Tax-Free First Home Savings Account (FHSA)

During the 2022 budget negotiations, the Government proposed the Tax-Free First Home Savings Account (FHSA). The proposal which is yet to receive the royal assent would allow individuals to save $40,000 tax-free. Similar to RRSPs, the contributions to FHSA would be tax deductible and eligible withdrawals to purchase a qualified first home are also non-taxable. A qualified home would be a housing unit in Canada. Annual contributions to an FHSA account are capped at $8,000 annually in addition to the lifetime contribution limit of $40,000. Based on Government's estimates, Canadians can expect to open and contribute to their FHSA some time during 2023. Individuals would be allowed to contribute their full $8,000 contribution limit in 2023 regardless of when the royal assent is granted.

To open a FHSA account, the individual must be:

at least 18 years of age

a resident of Canada (183-day rule)

a first-time home buyer, meaning that they have not owned a principal residence during the calendar year or at anytime in the past four calendar years

An Individual's FHSA ceases to be a FHSA and the individual will be disallowed to open a FHSA account, after December 31 of the year which the earliest of the following occurs

The fifteenth anniversary of the opening of FHSA account

The individual turns 71 years of age

In the event FHSA ceases to be a FHSA, or any amounts remaining in the account after purchasing a qualifying home can be transferred tax-free to a RRSP, RRIF, or withdrawn on a taxable basis.

FHSAs are allowed to hold the same qualified investments that are currently allowed to be held in a TFSA accounts such as publicly-traded shares, bonds, GICs and mutual funds. Disallowed investments are the investments in entities where the individual does not deal in arm's length, and investments in land, shares of private corporations, and general partnership units.

Several important points regarding FHSA contributions:

Unlike contributions to a RRSP, contributions to FHSA made within the first 60 days of a given year can not be contributed to the previous tax year. Therefore it is critical that all contributions are made on or prior to December 31 of the tax year

The unused portion of a FHSA contribution limit can be carried forward to future years. For example: If Jane contributed only $2,000 in 2023, she can carry forward the remaining contribution room and contribute $14,000 in 2024

An individual is allowed to have more than one FHSA account, but the total annual and lifetime contribution amounts can not exceed $8,000 and $40,000 respectively

Contributions made to a FHSA following a qualifying withdrawal (to purchase a first home) would not be deductible from net income

Non-residents will be allowed to contribute to their FHSA after emigrating from Canada but they will not be able to make a withdrawal as a non-resident

Unlike RRSPs, individuals will not be able to contribute to their spouse's FHSA and claim a deduction

Qualifying withdrawals must meet the following conditions

Individual must be a first-time home buyer when the withdrawal is made

Individual must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal

Qualifying home is a residential unit located in Canada. A share in a cooperative housing corporation where the individual taxpayer has an equity interest would also qualify. However, a share in a cooperative housing corporation where the individual taxpayer has only the right to tenancy is disallowed

Similar to RRSPs, non-qualifying FHSA withdrawals in a given tax year will be included in the individuals income and taxed. Financial institutions are also required to remit withholding tax on all non-qualifying withdrawals.

Transfers from a FHSA to another FHSA, a RRSP, or a RRIF are allowed on a tax-free basis. Transfers from FHSA to RRSP and RRIF will not reduce the individual's RRSP contribution room. Individuals will also be allowed to transfer from RRSP and RRIF to FHSA subject to their annual and lifetime contribution amounts.

Similar to TFSA, a 1% tax will be imposed on all FHSA over-contributions for each month (or part) the over-contribution remained in the account. The amount used for calculation of the penalty is the highest balance of the over-contribution in a given month.