First Home Savings Account: A Tax Gift from Ottawa

August 31st, 2023

Dear Friends of Pacific Spirit,

First Home Savings Account (FHSA) – An Overview

The First Home Savings Account (FHSA) is designed to help first-time home buyers save $40,000.00 or more towards the purchase of a home. The program provides benefits unlike any other program offered by the Federal Government. Contributions to a FHSA are deductible on the account owner’s tax return (like an RRSP). Income earned on the investments inside the FHSA is non-taxable and qualifying withdrawals from a FHSA are tax-free (like a TFSA) so long as they are used to purchase a first home. Used properly, a FHSA gives the holder a tax deduction going in and no tax as funds are withdrawn!

Like the TFSA the FHSA is a “tax gift” from Ottawa and, for some, it will make a difference in their ability to purchase a first home.

Who is Eligible?

You must be at least 18 years of age and a resident of Canada to open a FHSA. You must not have lived in a home that you or you spouse owned during the year that you open a FHSA or in any of the previous four calendar years. The way this requirement is worded allows you to participate in a FHSA if you owned a home, but did not live in it (e.g., you rented out a property).

An FHSA can only stay open:

  • for 15 years after the opening of the FHSA
  • until the end of the year following your 70th birthday
  • until the end of the year following the year you make your first qualifying withdrawal from a FHSA.

    • Contribution Limit

    Your contribution room does not start to accrue until after you open a FHSA.

    There is a lifetime contribution limit of $40,000.00, with an annual limit of $8,000.00.

    Each individual has their own limits, so a couple can direct up to $80,000 to a FHSA.

    There is no 60-day contribution grace period like with RRSPs – contributions must be made in the calendar year.

    You may carry forward up to $8,000.00 of your contribution room to a subsequent year. So, if you miss one year, you can contribute up to $16,000.00 in a subsequent year.

    You may also transfer funds from your RRSP to a FHSA tax-free, subject to the $40,000.00 lifetime and $8,000.00 annual contribution limits.

    Withdrawals – What Can the Funds in a FHSA be Used For?

    The balance in a FHSA may be withdrawn tax-free to make a purchase of a qualifying home which the individual intends to occupy as their principal residence within one year of the home’s purchase. A qualifying home is a housing unit in Canada (or a share of a cooperative housing corporation).

    You must be a resident of Canada from the time you withdraw the funds from the FHSA to the time of purchase of the home. Also, you cannot have lived in a home that you owned in the period spanning four calendar years before the FHSA withdrawal.

    You must have an agreement in place to purchase a home or build a home before October 1st of the year following the date of the FHSA withdrawal.

    You cannot have purchased the qualifying property more than 30 days before the withdrawal is made.

    You may transfer funds from a FHSA to a RRSP or to a RRIF on a non-taxable basis at any time before the year you turn age 71. Such transfers do not reduce your RRSP contribution room and are not limited by your contribution room. Unlike a TFSA, withdrawals do not replenish FHSA contribution limits.

    If you make a FHSA withdrawal for any other purpose, it is taxable.

    Tax Planning Considerations and Other Matters

    There are no income attribution rules for FHSAs, so parents can gift funds to their children to contribute to their FHSAs, grandparents can gift funds to their grandchildren to contribute to their FHSAs, and spouses can gift funds to their spouse to contribute to their plan.

    You do not have to take the income tax deduction for the FHSA in the year of contribution. If the FHSA holder is in a low-income year, they can carry forward the deduction to a future year when their income is higher. This will benefit individuals at the start of their careers whose peak income potential is in the future.

    You can use both a FHSA withdrawal and a RRSP Home Buyer’s Plan withdrawal for the same home purchase.

    If you don’t plan to buy a home, but otherwise would qualify for the FHSA, you can make FHSA contributions and then roll the accumulated wealth into a RRSP. This effectively increases your RRSP contribution limit by $8,000.00 per year.

    Since there is a 15-year time limit, be careful of the timing for when you open the FHSA. You don’t want to start the plan too early.

    Interest on funds borrowed to make a FHSA contribution is not deductible for tax purposes.

    You may designate your spouse as a successor holder of your FHSA which entitles them to transfer the assets of the deceased’s FHSA to their own FHSA on a tax-deferred basis. Funds received into the successor holder’s FHSA do not affect the successor holder’s own FHSA contribution limits. If the successor holder is not eligible to hold a FHSA, the assets in the deceased’s FHSA could be transferred on a tax deferred basis to the survivor’s RRSP or RRIF, or withdrawn on a taxable basis. If the the beneficiary of a FHSA is not the deceased’s spouse, the funds would need to be withdrawn and paid to the beneficiary who would then include them in their income.

    Disclaimer

    This is a summary of the highlights of the FHSA program. It is not intended to be a full and complete analysis of these new accounts. We recommend that you seek professional advice prior to opening a FHSA.

    Sincerely,

    Pacific Spirit Investment Management Inc.

    John and Dennis

    Please feel free to forward this commentary to anyone you feel would benefit from it.

    © Pacific Spirit Investment Management Inc, 2023