Design of the Tax-Free First Home Savings Account

In Budget 2022, the government proposed the introduction of the Tax-Free First Home Savings Account (FHSA). This new registered plan would give prospective first-time home buyers the ability to save $40,000 on a tax-free basis. Like a Registered Retirement Savings Plan (RRSP), contributions would be tax-deductible, and withdrawals to purchase a first home—including from investment income—would be non-taxable, like a Tax-Free Savings Account (TFSA).

Budget 2022 announced the key design features of the FHSA, including an $8,000 annual contribution limit in addition to a $40,000 lifetime contribution limit. Today, the Department of Finance is releasing for public comment draft legislative proposals that provide additional details on the design of the FHSA. This backgrounder offers a summary of these details.

The government expects that Canadians will be able to open and contribute to an FHSA at some point in 2023. No matter when this happens in 2023, Canadians would be allowed to contribute the full $8,000 annual limit in that year. 

Opening and Closing Accounts 

To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. In addition, an individual must be a first-time home buyer, meaning that they have not owned a home in which they lived at any time during the part of the calendar year before the account is opened or at any time in the preceding four calendar years. For this purpose, ownership is defined broadly and includes beneficial ownership, but excludes a right to acquire less than 10% of a qualifying home.

An FHSA of an individual would cease to be an FHSA, and the individual would not be permitted to open an FHSA, after December 31 the year in which the earliest of these events occurs:

• The fifteenth anniversary of the individual first opening an FHSA; or
• The individual turns 71 years old.

Any savings not used to purchase a qualifying home could be transferred on a tax-free basis into an RRSP or Registered Retirement Income Fund (RRIF) or would otherwise have to be withdrawn on a taxable basis. Individuals that make a qualifying withdrawal could transfer any unwithdrawn savings on a tax-free basis to an RRSP or RRIF until December 31 of the year following the year of their first qualifying withdrawal.

Qualified Investments

An FHSA would be permitted to hold the same qualified investments that are currently allowed to be held in a TFSA. In particular, taxpayers would be able to hold a broad range of investments, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates.

The prohibited investment rules and non-qualified investment rules applicable to other registered plans would apply, including the potential tax consequences described below. These rules are intended to disallow investments in entities with which the account holder does not deal at arm's length, as well as investments in certain assets such as land, shares of private corporations and general partnership units.

Contributions

The lifetime limit on contributions would be $40,000, with an annual contribution limit of $8,000. In other words, individuals would be subject to the lesser of their annual limit and remaining lifetime limit. The full annual limit would be available starting in 2023.

The annual contribution limit would apply to contributions made within a particular calendar year. Individuals would be able to claim an income tax deduction for contributions made in a particular taxation year. Unlike RRSPs, contributions made within the first 60 days of a given calendar year could not be attributed to the previous tax year.

An individual would be allowed to carry forward unused portions of their annual contribution limit up to a maximum of $8,000. This means that an individual contributing less than $8,000 in a given year could contribute the unused amount (i.e., $8,000 less their contribution in that year) in a subsequent year on top of their annual contribution limit of $8,000 (subject to their lifetime contribution limit). For example, an individual contributing $5,000 to an FHSA in 2023 would be allowed to contribute $11,000 in 2024 (i.e., $8,000 plus the remaining $3,000 from 2023). Carry-forward amounts would only start accumulating after an individual opens an FHSA for the first time.

An individual would be permitted to hold more than one FHSA, but the total amount that an individual contributes to all of their FHSAs could not exceed their annual and lifetime contribution limits. Taxpayers would generally be responsible for ensuring they do not exceed their limit in a given year. The Canada Revenue Agency (CRA) would provide basic FHSA information to support taxpayers in determining how much they can contribute in a given year. 

Contributions made to an FHSA following a qualifying withdrawal being made (i.e., when buying a first home) would not be deductible from net income.

Undeducted Contributions

An individual would not be required to claim a deduction for the tax year in which a contribution is made. Like RRSP deductions, such amounts could be carried forward indefinitely and deducted in a later tax year.

Qualifying Withdrawals

In order for an FHSA withdrawal to be a qualifying (i.e., non-taxable) withdrawal, certain conditions must be met.

