Are you saving to purchase a home, or do you have children saving to buy one? If so, you should learn
more about the Tax-Free First Home Savings Account (“FHSA”). If you are familiar with FHSAs, are a U.S.
citizen or Green Card holder, or are planning to relocate to the U.S., are you aware of the U.S. income tax
implications? If not, you should learn more about the U.S. implications before opening a FHSA.
What is an FHSA?
An FHSA is a relatively new type of account introduced to help “first-time” home buyers save up to
$40,000 for a home purchase. Note that “first-time” does not mean you have never purchased a home,
as mentioned below. It was possible to open a FHSA as of April 1, 2023. As such, 2024 is only the
second year these accounts are available. Here is some additional information regarding these accounts:
- “First-time” means that you have not owned a principal residence (individually or jointly) in the
current calendar year or the four previous calendar years. - You must be at least 18 and a Canadian tax resident to open the account.
- Contributions are deductible, like an RRSP.
- Income earned in the account and qualifying withdrawals are not taxable.
- Annual limit of $8,000 per person each year once the account is opened.
- It is possible to carry forward up to $8,000 to a later year.
- The maximum participating period is the earliest of:
o 15 years after opening the account.
o The end of the year you turn 71.
o The end of the year of your first withdrawal. - It uses a calendar year contribution period, like a TFSA, unlike an RRSP.
What is the Main Advantage of an FHSA?
If the conditions are met, it combines the best features of a TFSA and an RRSP, with deductible
contributions and tax-free distributions.
Are There Conditions That Need to be Met for Distributions to Avoid Taxation?
Several conditions need to be met, including the following:
- You must be a resident of Canada and have not lived in a principal residence that you owned
(individually or jointly) in the period spanning four calendar years before 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 you must intend to occupy the home as a principal
place of residence within one year after buying or building it. - A qualifying home is a housing unit located in Canada (or a share in a cooperative housing
corporation that entitles the taxpayer to possess and have an equity interest in a housing unit
located in Canada).
What Happens if I Don’t Use the Entire Account to Purchase a Home?
If a withdrawal does not meet the qualifications, the distribution is taxable. However, there is an
exception:
- Leftover funds can be transferred to an RRSP or an RRIF without incurring penalties if you
transfer the remaining funds by December 31 of the following year, since the plan stops being an
FHSA at that time. Transfers do not reduce or limit your available RRSP room.If the unused balance is not distributed before the end of the participating period, the account becomes
a taxable trust. The trust is required to file T3 (trust) returns on an annual basis.
Are There Rules Regarding What Happens Upon Death or the Dissolution of a Marriage?
There are rules specific to FHSAs regarding these events. Feel free to reach out to us to discuss these in
more detail.
Do I Need to Use My Funds to Contribute to a FHSA?
Canada has attribution rules that generally apply to gifts to children or spouses. Attribution rules require
certain types of income to revert to the person who gave the gift. We won’t go into detail regarding
these rules in this memo. If you have any questions, feel free to contact us. However, it is possible to
gift funds to your child or spouse without being subject to these rules if they use them to contribute to
their FHSA.
Funding the FHSA by withdrawing from an RRSP or Home Buyer’s Plan is possible, but whether you
should do so depends on your circumstances. We would be happy to discuss this with you.
How Are These Accounts Treated for U.S. Tax Purposes?
There is no definitive answer to this question since the IRS has not made any formal announcement
regarding this account. Given that the account shares many characteristics with a TFSA, it is likely that
this should be considered a taxable account for U.S. tax purposes, like the TFSA. In other words, there
would be no deduction for contributions, and interest, dividends, and capital gains would be taxable
annually. Also, given that the IRS has announced that TFSAs should be considered as foreign grantor
trusts, it is likely that these accounts should also be treated as foreign grantor trusts, subject to reporting
on:
- Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain
Foreign Gifts. - Form 3520-A, Annual Information Return of Foreign Trust With a U.S. OwnerIf gifts were made to a spouse or children to contribute to their FHSA, the gifts may or may not be
subject to U.S. gift tax, depending upon the size of the gift and whether the spouse was a U.S. citizen.Contact us to discuss the potential U.S. taxation of these accounts in more detail. An FHSA may still be
beneficial despite these U.S. tax implications.
Should I Contribute to a FHSA?
These accounts have the potential to be very beneficial in the right circumstances. While generally
helpful, your facts and circumstances should be considered. Some things that may impact the decision
on whether to contribute to a FHSA include:
- The target date of the potential home purchase.
- Your age.
- How a potential home purchase best fits into your financial plan.
- Whether you are a U.S. citizen or Green Card holder.
- If you could become a nonresident of Canada before purchasing the home.
Price & Comin LLP is here to help.
Contact us if you have any questions about Tax-Free First Home Savings Accounts and whether they
make sense for you or a family member.
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