TAX FREE HOME SAVINGS ACCOUNT

What Is The Tax Free Home Savings Account?

In the budget for 2022, the government suggested implementing the Tax-Free First Home Savings Account. Potential first-time home buyers could save $40,000 tax-free according to this new registered plan. Contributions would be tax-deductible, similar to a Registered Retirement Savings Plan (RRSP), and withdrawals for a first home would be tax-free, identical to a Tax-Free Savings Account (TFSA).

Budget 2022 announced the FHSA's core design elements, including an annual contribution cap of $8,000 and a lifetime contribution cap of $40,000. Today, the Department of Finance released draft legislative proposals for public consultation that add more information to the FHSA's structure. This backgrounder provides an overview of these facts.

Who is eligible for a Tax-Free First Home Savings Account?

Residents of Canada, 18 years or older and have not owned a property in the year of the account opening or the four years prior can go for FHSAs.

Up to a lifetime contribution cap of $40,000, the yearly tax-deductible contribution limit is $8,000 per year. Unlike other savings options, the plan should close after 15 years for any unused contribution room. For instance, this includes any Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plans (RRSP).

The money taken out to buy a qualifying home does not include any taxes. You can move any money left over after paying for a home penalty-free and tax-deferred into an RRSP or Registered Retirement Income Fund (RRIF) without affecting the taxpayer's contribution room.

You can have the same qualifying investments currently held in a TFSA in an FHSA. Taxpayers could have various investments, such as guaranteed investment certificates, mutual funds, publicly traded securities, corporate and government bonds, and more.

The restrictions on prohibited investments and non-qualified investments that apply to other registered plans, as well as the possible tax repercussions detailed below, would be in effect. One cannot make investments in entities with which the account holder does not trade at arm's length under these restrictions. This also stands true for investments in particular assets such as real estate, private company stock, and general partnership units.

What are the benefits of a Tax-Free First Home Savings Account?

According to Ball, the FHSA has features similar to RRSPs and TFSAs. The main benefits lie related to tax for both contributions and withdrawals.

Similar to RRSPs, donations lead to deductions of tax. So, if you made an $8,000 annual contribution, your taxable income would reduce by the same amount. In addition, just like a TFSA, withdrawals made to buy a qualified house do not include any tax. This encompasses any capital gains or income received. Some question how the FHSA differs from the Home Buyer's Plan (HBP). The HBP permits first-time house buyers to take up to $35,000 tax-free out of their RRSP. But, you need to repay the entire amount within 15 years, beginning the second year after the year you took the initial withdrawal (s). You can treat missed HBP payments as income and the ability to contribute to RRSPs as permanently lost. Additionally, once money is eventually taken from the plan, money repaid to an RRSP will be taxed. Contributions lead to tax deductions, and withdrawals do not include taxes when meeting specific requirements. Thus, an FHSA offers a more significant tax benefit.

Tax-Free First Home Savings Account Contributions

There would be a $40,000-lifetime contribution cap and an $8,000 annual contribution cap. To put it another way, people would be bound by the lower of their yearly limit and remaining lifetime limit. Starting in 2023, the entire annual limit would be accessible.

Contributions made during a specific calendar year would be subject to the yearly contribution cap. An income tax deduction would be available for donations made by individuals within a certain tax year. Unlike RRSPs, one cannot write off the contributions made within the first 60 days of a calendar year as part of the prior tax year.

Up to $8,000, a person might carry forward any unused portions of their annual contribution cap. This means that an individual can contribute an additional $8,000 on top of their $8,000 yearly contribution cap in a subsequent year. But, they should contribute less than $8,000 in a particular year (subject to their lifetime contribution limit). For instance, a person who made a $5,000 contribution to an FHSA in 2023 can make an $11,000 contribution in 2024. The calculation goes as $8,000 + the remaining $3,000 from 2023. Only after a person opens an FHSA for the first time would carry-forward amounts begin accumulating.

Individuals' total amount to their FHSAs cannot exceed their annual and lifetime contribution restrictions. However, they can still hold multiple FHSAs. In principle, it would be the taxpayer's responsibility to ensure they don't go over their allotment in a particular year. To assist taxpayers in estimating how much they can contribute in a specific year, the Canada Revenue Agency (CRA) would publish basic FHSA information.

For example, when purchasing a first home, contributions paid to an FHSA after a qualifying withdrawal do not lead to any tax deduction from net income.

Tax-Free First Home Savings Account Withdrawals

Qualifying

A few requirements must be satisfied for an FHSA withdrawal to qualify as a non-taxable (i.e., non-taxable) withdrawal.

Before making a withdrawal, a taxpayer must be a first-time home buyer. In particular, the taxpayer cannot own a residence where they resided at any point during the calendar year before the withdrawal. Also, they cannot do it at any time during the four years before that. Within 30 days of moving into their residence, people are permitted to make qualified withdrawals under exceptional circumstances.

The taxpayer additionally needs a written contract stating that they will buy or construct a qualifying home before October 1 of the year after the year of withdrawal. Also, they intend to live in it as their primary residence for at least a year after doing so.

A residence situated in Canada would be considered a qualifying home. The taxpayer can also own a share of a co-operative housing corporation that gave them the right to own and have an equity stake in a home in Canada. However, a share that solely grants the right to residence in the dwelling unit would not be considered.

The total amount of accessible FHSA funds may have tax-free once or throughout several withdrawals. However, the taxpayer should satisfy the qualifying withdrawal requirements.

Non-qualifying Non-qualifying withdrawals would be counted as part of the person making the withdrawal's income. Following the rules governing taxable RRSP withdrawals, financial institutions would have to collect and remit withholding tax on non-qualifying withdrawals.

Non-qualifying withdrawals would not reinstate the annual and lifetime contribution limits.

What about the non-residents?

After leaving Canada, taxpayers can contribute to their current FHSAs but would not qualify for a withdrawal as a non-resident. A taxpayer who withdraws money from an FHSA must be a Canadian resident at the time of the withdrawal. This requirement also stands until the completion of a qualified home purchased or constructed. Non-resident withdrawals would be subject to a withholding tax.

Tax-Free First Home Savings Account Takeaway

When selecting which savings option is appropriate, potential home purchasers should consider some FHSA-specific elements. Additional analysis will be required once the final rules are released.

Last but not least, a single person may open numerous FHSA accounts. But the cumulative contributions to each plan cannot exceed the annual ($8,000) or lifetime ($40,000) restrictions. The donation caps are, therefore, per individual and not per account