at the same rate that applies to lump-sum payments from an RRSP/RRIF.
If you name your estate as the beneficiary of your FHSA, you may still benefit from the tax-deferred rollover. To achieve this, your spouse/CLP and legal representative of your estate may jointly elect to transfer the FHSA to:
It must be done within the exempt period (year after year of death).
Your spouse and legal representative can also elect to transfer the proceeds to your spouse as taxable cash. Your spouse/CLP includes the value of the FHSA in their income and pays the tax rather than your estate. Or your estate’s legal representative can choose to retain the FHSA proceeds and have the estate pay the tax. The after-tax proceeds form part of the estate and pass it to your heirs.
Read this article to know more about what happens to your accounts when you die:
Do you know what happens to your accounts when you die?
No.
No.
You can keep contributing to an FHSA. But, you won’t be able to make a tax-free qualifying withdrawal to buy a first home as a non-resident. Withdrawals by non-residents are subject to a non-resident withholding tax of 25%.
No.
Yes. But, you’ll have to include the fair market value of the FHSA in your income in the year pledged. A tax deduction is available in the year when it is no longer pledged. As market values of FHSA investments can fluctuate, the deduction may not equal the income inclusion.
No, the HBP continues to exist. You can use both the HBP and your FHSA on the same qualifying first home purchase. Unlike the HBP, you don’t need to pay back the FHSA funds you use to buy a home. With up to $40,000 plus investment income accumulated in the FHSA and up to $35,000 through the HBP, you could have upwards of $75,000, plus growth within the FHSA, towards your first home purchase.
There’s a lot to like about the FHSA. That’s because of tax deductibility, tax-free compounding and withdrawals, and the flexibility to transfer unused funds on a tax-deferred basis to your RRSP/RRIF. Think of it as a hybrid of a TFSA and an RRSP for first home savings. Speak to your financial advisor to learn more about the FHSA program or to open your account.
Information contained in this article is provided for information purposes only. It is not intended to provide or be a substitute for professional, financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard. It also does not constitute a specific offer to buy and/or sell securities. You should always consult your financial advisor or tax specialist before undertaking any of the strategies discussed in this article to ensure that all elements and your personal circumstances are taken into consideration in developing your individual financial plan. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy and SLGI Asset Management Inc. disclaims any responsibility for any loss that may arise as a result of the use of the strategies discussed.
SLGI Asset Management Inc. is the investment manager of the Sun Life family of mutual funds. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund’s prospectus. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
Sun Life Assurance Company of Canada is the issuer of accumulation annuities (insurance GICs), payout annuities and individual variable annuity contracts (segregated fund contracts). Any amount that is allocated to a segregated fund is invested at the risk of the contract owner and may increase or decrease in value. Sun Life Financial Trust Inc. is the issuer of guaranteed investment certificates.
Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada and Sun Life Financial Trust Inc. all of which are members of the Sun Life group of companies.
