The new Tax-Free First Home Savings Account (FHSA) is meant to help first-time home buyers save for a down payment, as both contributions and withdrawals are free from tax.
But there are key differences in the rules governing the account when a client opens an FHSA and when they withdraw from it to buy their first home.
In this two-part series, we’ll dive into the quirks of the FHSA rules. In Part 1, we look at the eligibility rules to open an FHSA.
Definition of a first-time home buyer
An individual must be aged at least 18, a Canadian resident and a “first-time home buyer” to be eligible to open an FHSA.
For purposes of opening an FHSA, a first-time home buyer is someone who has not lived in a “qualifying home” (or what would be a qualifying home if it were located in Canada) as a principal place of residence that they either owned or jointly owned in the current calendar year, or in the previous four years.
Crucially, if the individual lives with a spouse or common-law partner at the time the individual opens the FHSA, the spouse or partner cannot have owned or jointly owned the qualifying home for the relevant period either.
“Even if [the FHSA holder is] not on title, as long as they’re residing in a home with their partner, they’re going to be captured by their spouse’s ownership as well,” said Aaron Hector, private wealth advisor with CWB Wealth in Calgary.
What’s a “principal place of residence?”
The definition of principal place of residence is not specific to the FHSA, the Canada Revenue Agency (CRA) stated in an emailed reply to questions from Advisor.ca. The agency said the definition appears in Income Tax Folio S1-F3-C2, Principal Residence: it’s a housing unit that must generally be inhabited by the taxpayer or by their spouse or common-law partner, former spouse or common-law partner, or child.
What is a qualifying home?
For purposes of the FHSA, a qualifying home is a housing unit located in Canada. A housing unit may include single-family homes, semi-detached homes, townhouses, mobile homes, condominium units, and apartments in duplexes, triplexes, fourplexes or apartment buildings.
A share in a co-operative housing corporation that entitles an individual to own equity in a housing unit located in Canada also is a qualifying home. A share that only provides the owner with a right to tenancy isn’t.
A qualifying home could be an existing home or one that is under construction.
Rental property and the FHSA
David Truong, chief advisor, Expertise Center, with National Bank Private Banking 1859 in Montreal, said that clients who own a home may mistakenly believe they aren’t eligible to open an FHSA when they might be. As long as an individual hasn’t lived in a home they own as their principal place of residence in the current year, or any of the previous four, they may be eligible to open an FHSA.
For example, a person who owns a rental property and has never lived in it may be eligible to open an FHSA.
Overview of FHSA rules
The FHSA allows first-time home buyers to save for a down payment on a tax-free basis. Like with an RRSP, contributions to an FHSA are tax-deductible, while withdrawals to purchase a first home — including from investment income — are tax-free, like with a TFSA.
Contribution room begins to accumulate once an FHSA is opened. There is an annual contribution limit of $8,000 and a lifetime contribution limit of $40,000. Up to a maximum of $8,000 in unused contribution room can be carried forward to a future year.
A withdrawal from an FHSA to buy a qualifying home is a tax-free qualifying withdrawal. Any un-withdrawn savings in the FHSA may be transferred on a tax-free basis to an RRSP or RRIF until Dec. 31 of the year following the year of their first qualifying withdrawal. Non-qualifying withdrawals are included in the FHSA holder income in the year of withdrawal.
Both the FHSA and the Home Buyers’ Plan can be used to purchase the same home.