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Prospective first-time homebuyers in Canada now have the opportunity to save up to $40,000 on a tax-free basis towards purchasing their first home. This is made possible through the newly registered First-Time Home Buyer Savings Account (FHSA). Contributions to an FHSA will be tax deductible, just like a Registered Retirement Savings Plan (RRSP). Withdrawals from the FHSA to purchase a first home, including any investment income or growth earned within the account, will be non-taxable, similar to Tax Free Savings Accounts (TFSAs).
In order to open an FHSA, an individual must meet certain criteria: they must be 18 years or older and a resident of Canada. Additionally, they must not have owned a principal residence in which they lived either during the year prior to opening the FHSA account or during the preceding four calendar years.
Qualifying withdrawals to buy a home are tax-free. To qualify, a withdrawal needs to meet these conditions:
- You must be a resident in Canada from the time of the withdrawal to the acquisition of the qualifying home and a first-time home buyer when you make the withdrawal. There is an exception to allow individuals to make qualifying withdrawals within 30 days of moving into a qualifying home.
- You must 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 home as a principal place of residence within one year after buying or building it.
- The qualifying home must be a housing unit located in Canada.
Funds left over after making a qualifying withdrawal can be transferred to another FHSA or RRSP or registered retirement income fund (RRIF), on a tax-free basis, before the end of the year following the year that first qualifying withdrawal is made.
Transfers do not reduce or limit your available RRSP contribution room. Once transferred, the funds are subject to the rules of the applicable accounts, including that the funds will be taxable when you withdraw them from the account.
Withdrawals and transfers do not replenish FHSA contribution limits.
Non-qualifying withdrawals will be included in your amount of income for the year of the withdrawal and taxes will be withheld.
FHSA withdrawals and withdrawals under the HBP can be made for the same qualifying home purchase.
HBP withdrawals are borrowed from your RRSP (interest-free) and must be paid back within 15 years, whereas qualifying FHSA withdrawals are tax-free and do not need to be repaid.
If you do not buy a home within the 15-year FHSA limit, the funds can be transferred to your RRSP tax-free before the end of the 15th year, where they can later be withdrawn under the HBP.
Because a transfer of funds from an FHSA to an RRSP will not reduce your available RRSP contribution room, you can effectively create more RRSP room by starting to contribute to your FHSA.
The FHSA must be closed by December 31 of the year you turn age 71, by December 31 of the 15th anniversary of first opening the account if the funds have not been used to purchase a qualifying home, or by December 31 of the year following the year of the qualifying withdrawal.
Unused funds in the FHSA can be transferred to an RRSP or RRIF on a tax-free basis before the FHSA closure or withdrawn, but the withdrawal will be taxable.
If a withdrawal was made to purchase a qualifying home, unused funds can be transferred to an RRSP or RRIF on a tax-free basis until December 31 of the year following the year of the qualifying withdrawal.
Only the FHSA holder can claim a deduction for contributions made to their own FHSA. You cannot contribute to your spouse’s and claim a deduction; however, you can gift funds to your spouse so that they can claim a deduction on their own FHSA contribution. Normally, if you gift funds to your spouse, attribution rules apply so all income earned and capital gains realized on those funds will be attributed back to you and taxed in your hands, but an exception applies to the FHSA that attribution rules will not apply to income earned and capital gains generated within an FHSA derived from these contributions. When the spouse withdraws amounts from the FHSA, only the spouse will need to include the amounts withdrawn in income. No portion of your gifted funds to your spouse’s FHSA would be attributed back to you. Similarly, no attribution arises if you give cash to an adult child to contribute to their FHSA.
In the event of a marriage or common-law breakdown, you may transfer funds from your FHSA to your former spouse’s FHSA, RRSP or RRIF. This will not reinstate an FHSA contribution room for you and would not use any contribution room of your former spouse. If your spouse has overcontributed, the amount eligible for transfer will be reduced.
You can continue to make contributions to your existing FHSA after moving from Canada but will not be able to make a qualifying withdrawal as a non-resident. To make a qualifying withdrawal, you must be a resident of Canada at the time of the withdrawal and up until the time the home is bought or built.
Non-qualifying withdrawals as a non-resident are subject to withholding tax.