Introduction: First Home Savings Account (FHSA)
Purchasing a home is a significant milestone in one's life, often requiring substantial financial planning and saving. With increasing housing prices and stagnant housing supplies in Canada, in August 2022, the Canadian federal government in Budget 2022 proposed the tax-free First Home Savings Account (FHSA), alongside other restrictions on foreign home buyers. The FHSA is a new register plan allowing a prospective first-time home buyers the ability to save up to $40,000 on a tax-free basis in their lifetime. Similar to a Registered Retirement Savings Plan (RRSP), contributions would be tax-deductible. An individual can contribute up to $8,000 to his or her First Home Savings Account for each calendar year, starting from 2023. Qualifying withdrawals from the FHSA to purchase a first home would be non-taxable, like a Tax-Free Savings Account (TFSA).
One of the unique features of the First Home Savings Account is the tax-free status of both the contributions and qualifying withdrawals. In other words, a taxpayer would pay no income tax on the contributions made to the FHSA and investment income made in the FHSA, when the taxpayer makes withdrawals from the FHSA to pay for his or her first home in Canada. For example, a taxpayer makes $8,000 contribution to the taxpayer's FHSA in 2023, which subsequently increases to $8,500 after a year via investment. Say in 2024, if the taxpayer withdraws the $8,500 to pay for the down payment of the taxpayer's first home in Canada, there will be no tax payable. In contrast, contributions made to a TFSA are not deductible, while withdrawals from the RRSP are subject to income tax.
Qualifying Withdrawals from FHSAs
A qualifying withdrawal does not require a home buyer to withdraw all amounts in the FHSA in a single transaction. A qualifying withdrawal from a First Home Savings Account must meet the following conditions. First, a Form RC725 must be filled out by a qualified first home buyer and submitted to the financial institutions that issues and hosts the FHSA. Some financial institutions may have copies of the forms ready for home buyers who look to make withdrawals from their FHSA. However, ultimately, it is the home buyer's responsibility to ensure compliance with the FHSA rules.
Second, the home buyer must have a written agreement to buy or to build a qualifying home with the acquisition or construction completion date of the qualifying home before October 1 of the year following the date of the withdrawal. The home must not be acquired more than 30 days before the home buyer makes the withdrawal from his or her FHSA.
- Example #1: if you intend to make withdrawals from your FHSA on December 31, 2023, the earliest date you can acquire a home is on December 1, 2023, and the latest date to acquire a home will be October 1, 2024.
- Example #2: if you intend to make withdrawals from your FHSA on January 5, 2024, the earliest date you can acquire a home is on December 6, 2023, and the latest date to acquire a home will be October 1, 2025.
Third, the home buyer must be a resident of Canada from the time he or she makes the first qualifying withdrawal from an FHSA until the earlier of the acquisition of the qualifying home, or the date of the home buyer's death. Last but not least, a home buyer must occupy or intend to occupy the qualifying home as his or her principal place or residence within one year from buying or building it.
Non-residents and FHSA
Only residents of Canada can open First Home Savings Account. If an individual becomes a non-resident of Canada after he or she opens an FHSA, that individual can continue to maintain the FHSA. However, a non-resident cannot make any new contributions to the FHSA and cannot make a qualifying withdrawal. One of the key requirements of a qualifying withdrawal, as noted above, is that the individual must be a resident of Canada throughout the period between the date of the first qualifying withdrawal and the date of acquisition of the qualifying home. As a result, any withdrawals by non-residents from FHSAs will be subject to 25% of withholding tax in the year of withdrawal, unless it is reduced by a tax treaty.
Non-compliance and Relevant Remedies
If a withdrawal from a First Home Savings Account is not a qualifying withdrawal, the withdrawal amount will be added to the FHSA holder's income in the year that the withdrawal occurs. Excessive contributions to an FHSA will result in a tax of 1% per month on the highest excess FHSA amount in that month. The tax will continue to apply until the full excess FHSA amount is eliminated. Interests will also apply to the balance owing if the penalty is not paid on time, which can quickly increase the total amount owed.
An excess FHSA amount can be reduced by making taxable withdrawals and awaiting the contribution room to increase in the following year. If the overcontribution was due to transferred funds from RRSPs, a designated transfer can be made to reduce the excess FSA amount by returning the funds back to RRSPs. Designated transfers cannot exceed the total amount of transfers from the RRSPs.
Pro Tax Tips – Beware of the Contribution and Withdrawal Rules of the FHSA
You must pay attention to the FHSA-related rules when you open, contribute to, and withdraw from your FHSA. Similar to other types of registered accounts (e.g., RRSP, TFSA, etc.), overcontribution to the FHSA results in penalties from the moment the overcontribution occurs. While 1% per month on the highest excess FHSA amount may not sound significant, the penalties will not stop accruing until the full excess amount has been withdrawn or transferred from the FHSA. For example, if you overcontribute to your FHSA by $10,000 on January 1, 2024, and the full excess amount is not withdrawn until December 31, 2024, the total amount of penalties will be $1,200.
A taxable withdrawal, which is not a qualifying withdrawal, from an FHSA will result in additional taxes, since the withdrawn amount will be included in your income of the year that the withdrawal occurs. If you have concerns regarding any of your registered accounts, please contact our expert Toronto tax lawyers for legal advice.
Who Can Open First Home Savings Accounts?
An individual must meet the following requirements to be eligible for the FHSA:
- You must be at least 18 years of age.
- You must not be more than 71 years of age on December 31 of the year that you first open a First Home Savings Account.
- You must be a resident of Canada.
- You must be a first-time home buyer.
For the purpose of opening an FHSA, a first-time home buyer is someone who has not owned or jointly owned his or her principal place of residence in the year the FHSA is opened or at any time in the preceding four calendar years. If this person has a spouse or common-law partner, his or her spouse or common-law partner, at the time the FHSA is opened, also cannot own, or jointly own a property, for the same period of time.
How Do I Make a Qualifying Withdrawal?
You must be considered a first-time home buyer at the time of your withdrawal from an FHSA. When you make withdrawals from your FHSA, first, you must fill out a Form RC725 and submit it to the financial institutions that issue and host the FHSA. Second, you must have a written agreement to buy or to build a qualifying home with the acquisition or construction completion date of the qualifying home before October 1 of the year following the date of the withdrawal. Third, you must be a resident of Canada from the time of your first qualifying withdrawal to the earlier of the acquisition of the qualifying home, or the date of the home buyer's death. Last but not least, you must occupy or intend to occupy the qualifying home as your principal place or residence within one year of buying or building it. For questions on qualifying withdrawals from your First Home Savings Account, please contact our expert Canadian tax lawyers for legal advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.