The newest way to build a down payment for a new home

Housing cost is one of the largest budgeting outlays for the average family. For those looking to make the move from being renters to owners, it can be challenging to both cover current shelter needs and save toward a down payment on a first home.

First proposed in the 2022 Federal Budget and brought into effect in 2023, the First Home Savings Account (FHSA) entitles eligible taxpayers to:

• • Tax-deductible contributions,
  • Tax-free investment growth, and
  • Tax-free withdrawals for a first home purchase.

Eligibility

The FHSA is open to Canadian residents age 18 to 71. To open an account, an individual cannot be living in a home owned by that person (solely or jointly) in the year the account is opened, or in any of the four preceding calendar years. This includes a home owned by a spouse or common law partner (CLP).

No tax will apply on FHSA withdrawals used for the purchase of a new home, but only one property will qualify for this special treatment over an individual’s lifetime.

Contribution treatment and dollar limits

Tax treatment

Like a registered retirement savings plan (RRSP), FHSA contributions are tax-deductible. Alternatively, an individual may choose to transfer existing RRSP funds to a FHSA on a tax-free rollover basis, though such a transfer will not restore RRSP contribution room.

Dollar limits

The lifetime contribution limit is $40,000, subject to a base annual FHSA participation room of $8,000. Both new contributions and existing RRSP transfers count toward both the annual limit and lifetime limit.

A limited carryforward rule allows unused room to be added to a later year’s FHSA participation room. In the year that a person opens their first FHSA, their FHSA participation room that year is $8,000. In following years, the FHSA carryforward is $8,000 less all contributions and transfers made to all FHSAs in the prior year. That means that up to $16,000 could be contributed in a given year (other than the year the first FHSA is opened), though that would be the result of having made no contributions in the immediately preceding year.

An individual is allowed to open as many FHSAs as desired, but the annual and lifetime limits apply to transfers and contributions across all accounts. For someone who begins contributing the maximum $8,000 annual amount as soon as their first FHSA is opened, the lifetime $40,000 limit could be reached in five years.

Timing of deductions

Despite the similarities to RRSPs, there are important distinctions as to when deductions may be claimed:

• • Whereas RRSP contributions in the first 60 days of a year may be deducted against the previous year’s income, FHSA contributions are deductible in the calendar year when made.
  • Still, like RRSP contributions, if the person does not wish to take the deduction presently, it may be carried forward to use in any future year.
  • Once there has been a qualifying withdrawal for a new home purchase, no further FHSA contributions may be made (and accordingly no new deductions allowed), but past deductions may still be used or carried forward.

Tax-sheltering investment income

Like many other registered accounts, including RRSPs and tax-free saving accounts (TFSAs), investment income and growth while within a FHSA are not taxable.

Withdrawals

Withdrawals to assist in the purchase of a first home are non-taxable, as long as you are not living in a home as your principal residence that year or in the preceding four years. Note that, unlike the criteria for opening a FHSA, you may be living in a home owned by a spouse or common law partner and still qualify for the tax-free withdrawal – understanding that the withdrawn amount must then be applied to a new home purchase. As well, both spouse/CLPs may use their FHSAs on the same purchase, if both meet the withdrawal criteria.

Tax will apply on FHSA withdrawals taken for any purpose other than a home purchase. However, this can be deferred by transferring into a RRSP, or to a registered retirement income fund (RRIF). Such transfers will not replenish FHSA room, but also will not require or reduce an individual’s RRSP room. Eventual withdrawals from the RRSP or RRIF will be taxable in the normal course.

Coordination with the RRSP home buyers’ plan

The RRSP home buyers’ plan (HBP) allows individuals to take up to $35,000 from a RRSP without tax applying in the year of withdrawal. Beginning in the second year following the first HBP withdrawal, withdrawn amounts must be returned to a RRSP over the course of up to 15 years. Repayments are not deductible, while any unrepaid amount is taxable in the year it is due.

As originally proposed in 2022, an individual was not permitted to use both the HBP and FHSA for the purchase of the same qualifying home. This restriction was removed by the time the rules came into force in 2023.

Plan closure

All FHSAs must be closed by December 31 of the earliest of:

• • the year following the first qualifying withdrawal for a first home purchase,
  • the 15^th anniversary of the first FHSA opening, and
  • the year the individual turns age 71.

Amounts remaining in any FHSAs at the end of the defined period will be treated as income for that year.

Treatment at death

A detailed discussion of FHSAs at death is beyond the scope of this summary article, as there are many variables that can come into play. In general, any remaining account value will be treated as income of the estate, unless directed otherwise in the FHSA contract or in the deceased’s Will:

• • If a spouse or common law partner is named as either successor holder or beneficiary, options may include receiving the amount as a taxable distribution, or transferring tax-deferred to the survivor’s own FHSA (if the survivor meets the qualifying criteria at that time), RRSP or RRIF.
  • For any other named beneficiary, any amount received will be taxable income to the beneficiary in the year received. Not that this distinguishes FHSAs from RRSP/RRIF where the named beneficiary is entitled to the gross proceeds, but the amount is treated as taxable income in the deceased’s final year.