- Before the withdrawal, the individual has signed an agreement to purchase or construct the ‘qualifying home’ before October 1 of the year following the year of the withdrawal, and
- The individual did not acquire the ‘qualifying home’ more than 30 days before the withdrawal is made.
A qualifying home is a housing unit located in Canada. A share in a co-operative housing corporation that entitles the holder to own and have an equity interest in a housing unit located in Canada, would also qualify. However, a share that only provides a right to tenancy in the housing unit would not qualify.
Provided the individual meets the qualifying withdrawal conditions, the entire balance in their FHSA may be withdrawn on a tax-free basis in a single withdrawal or a series of withdrawals.
If an individual has made a qualifying withdrawal and a balance remains in the FHSA, they have two options:
- The balance can be transferred on a tax-free basis to an RRSP or registered retirement income fund (RRIF) until December 31 of the year following the year of their first qualifying withdrawal, provided it is a direct transfer to a plan where the individual is the annuitant, or
- The balance can be withdrawn and included in their income for tax purposes in the year of the withdrawal.
The FHSA and Home Buyer’s Plan (HBP)
The HBP would continue to be available under the existing rules. An individual would be permitted to make both an FHSA withdrawal and an HBP withdrawal in respect of the same qualifying home purchase. Since HBP allows first-time homebuyers to withdraw up to $35,000 from an RRSP to buy a home, a homebuyer maximizing both programs could potentially access $75,000 in capital, plus any growth accumulated in the FHSA, for a down payment.
Cessation and transfers
There is a limit to the period of time that an FHSA can remain open (the "maximum participation period"). An individual's maximum participation period would begin when the individual opens their first FHSA. It would finish at the end of the year following the year in which the earliest of the following events occur:
- the 14th anniversary of the date the individual first opened their FHSA,
- when the individual turns 70 years old, and
- the individual first makes a qualifying withdrawal from an FHSA.
For example, if a 20-year-old individual opens an FHSA in 2023, their maximum participation period will conclude at the end of 2038 (i.e., the 14th anniversary of the date since the opening of the FHSA is in 2037 and the end of the year following that year is 2038). However, if that individual makes a qualifying withdrawal from their FHSA during 2028, their maximum participation period will conclude at the end of 2029.
Once an FHSA is past that maximum participation period, it is no longer exempt from tax on the income earned within the account.
In that year, the account holder must include in their income for the taxation year an amount equal to the fair market value of all property of the FHSA immediately before the FHSA lost its tax-free status.
Any savings not used to purchase a qualifying home can be transferrable on a tax-free basis into an RRSP or a RRIF in which the individual is the annuitant and provided the transfer is a direct transfer, without requiring RRSP contribution room, or it would have to be withdrawn and is taxable in that year. Such transfer or withdrawal would have to be completed by December 31 of the year following the year of the first qualifying withdrawal.
If an individual has made a qualifying withdrawal, any unwithdrawn amounts still held in the FHSA can also be transferred on a tax-free basis to an RRSP or RRIF until December 31 of the year following the year of their first qualifying withdrawal.
It will be possible for an individual to have more than one FHSA and to transfer funds directly from one FHSA to another FHSA on a tax-free basis.
Note that funds transferred from an FHSA to an RRSP or RRIF will be subject to tax upon withdrawal from the RRSP or RRIF, similar to any other withdrawals from those accounts. Individuals would also be allowed to transfer funds directly from an RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits. Such transfers would not be deductible and would also not reinstate an individual's RRSP contribution room. Finally, transfers from an individual's RRSP to their FHSA will not be possible on a tax-free basis if a spousal contribution has been made to the RRSP in the current year or two preceding years.
Breakdown of a marriage or a common-law partnership
In case of the breakdown of a marriage or a common-law partnership, any amount held in the FHSA can be transferrable directly from the FHSA of one party to the relationship (the transferor). This includes an FHSA, RRSP, or RRIF of the other party to the relationship (the transferee), provided it is pursuant to a decree, order, or judgement of a competent tribunal or under a written agreement, relating to a division of property in settlement of rights arising from their marriage or common-law partnership. Such transfers would not re-instate any contribution room of the transferor and would not be counted against any contribution room of the transferee.
FHSA at death
An FHSA will cease, at the latest, to be an FHSA at the end of the year following the year of death of the last holder. After that, the FHSA will no longer be exempt from tax on the income earned within the account.
Any individual, including the estate of the FHSA holder, who receives a distribution from the FHSA shall include the amount in computing their income for the year. Under certain circumstances, an election will be available, to shift the tax liability from the holder's estate to a beneficiary of the estate.
If no individual has been named beneficiary to the FHSA, the deceased individual's estate would be considered the beneficiary and the fair value of the FHSA would be included in the deceased estate's income.