First, a taxpayer must be a first-time home buyer at the time a withdrawal is made. Specifically, the taxpayer could not have owned a home in which they lived at any time during the part of the calendar year before the withdrawal is made or at any time in the preceding four calendar years. There is an exception to allow individuals to make qualifying withdrawals within 30 days of moving into their home. 

The taxpayer must also have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal and intend to occupy the qualifying home as their principal place of residence within one year after buying or building it.

A qualifying home would be a housing unit located in Canada. A share in a co-operative housing corporation that entitles the taxpayer to possess, and have an equity interest in a housing unit located in Canada, would also qualify. However, a share that only provides a right to tenancy in the housing unit would not qualify.

Provided the taxpayer meets the qualifying withdrawal conditions, the entire amount of available FHSA funds may be withdrawn on a tax-free basis in a single withdrawal or a series of withdrawals.

Non-qualifying Withdrawals

Withdrawals that are not qualifying withdrawals would be included in the income of the individual making the withdrawal. Financial institutions would be required to collect and remit withholding tax on non-qualifying withdrawals, consistent with the treatment applicable to taxable RRSP withdrawals.

Non-qualifying withdrawals would not re-instate either the annual contribution limit or the lifetime contribution limit.

Transfers     

An individual could transfer funds from an FHSA to another FHSA, an RRSP or a RRIF on a tax-free basis.

Funds transferred to an RRSP or RRIF will be subject to the usual rules applicable to these accounts, including taxability upon withdrawal. These transfers would not reduce, or be limited by, an individual's available RRSP contribution room. These transfers would not reinstate an individual's FHSA lifetime contribution limit.

Individuals would also be allowed to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits and the qualified investment rules. Although such transfers would be subject to FHSA contribution limits, they would not be deductible and would also not reinstate an individual's RRSP contribution room.

Treatment of FHSA Income for Tax and Income-Tested Benefit Purposes   

Contributions to an FHSA would be deductible in computing income for tax purposes. In addition, income, losses and gains in respect of investments held within an FHSA, as well as qualifying withdrawals, would not be included (or deducted) in computing income for tax purposes or taken into account in determining eligibility for income-tested benefits or credits delivered through the income tax system (for example, the Canada Child Benefit and the Goods and Services Tax Credit).

Eligible Issuers    

Any financial institution that is able to issue RRSPs and TFSAs would be able to issue FHSAs. This includes Canadian trust companies, life insurance companies, banks and credit unions.

Interaction with the Home Buyers' Plan (HBP)

The HBP would continue to be available as under existing rules. However, an individual would not be permitted to make both an FHSA withdrawal and an HBP withdrawal in respect of the same qualifying home purchase.

Spousal Contributions and Attribution Rules

The FHSA holder would be the only taxpayer permitted to claim deductions for contributions made to their FHSA. Individuals would not be able to contribute to their spouse or common-law partner's FHSA and claim a deduction.

That said, an individual could contribute to their FHSA from funds provided to them by their spouse. Normally, if an individual transfers property to the individual's spouse or common-law partner, the income tax rules generally treat any income earned on that property as income of the individual. An exception to these "attribution rules" would allow individuals to take advantage of the FHSA contribution room available to them using funds provided by their spouse. Specifically, these attribution rules would not apply to income earned in an FHSA that is derived from such contributions.

Marital Breakdowns

On the breakdown of a marriage or a common-law partnership, it is proposed that an amount may be transferred directly from the FHSA of one party to the relationship to an FHSA, RRSP, or RRIF of the other. In such circumstances, transfers would not re-instate any contribution room of the transferor, and would not be counted against any contribution room of the transferee.

Over-contribution, Non-qualified Investment, Prohibited Investment, and Advantage Taxes

Like TFSAs, a 1% tax on over-contributions to an FHSA would apply for each month (or a part of a month) to the highest amount of such excess that exists in that month.

When a taxpayer's annual contribution limit is reset at the beginning of each calendar year, over-contributions from a previous year may cease to be an over-contribution. A taxpayer would be allowed to deduct an over-contributed amount for a given year in the tax year in which it ceases to be an over-contribution but not earlier. However, if a qualifying withdrawal is made before an over-contribution ceases to be an over-contribution, no deduction would be provided for the over-contributed amount.

