The rules for the new Tax-Free First Home Savings Account (FHSA), which is meant to help first-time home buyers save for a down payment, are complex to navigate.
As we saw in a previous article, the definitions of “first-time homebuyer,” a “principal place of residence” and a “qualifying home” may not be intuitive.
Further, there are key differences in the rules when a client withdraws from the FHSA to buy their first home.
In the second in a two-part series, we dive into the FHSA withdrawal rules.
The FHSA’s qualifying withdrawal form
A FHSA holder must complete Form RC725, Request to Make a Qualifying Withdrawal from your FHSA and provide it to the FHSA issuer for any tax-free “qualifying withdrawals” to buy a home.
The form makes it clear that the FHSA holder is responsible for ensuring the conditions for making a qualified withdrawal have been met, not the FHSA issuer.
In an emailed response to questions from Investment Executive, the Canada Revenue Agency (CRA) indicated that “if one or more of the conditions for a qualifying withdrawal are not met, the withdrawal will be treated as a taxable withdrawal and must be included as income on the taxpayer’s income tax and benefit return for the year received.”
Conditions for a qualifying withdrawal
An FHSA holder must be a resident of Canada when they make their first qualifying withdrawal and remain a resident until they acquire the qualifying home being bought or built.
The FHSA holder must be a first-time home buyer, which is defined differently for the purposes of making a qualifying withdrawal than it is when opening the account (as described in Part 1).
For the purpose of making a qualifying withdrawal, a first-time home buyer is someone who has not owned or jointly owned their principal place of residence in the current year or any of the previous four years.
An exception allows the FHSA holder to own or jointly own the home for up to 30 days before making a qualifying withdrawal.
In addition, the question of whether the FHSA holder lives in a home that their spouse or common-law partner owns or jointly owns isn’t a determining factor as to whether the FHSA holder is considered a first-time home buyer.
“You just have to consider your situation only,” said David Truong, chief advisor, Expertise Center, with National Bank Private Banking 1859 in Montreal.
The FHSA holder must have a written agreement to buy or build a qualifying home, with the acquisition or construction completion date being before Oct. 1 of the year following the year of a first withdrawal. The definition of a qualifying home for qualifying withdrawals is identical to the rules for eligibility to open an account.
The FHSA holder also must occupy or intend to occupy the qualifying home as their principal place of residence within one year after buying or building it.
In an email to Investment Executive, the CRA confirmed that “there is no minimum amount of time that the FHSA holder must live in the qualifying home as their principal place of residence in order for the withdrawal from the FHSA to be considered a qualifying withdrawal.”
A late home acquisition
What happens if the FHSA holder doesn’t acquire a qualifying home by Oct. 1 of the year following the date of the qualifying withdrawal, or did not occupy the home as their principal place of residence one year after buying or building it?
The CRA said it would “evaluate the taxpayer’s circumstances to determine if they still meet the qualifying withdrawal conditions.”
Truong believes the CRA would examine the taxpayer’s actions as well their situation to determine if the conditions for a qualifying withdrawal were met.
“The [key] word is ‘intent,’” Truong said. “Let’s say something happens, and the [building] developer goes bankrupt, but you did intend to [acquire] the house before Oct. 1 — you shouldn’t be penalized for that.”
Do you have to use a qualifying withdrawal to buy a home?
There is no requirement that money withdrawn from the FHSA as a qualifying withdrawal be used to purchase a qualifying home.
“There is no ‘tracking’ of the amounts withdrawn,” said Aaron Hector, private wealth advisor with CWB Wealth in Calgary, if all the conditions for a qualifying withdrawal have been met.
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.