If a beneficiary to the FHSA has been named by the holder, the law will require that they include in their income for the year the fair market value of the FHSA. If the surviving spouse or common law partner (CLP) has been named as a beneficiary of the FHSA, they will be able to transfer the fair market value of the deceased FHSA, minus any excess contribution, directly to an FHSA in their own FHSA or to their RRSP or RRIF, without needing contribution room.
Such inherited FHSAs would assume the surviving spouse's maximum participation period.
If, however, the surviving spouse is not eligible to open an FHSA (they are not a qualifying individual), the FHSA can instead be transferred directly to their RRSP or RRIF or withdrawn on a taxable basis.
If the beneficiary of an FHSA is not the deceased's spouse or common-law partner, the funds would be withdrawn and paid to the beneficiary. Amounts paid to the beneficiary would be subject to withholding tax and included in the income of the beneficiary for tax purposes in the year received.
Similar to a Tax-Free Savings Accounts (TFSA), individuals may be permitted to designate their spouse or common-law partner as the successor holder. If named as the successor holder, the surviving spouse would become the new holder of the FHSA immediately upon the death of the original holder provided the surviving spouse meets the eligibility criteria to open an FHSA.
In Québec, naming Successor holder (or a beneficiary) would only be possible if the account is held in a segregated fund contract.
If the surviving spouse or common law partner is not a qualifying individual (see definition in first section), the law would prohibit the surviving spouse/CLP from becoming the owner of the account. They must either transfer the deceased FHSA property directly into their RRSP or RRIF, or receive a taxable distribution from the deceased holder's FHSA.
If the holder of an FHSA has not named their spouse or common-law partner as a beneficiary or Successor holder of the account, but has instead bequeathed the account to a surviving spouse/CLP in their will, the legal representative of a deceased holder's estate and the surviving spouse/CLP can jointly designate, using a prescribed form, to have the FHSA proceeds that were paid to the estate treated as having been transferred from the FHSA of the deceased holder to an FHSA, RRSP or RRIF of the survivor. All subject to meeting certain conditions. As a result, the legal representative does not need to include the amount received in computing the income of the estate. Such a disposition will allow for an indirect tax-free rollover of the deceased FHSA to the surviving spouse/CLP FHSA.
Alternatively, the legal representative of a deceased holder's estate and the surviving spouse/CLP can jointly designate, using a prescribed form, to have the FHSA proceeds that were paid to the estate treated as having been paid directly to the surviving spouse/CLP as a beneficiary. In that case, the amount will be included in the surviving spouse/CLP income for the year in which the survivor received the payment. As a result, the legal representative does not need to include the amount received in computing the income of the estate.
Such options will allow for some tax planning between the deceased and the surviving spouse/CLP.
Miscellaneous rules
As is the case for an RRSP, RRIF, and TFSA, an investor would not be allowed to deduct fees for the administration or management of their FHSA or for advice in connection with purchasing or selling securities in respect to an FHSA. Similarly, interest paid on money borrowed by an individual to make a contribution to an FHSA would not be deductible.
Attribution rules will not apply when a person gifts money to a spouse or common-law partner and that spouse or common-law partner uses those funds to contribute to an FHSA opened in their name. And, when a withdrawal is made from the FHSA, no portion of such withdrawal would be attributed back to the spouse who made the gift.
The Income Tax Act will prevent using an FHSA as security for a loan. Should a taxpayer pledge an FHSA as security for a loan, the fair market value of the FHSA at the time of the loan will be included in the account holder’s income in the year.
Taxpayers would be allowed to contribute to an existing FHSA after emigrating from Canada but would not be able to make a qualifying withdrawal -to buy a property- as a non-resident. A taxpayer making a qualifying withdrawal from an FHSA must be a resident of Canada at the time of withdrawal and up to the time a qualifying home is bought or built. Withdrawals by non-residents would be subject to a non-resident withholding tax of 25%.
Finally, contrary to RRSPs and RRIFs, FHSAs would not be afforded creditor protection under the Bankruptcy and Insolvency Act.
Conclusion
Combining the best of both an RRSP (deductibility of contributions) and a TFSA (tax-free withdrawal) when used to buy a first property, the FHSA will probably become the preferential tool for young (and not so young) Canadians to accumulate savings.
Used in conjunction with the HBP, it will allow a prospective first-home buyer to accumulate a sizeable amount for a down payment. Furthermore, even if the sums accumulated in the FHSA are not used to acquire a property, they can eventually be transferred into an RRSP or RRIF, thus indirectly allowing an individual to enhance their retirement savings.
Whether you plan to buy a home or not, what’s not to like?
Bill C-32, which contains the new disposition of the Income Tax Act pertaining to the FHSA has set an effective date for the new account: April 1, 2023.