Example:

Alyssa contributes $10,000 on November 15, 2023 and does not withdraw it. This contribution exceeds Alyssa's annual FHSA contribution limit by $2,000.

Alyssa would be subject to an over-contribution tax of $40 (1% × $2,000 × 2 months) when filing her 2023 tax return in 2024. The $2,000 amount would cease to be an over-contribution on January 1, 2024, as a new annual limit of $8,000 would be available.

Alyssa would be allowed to deduct $8,000 from her 2023 net income. Presuming Alyssa did not make a qualifying withdrawal between November 15, 2023 and January 1, 2024, she would be allowed to deduct the additional $2,000 from her 2024 net income.

The Income Tax Act imposes other taxes in certain circumstances involving non-qualified investments, prohibited investments, and unintended advantages in respect of other registered plans. These rules would also apply to the FHSA.

The Minister of National Revenue would have authority to cancel or waive all or part of these taxes in appropriate circumstances. Various factors would be taken into account including reasonable error, the extent to which the transactions that gave rise to the tax also gave rise to another tax, and the extent to which payments were made from the taxpayer's registered plan.

Treatment Upon Death

Like TFSAs, individuals would be permitted to designate their spouse or common-law partner as the successor account holder, in which case the account could maintain its tax-exempt status. If named as the successor holder, the surviving spouse would become the new holder of the FHSA immediately upon the death of the original holder provided the surviving spouse meets the eligibility criteria to open an FHSA (see the discussion above under "Opening and Closing Accounts"). Inheriting an FHSA in this way would not impact the surviving spouse's contribution limits. Inherited FHSAs would assume the surviving spouse's closure deadlines. If the surviving spouse is not eligible to open an FHSA, amounts in the FHSA could instead be transferred to an RRSP or RRIF of the surviving spouse, or withdrawn on a taxable basis.

If the beneficiary of an FHSA is not the deceased account holder's spouse or common-law partner, the funds would need to be withdrawn and paid to the beneficiary. Amounts paid to the beneficiary would be included in the income of the beneficiary for tax purposes. When such payments are made, the payment to the beneficiary would be subject to withholding tax.

Non-residents

Taxpayers would be allowed to contribute to their existing FHSAs after emigrating from Canada, but they would not be able to make a qualifying withdrawal as a non-resident. Specifically, a taxpayer withdrawing funds from an FHSA must be a resident of Canada at the time of withdrawal and up to the time a qualifying home is bought or built.

Withdrawals by non-residents would be subject to withholding tax.

Reporting Requirements

Opening an Account

In order to open an FHSA, a taxpayer would be required to confirm their eligibility to an eligible issuer.

Ongoing Reporting

Financial institutions would be required to send to the CRA annual information returns in respect of each FHSA that they administer. The CRA would use information provided by issuers to administer the FHSA and provide basic FHSA information to taxpayers.

Withdrawals

In order to make a qualifying withdrawal, an individual would be required to submit a request to their FHSA issuer confirming their eligibility. Issuers would not apply withholding taxes upon receiving a valid qualifying withdrawal request.

When any withdrawals are made (qualifying or non-qualifying), the FHSA issuer would be required to prepare an information slip with the amount of the withdrawal and, in the case of a non-qualifying withdrawal, any income tax withheld on that amount.

Account Closure

The CRA would issue a reminder to all taxpayers and their FHSA issuers of when an FHSA will no longer have tax-advantaged status.

Deposit Insurance Framework

The Canada Deposit Insurance Corporation insures eligible deposits up to $100,000 per member institution, per person, per category. It is proposed that the Canada Deposit Insurance Corporation Act be amended to create a new category of insured deposits for FHSAs, as is the case for RRSPs and TFSAs.

Interest Deductibility   

Like RRSPs and TFSAs, interest on money borrowed to invest in an FHSA would not be deductible in computing income for tax purposes.

Collateralization    

Taxpayers must include in income the full value of any assets held within an FHSA and pledged as collateral for a loan.

Bankruptcy

FHSAs would not be afforded creditor protection under the Bankruptcy and Insolvency Act.