The Government of Canada has introduced a new tax-free plan that aims to help Canadians enter the housing market. This plan was first proposed in the 2022 federal budget and would allow first-time home buyers to save for a down payment on a tax-free basis.

The FHSA, or First Home Savings Account, will be available to Canadian residents, who are 18 years old or older and is a first-time home buyer. A first-time home buyer is defined as someone who has not owned a home in which they lived at any time during the part of the calendar year before the account is opened or at any time in the preceding four calendar years.

The annual tax-deductible contribution limit is $8000 up to a lifetime contribution of $40,000.

The Department of Finance said it expects people will be able to open and contribute to an FHSA “at some point in 2023” but did not specify a date.

Nevertheless, accountholders would be allowed to contribute the full $8000 annual limit in that year. Any financial institutions (including Canadian trust companies, life insurance companies, banks, and credit unions) that can issue RRSPs and TFSAs would be able to issue FHSAs.

An FHSA can only be open for 15 years, and an accountholder must be younger than 71.

An individual’s account would discontinue to be an FHSA, and the individual would not be permitted to open an FHSA, after Dec 31 of the year in which the earlier of these events occurs:

The fifteenth anniversary of the individual first opening an FHSA; or the individual turns 71.

Any savings not used to purchase a qualifying home could be transferred, tax free into an RRSP or RRIF. Otherwise, the savings would have to be withdrawn on a taxable basis.

An FHSA would be permitted to hold the same investments that are allowed to be held in a TFSA, which include mutual funds, publicly traded securities, government, and corporate bonds and GICs.

The prohibited investment rules and non-qualifying investment rules applicable to other registered plans would also apply to FHSAs.

An individual would be allowed to carry forward unused portions of their annual contribution limit. Carry forward amounts would only begin accumulating after the FHSA is open.

Just like with TFSAs, an individual is allowed to hold more than one FHSA, but the total amount of individual contributions to all the open FHSA accounts cannot exceed their annual and lifetime contribution limits.

Contributions made to an FHSA following a qualifying withdrawal to buy a first home would not be deductible from net income.

Certain conditions must be met for an FHSA withdrawal to be non-taxable (a qualifying withdrawal).

The taxpayer must meet the definition of a first-time home buyer. Individuals may make qualifying withdrawals within 30 days of moving into the home.

The taxpayer must also have a written agreement to buy or build a qualifying home before Oct. 1 of the year following the year of withdrawal and intend to occupy the qualifying home as their principal place of residence within one year after buying or building it.

The qualifying home must be in Canada.

Individuals that make a qualifying withdrawal could transfer any un-withdrawn savings on a tax-free basis to an RRSP or RRIF until Dec. 31 of the year following the year of their first qualifying withdrawal.

Withdrawals that do not qualify would be included in the individual’s income. Financial institutions would be required to collect withholding tax, just like with taxable RRSP withdrawals. Non-qualifying withdrawals would not reinstate either the annual contribution limit or the lifetime contribution limit.

An individual could transfer funds from an FHSA to an RRSP, RRIF or another FHSA on a tax-free basis.

Funds transferred to an RRSP or RRIF are then subject to those accounts’ rules. These transfers would not reduce, or be limited by, an individual’s available RRSP contribution room, and would not reinstate an individual’s FHSA lifetime contribution limit.

Individuals would also be allowed to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits and the qualified investment rules. Although such transfers would be subject to FHSA contribution limits, they would not be deductible and would also not reinstate an individual’s RRSP contribution room.

Income, losses, and gains in respect of investments held within an FHSA, as well as qualifying withdrawals, would not be included (or deducted) from income for tax purposes or taken into account in determining eligibility for income-tested benefits or credits.

An individual would not be permitted to make both an FHSA withdrawal and Home Buyers’ Plan withdrawal for the same qualifying home purchase.

The FHSA holder would be the only taxpayer permitted to claim deductions for contributions made to their FHSA. Individuals would not be able to contribute to their spouse’s FHSA and claim a deduction.

However, an individual could contribute funds provided to them by their spouse without triggering the attribution rules.

On the breakdown of a marriage or a common-law partnership, an amount may be transferred directly from the FHSA of one spouse to the other’s FHSA, RRSP or RRIF. Such transfers would not reinstate any contribution room of the transferor and would not be counted against any contribution room of the transferee.

Like TFSAs, over contributions are subject to a monthly 1% tax. When a taxpayer’s annual contribution limit resets at the beginning of each calendar year, over contributions from a previous year may cease to be an over contribution.

A taxpayer would be allowed to deduct an over contributed amount in the tax year in which it ceases to be an over contribution, but not earlier. However, if a qualifying withdrawal is made before an over contribution cease to be an over contribution, no deduction would be provided for the over contributed amount.

Like with TFSAs, individuals would be permitted to designate their spouse or common-law partner as the successor accountholder, in which case the account maintains its tax-exempt status.

The surviving spouse must meet the eligibility criteria to open an FHSA. Inheriting an FHSA in this way would not impact the surviving spouse’s contribution limits. Inherited FHSAs would assume the surviving spouse’s closure deadlines.

If the surviving spouse is ineligible, amounts in the FHSA could instead be transferred to their RRSP or RRIF, or withdrawn on a taxable basis.

If the beneficiary of an FHSA is not the deceased accountholder’s spouse or common-law partner, the funds would need to be withdrawn and paid to the beneficiary. Amounts paid to the beneficiary would be included in the income of the beneficiary for tax purposes. When such payments are made, the payment to the beneficiary would be subject to withholding tax.

Taxpayers would be allowed to contribute to their existing FHSA after emigrating from Canada, but they would not be able to make a qualifying withdrawal as a non-resident. Specifically, a taxpayer withdrawing funds from an FHSA must be a resident of Canada at the time of withdrawal and up to the time a qualifying home is bought or built. Withdrawals by non-residents would be subject to withholding tax.

Like with RRSPs and TFSAs, interest on money borrowed to invest in an FHSA would not be deductible in computing income for tax purposes.