Understanding FHSA Withdrawals

Evelyn Jacks

The last thing that may be on the minds of prospective First Home Savings Account holders is a withdrawal, considering how new the plan is.  Available since April 1, 2023, many advisors and clients are just now gearing up to engage clients in the significant opportunity for first home savings.   However, it’s important to look at every investment holistically, and that means understanding the tax consequences going in and coming out of the FHSA.

As discussed in KBR previously, the FHSA is a significant investment opportunity.  It’s possible to contribute up to $8,000 per year to your new First Home Savings Account (FHSA), starting in 2023. Each qualifying individual can contribute $8,000 a year.  The maximum lifetime contribution to the account is $40,000.  In the case of a couple, annual savings of $16,000 ($8,000 each) and a lifetime maximum of $80,000 ($40,000 each) can be achieved.  CRA will provide information about any unused FHSA contributions available on the first notice of assessment or reassessment after the first FHSA account has been opened.

Contributions to the FHSA are tax deductible, and income earned in the plan while the money is held there will not be subject to tax. 

Are withdrawals taxable?  No, not if they are qualifying withdrawals; that is,  used to purchase a first home.  But other withdrawals may be taxed, as described below.  

Note that the plan must be closed if the funds are withdrawn to purchase a home or if the plan has been in existence for 15 years.

How do you withdraw money from a FHSA?  There are three types of withdrawals possible, potentially with different tax consequences:

1.     A qualifying, tax-free withdrawal

2.     A designated withdrawal

3.     A taxable withdrawal

A qualifying tax-free withdrawal.  To qualify, you must be a  “first-time home buyer,” and this definition is different for withdrawal purposes than it is when you open the FHSA.  Here’s CRA’s definition:

“For purposes of a qualifying withdrawal, you will be considered to be a first-time home buyer if you did not, at any time in the current calendar year before the withdrawal (except the 30 days immediately before the withdrawal) or at any time in the preceding four calendar years, live in a qualifying home (or what would be a qualifying home if located in Canada) as your principal place of residence that you owned or jointly owned.”

You must also meet the following criteria:

·      Complete Form RC725, Request to Make a Qualifying Withdrawal from your FHSA and give it to your FHSA issuer.

·      Have a written agreement to buy or build a qualifying home.

·      The acquisition or construction completion date of the qualifying home must be before October 1 of the year following the date of the withdrawal.

·      You must not have acquired the qualifying home more than 30 days before making the withdrawal.

·      Be a resident of Canada from the time that you make your first qualifying withdrawal from one of your FHSAs until the earlier of the acquisition of the qualifying home or the date of your death.

·      Occupy or intend to occupy the qualifying home as your principal place of residence within one year after buying or building it.

Remember:  Close all  FHSAs on or before December 31 of the year following the year of your first qualifying withdrawal.

A Designated Amount Withdrawal.  If you have an excess FHSA amount, there will be a 1% per month penalty on the highest excess amount.  It’s possible to reduce or eliminate this excess FHSA amount by making a designated withdrawal and, at the same time, avoid income inclusion on your tax return.  At the time of writing, the form for doing so was not available.  However, the excess FHSA amount can be reduced or eliminated by making a taxable withdrawal.

Taxable Withdrawals.  Any withdrawal from a FHSA that is not a qualifying withdrawal or a designated withdrawal is a taxable withdrawal.  A taxable withdrawal must be included in your income in the year the withdrawal is made.  A withholding tax will apply, claimable on your tax return.

Is it possible to use both the FHSA and the Home Buyer’s Plan (HBP) available under the RRSP to purchase your first home?  Yes, both FHSA and HBP withdrawals may be made in respect of the same home purchase. The HBP will have different withdrawal rules, however.

Bottom Line:  Discuss the “lifeline” of the FHSA with all potential depositors, to ensure they have a solid understanding of the rules for maximizing the tremendous tax benefits provided by this new plan.

Evelyn Jacks is the best-selling author of 55 books on personal tax filing, planning and family wealth management.  Her latest, Make Sure It’s Deductible, is available at leading books stores.  Follow her on twitter @evelynjacks.