What is a qualifying home under FHSA rules?

The first home savings account (FHSA) can be a powerful tool to save for a down payment.

What’s critical to getting most out of the plan, however, is understanding what counts as a “qualifying home” under the FHSA’s rules, both when someone opens an account and when they want to make a tax-free qualifying withdrawal to buy or build a home.

Let’s start with the basics.

The FHSA allows first-time home buyers to save for a down payment on a tax-free basis. As with an RRSP, contributions to an FHSA are tax-deductible, while withdrawals to purchase a first home are tax-free, like with a TFSA.

Contribution room begins accumulating once an FHSA is opened. The annual contribution limit is $8,000, with a lifetime contribution limit of $40,000. Up to $8,000 in unused contribution room can be carried forward to a future year. An FHSA can remain open for up to 15 years or until the end of the year when the holder turns 71, whichever is earlier.

An FHSA withdrawal to buy a qualifying home is known as a tax-free qualifying withdrawal. Any savings remaining in the FHSA may be transferred, tax-free, to an RRSP or RRIF until Dec. 31 of the year following the year of the first qualifying withdrawal. Non-qualifying withdrawals are included in the FHSA holder’s income in the year of withdrawal.

Both the FHSA and the Home Buyers’ Plan can be used to purchase the same home.

What is a qualifying home?

A qualifying home is defined as a housing unit located in Canada, whether existing or being constructed.

The definition includes detached and semi-detached homes; townhouses; mobile homes; condo units; and apartments in duplexes, triplexes, fourplexes and apartment units.

Also included is a share in a co-op housing corporation that entitles someone to an equity interest in a housing unit. (A share that only provides a right to tenancy would not qualify.)

“The criteria for what qualifies is quite broad, really,” said Aaron Hector, private wealth advisor with CWB Wealth in Calgary. “Any actual equity ownership interest in what could be considered a personal residence is going to count.”

Opening an FHSA

A person must be a first-time home buyer to open an FHSA.

For FHSA purposes, a first-time home buyer is defined as a Canadian resident aged 18 to 71 who didn’t live in a qualifying home (or what would be a qualifying home if it were in Canada) that the person owned or jointly owned in the current year or the previous four years.

In addition, the person cannot have lived in a qualifying home (or what would be a qualifying home if it were in Canada) that their spouse or common-law partner owned or jointly owned in the current year or in the previous four.

If the person is single when they open an FHSA, the spousal condition doesn’t apply.

A person who owns or owned a rental property but didn’t live in that property as a principal residence in the current or previous four years is considered a first-time home buyer if they meet all other conditions.

Qualifying withdrawals

A Canadian resident who has a written agreement to buy or build a qualifying home by October 1 of the following year, and who lives in or intends to live in that home as their principal residence within a year of buying or building it, can make a tax-free qualified withdrawal from their FHSA.

The FHSA holder must again be a first-time home buyer, but the term is defined differently when withdrawing from the account than when opening it. For the purposes of making a qualifying withdrawal, a first-time home buyer is someone who has not owned or jointly owned their principal residence in the current year, except for the 30 days immediately before the withdrawal, or any of the previous four years.

The 30-day exception allows a homeowner to move into a qualifying home and then make the qualifying withdrawal.

Hector said he expects that some FHSA holders to be tripped up by this rule: “Thirty days goes by quickly when you’ve got a lot of stuff going on in your life.” If the new homeowner misses this window, they won’t be able to make a qualifying withdrawal for that home at all.

Another difference in qualifying as a first-time home buyer when you make a qualifying withdraw is that it doesn’t matter whether the FHSA holder lives in a home that their spouse or common-law partner owns or jointly owns when they make the withdrawal.

For example, a person who opens an FHSA and later begins living in a home owned by a spouse or common-law partner qualifies as a first-time home buyer for purposes of making a qualified withdrawal for the purchase of a home, if they live or intend to live in that home within a year of acquisition, Hector said. This rule could be helpful to an FHSA holder who wants to buy part of their partner’s home, for example.

Qualified home, qualified withdrawals

A multi-unit dwelling is a qualifying home if the buyer lives or intends to live in that home.

“Someone could go out and buy an eightplex and they rent out seven units and live in the eighth, and that [would qualify as a qualifying home] as long as [it] belongs to them and they’re living there,” Hector said. “The kicker is you have to be intending to use this home as your principal residence within a year of acquiring it.”

A mixed-use commercial-residential property — a residence above a shop, for example — should be a qualifying home “as long as more than 50% of the property is considered personal-use property,” said Jacqueline Power, assistant vice-president of tax and estate planning and distribution with Mackenzie Investments in Toronto. “There is nothing definitive [in CRA guidance] stating this, but this [application] is similar to other areas, [such as] the application of HST, for instance.”

However, a person buying land could not make a qualifying withdrawal, Power said, unless they had an agreement to build a home on that land by October 1 of the year after the purchase was made, and they meet all other requirements.