The Canada Revenue Agency (CRA) has released forms to allow tax-free first home savings account (FHSA) holders to transfer assets from their accounts to their RRSP, RRIF or to another FHSA.
While the new registered plan officially launched on April 1, the CRA has yet to release all the forms financial providers need to administer the accounts.
Earlier this week, the CRA released Form RC721 – Transfer from your FHSA to your FHSA, RRSP or RRIF and Form RC723 – Transfer from an FHSA to another FHSA, RRSP or RRIF on Breakdown of Marriage or Common-law Partnership.
In April, the agency released Form RC725 – Request to Make a Qualifying Withdrawal from your FHSA, and in March it released Form RC720 – Transfer from your RRSP to your FHSA.
Financial providers are still waiting for the CRA to release the FHSA form that allows a TFSA holder to make a withdrawal or transfer of a designated amount (excess contribution) from an FHSA and the form to allow a beneficiary and executor to make a joint election of a deemed transfer or distribution from a FHSA on the death of the holder.
Josée Baillargeon, senior policy advisor, taxation with the Investment Funds Institute of Canada (IFIC), said in an email that the CRA has indicated only three FHSA forms will be prescribed forms that must be used: the forms for making a qualifying withdrawal (Form RC725) as well as the two forms yet to be released.
The other forms will be non-prescribed, which means financial institutions offering the FHSA have the option of using the CRA form, creating their own form or potentially adding the required information as part of existing forms.
The two FHSA forms released this week don’t need to be sent to the CRA once completed, but should be kept on file in case the agency requests them, the CRA said. An FHSA holder needs to fill out a separate Form RC721 or Form RC723 for each transfer they make.
Form RC721 should be completed and signed by the FHSA holder, the bank receiving the FHSA property and the bank transferring the property.
Form RC723 should be completed and signed by the FHSA holder, the bank receiving the FHSA property, the bank transferring the property and the former spouse or partner. However, if the bank making the transfer isn’t able to secure the signatures of both spouses or partners — either on the form itself or in an attached letter in lieu — they are to review and keep a copy of the decree, order or judgement of the competent tribunal or the written separation agreement on the relationship breakdown.
Only some banks and other financial providers have launched FHSAs. Others have said they will introduce their accounts before the end of the year, once they have prepared back-office systems and received additional guidance from the CRA on administering the plans.
Baillargeon said the CRA has been working “collaboratively” with the financial services industry to address its FHSA administration questions, including providing examples of how certain scenarios should be reported.
However, Baillargeon said the federal government has not provided an update on whether the U.S. Internal Revenue Service (IRS) would put the FHSA on the list of exempted accounts for FATCA reporting purposes. Earlier this year, the Department of Finance provided IFIC with a comfort letter stating it was working with the IRS on this issue.
FHSA transfer rules in brief
Generally, an individual can transfer property from their RRSP to their FHSA without any immediate tax consequences, as long as it is a direct transfer, and the transfer does not exceed their unused FHSA participation room at the time of the transfer. The individual can also transfer property from their FHSA to another one of their FHSAs, or to their RRSP or RRIF, without any immediate tax consequences, as long as it is a direct transfer (and other conditions are met where necessary).
An individual may have multiple FHSAs, but the total amount they can contribute to all of their FHSAs and transfer from their RRSPs to all of their FHSAs cannot be more than their FHSA participation room for the year.
If the individual has an excess amount (overcontribution) in their FHSA, and transfers property from the FHSA to their RRSP or RRIF, any portion of the amount transferred that is more than the fair market value of the property held in the FHSA less the excess amount will be treated as taxable income in the year of withdrawal and be considered a new RRSP contribution at the time of transfer to the RRSP or RRIF.
Transfers from an FHSA when a relationship breaks down
Generally, FHSA holders aren’t allowed to transfer property from their FHSAs to their current or former spouse or common-law partner without tax consequences.
However, an exception exists if an FHSA holder makes a direct transfer from their FHSAs to the FHSA, RRSP or RRIF of their current or former spouse or common-law partner, where the current or former spouse or partner is entitled to an amount under a decree, order, or judgment of a competent tribunal, or is entitled to the amount under a written agreement relating to a division of property arising from the breakdown of the marriage or common-law partnership.