The proposed rules for Canada’s tax-free savings account for first home purchases have been released for public comment. The new savings channel, which was announced in the 2022 federal budget, will share features with both registered retirement savings plans (RRSPs), allowing annual tax deductible contributions, and tax-free savings accounts (TFSAs) with no tax payable on withdrawals used to purchase or build dwellings that meet the regulation’s definition of a first-time home.
As proposed, an eligible prospective homebuyer can contribute up to $8,000 annually to a lifetime maximum of $40,000 to a first home savings account (FHSA), which will be available through qualifying Canadian financial institutions, including banks, credit unions, trust companies and life insurance companies. Account holders could also hold some of their FHSA funds as other investments, such as mutual funds, guaranteed investment certificates (GICs), government and corporate bonds and/or publicly traded securities.
As with RRSPs, unused contribution room can be forwarded to subsequent years, and deductions do not have to be claimed in the current tax year. However, FHSA contributions will be computed on a Jan. 1 to Dec. 31 calendar, unlike the 60-day allowance into the next year afforded to RRSPs.
Individuals could hold multiple FHSAs but the $8,000 annual deduction and $40,000 lifetime limit thresholds would continue to apply. Taxpayers could not claim deductions on contributions to a spouse’s FHSA.
To qualify for special tax treatment, savers must be residents of Canada and not occupy a home they own within the four calendar years prior to the year they open the account. For withdrawals, they must have a written agreement to buy or build a home by Oct. 1 of the subsequent calendar year and occupy it as their principal residence within one year of the purchase or completion of construction. Withdrawals would not be allowed in combination with withdrawals from RRSPs through Canada’s home buyers’ plan.
An account would no longer qualify for FHSA status when the holder turns 71 or 15 years after the date it is opened. Funds not withdrawn for a first home purchase could be transferred to an RRSP or an registered retired investment fund (RRIF) without tax penalty.
The Department of Finance is accepting comments on the proposed FHSA design until Sept. 30. It’s expected financial institutions will be ready to open the accounts in 2023 and contributions will be recognized beginning with the 2023 tax year.
