FHSA:  Digging Deeper into the New Rules

Evelyn Jacks

The First Home Savings Account (FHSA) is the new investment vehicle on the block and people have lots of questions about it.  For example, is there an age limit to contributing to a FHSA?  Can you transfer your RRSP balances into it?  Should you?  Learn more here:

What is the maximum FHSA participation period?  The FHSA participation period begins when you open the account and ends on the earlier of three events:

1. the 15^th anniversary of the opening of your first FHSA
2. when you turn age 71
3. the year following your first qualifying withdrawal

If you don’t buy a qualifying home within the earlier of these events, the plan ends, and the amounts are taxable unless a direct transfer to another registered account is made, as described below.

Can RRSP balances be contributed to a FHSA?  Yes.  Funds from your own RRSP may be rolled over to the individual’s FHSA on a tax-free basis subject to the annual and lifetime FHSA limits, as long as other criteria are met – that is, the taxpayer or spouse did not own a home in the current or four immediately preceding years.  By transferring RRSP funds into the FHSA, it’s possible to withdraw up to $40,000 of otherwise taxable savings for the purchase of a home. 

However, be cautious before transferring funds from a spousal RRSP into a FHSA.  If your spouse has made contributions to the plan within the current or prior two years, any money removed from the spousal RRSP, including transfers to a FHSA, will have to be included in the contributor’s income in the year they are removed.  The result is no deduction for the transfer but the inclusion of all or part of the transferred amount in the contributor’s income.

Also, the rollover of RRSP assets into a FHSA will not result in a tax deduction for the contribution (the original contribution was already deducted when it was contributed to the RRSP).  Further, retirement funds in the RRSP will be interrupted, with no ability to recover RRSP contribution room.

But most of all, you’ll miss leveraging home buying opportunities using both plans.

Can I Use my RRSP Home Buyer Plan and the FHSA to buy a home?  Yes. To leverage the opportunities in both the RRSP and the FHSA, better planning would be to leave enough RRSP accumulations undisturbed to take advantage of the RRSP Home Buyer Plan (HBP).  This allows you to withdraw an additional $35,000 for the purchase of a home.  As long as you repay the funds within 15 years, the withdrawal is tax-free. The repayment begins the second year after you withdraw these funds.

What tax restrictions are attached to the FHSA? Similar to the tax treatment afforded to RRSPs, RRIFs or TFSAs, holders of the FHSA will be prohibited from deducting fees paid for investment counselling or administrative or other fees.  In addition, it is not possible to deduct any interest costs incurred when money is borrowed to invest in a FHSA.

Also, similar to stop loss rules applied to other registered accounts, a capital loss that arises on the disposition of a property that is then invested in a FHSA cannot be claimed.

What happens if you can’t afford to contribute this year?  If you can’t afford to make a contribution in any year after the account is opened, you can make it in a future year.  Your FHSA “unused participation room”, is your FHSA participation room for the year – a maximum of $8000 per year – less all  new contributions plus transfers from your RRSPs during the year.

Bottom Line.  It does make good tax sense to consider all your  options for making the FHSA contribution in the current year:   you can transfer in cash from other savings, in particular,  a non-registered savings account, an inheritance or a gift from a benefactor like a spouse, parent or grandparent.  It’s also possible to borrow to invest;  however in this case, interest would not be tax deductible.

Next week join us to learn about FHSA withdrawals.