(From the April 2022 Edition of eFORUM)
By Jamie Golombek
The April 2022 federal budget introduced more details on the proposed launch of the Tax-Free First Home Savings Account (FHSA), a new registered account to help individuals save for their first home. No doubt our clients have already been asking us how they might take advantage of the new plan come 2023 and where it fits in with other ways of saving for a down payment for a new home, such as via a Tax-Free Savings Account (TFSA) or accessing Registered Retirement Savings Plan (RRSP) funds via the Home Buyers’ Plan (HBP). While much more information is sure to come out in the months ahead regarding the details of the FHSA, let’s take a quick look at what we know so far.
To open an FHSA, the individual must be at least 18 years of age and a resident of Canada. In addition, they can’t have lived in a home that they owned either in the year they open the account or during the prior four calendar years. Individuals can only participate once in their lifetime to purchase a single property. Once a non-taxable withdrawal is made toward a qualifying purchase of a home, the FHSA must be closed within one year from the first withdrawal.
Contributions to an FHSA would be tax deductible and income earned in an FHSA would not be taxable while in the plan, nor taxable when withdrawn so long as the funds are used to buy a first home. There’s a lifetime contribution limit of $40,000, and an annual contribution limit of $8,000 beginning in 2023. Unlike RRSP or TFSA contributions, unused annual contribution room cannot be carried forward, meaning an individual contributing less than $8,000 in a given year would still face an annual limit of $8,000 in subsequent years.
And, while a client can have multiple FHSAs, the total amount they can contribute to all of their FHSAs cannot exceed the annual and lifetime FHSA contribution limits.
To provide flexibility, individuals will be able to transfer funds from an FHSA to an RRSP or a Registered Retirement Income Fund (RRIF) on a tax-deferred basis. Transfers to an RRSP or RRIF won’t be taxable at the time of transfer, but amounts will be taxed when withdrawn from the RRSP or RRIF in the usual manner. Transfers will not affect, or be limited by, clients’ RRSP contribution room.
If the individual hasn’t used the funds in their FHSA for a qualifying first home purchase within 15 years of first opening the FHSA, it must be closed and any unused savings can either be transferred into an RRSP or RRIF, or can simply be withdrawn on a taxable basis.
Clients will also be allowed to transfer funds from an existing RRSP to an FHSA on a tax-free basis, subject to the $40,000 lifetime and $8,000 annual contribution limits. These transfers, however, will not restore their RRSP contribution room with respect to the amount transferred.
Note that the HBP, which allows individuals to withdraw up to $35,000 from an RRSP to purchase or build a first home without having to pay tax on the withdrawal, isn’t going away. Amounts withdrawn under the HBP must be repaid to an RRSP over a period not exceeding 15 years, starting the second year following the year of the withdrawal. And while no changes are being made to the HBP rules, clients won’t be permitted to make both an FHSA withdrawal and an HBP withdrawal for the same home purchase.
And, while it’s hoped that Canadians will be able to open an FHSA and start contributing at some point in 2023, that will depend on when detailed rules are introduced by the government and financial institutions’ ability to launch a new type of registered plan in the months ahead.
Finally, it wouldn’t surprise this author if some tweaks are ultimately made to the rules as outlined in the Budget to close some potential unintended planning opportunities that now seem to be available. For example, consider the lifelong renter who is happy to continue to rent a condo or house for the rest of their life. They have no intention of ever buying a home. Yet, they qualify as a potential first-time home buyer under the proposed FHSA rules. Assuming they have the funds to make both their maximum contribution to their RRSP, TFSA, and FHSA, why wouldn’t they simply begin contributing $8,000 annually for up to five years, for a tax-deductible contribution of $40,000 and then, at the end of 15 years, simply transfer the amount to their RRSP or RRIF? This way they’ve been able to effectively get an extra $8,000 annually of RRSP room and a deduction; otherwise, they might be either maxed out, or, perhaps not even have been able to contribute if they don’t have any earned income/RRSP room, or perhaps they’re over 71 years old!
I suspect that the rules may be changed to provide either an age limit (the original pre-election Liberal plan had an age cap of 40) or perhaps a mandatory income inclusion at the end of the 15-year period, rather than permit a transfer to an RRSP/RRIF for possibly decades’ worth of continued tax-deferred compounding. Alternatively, the government may allow a tax-free transfer to an RRSP, but only if the individual has unused RRSP room.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, tax & estate planning with CIBC Private Wealth in Toronto.