What Happens When a FHSA Ends?

What happens when a FHSA (First Home Savings Account) ends because it is closed by the account holder or the account holder dies?  Recent legislation has been drafted to cover these FHSA lifecycle events:

FHSA Cessation.  If an arrangement ceases to be an FHSA, there are rules that exempt the trust, deposit or contract from tax under Part I of the Act.  Specifically, where the last holder of an FHSA is alive, the fair market value of the FHSA is deemed to be received by the holder upon cessation.

Where the last holder of an FHSA is deceased, the fair market value of the FHSA is deemed to be distributed to a beneficiary (or proportionally in the case of multiple beneficiaries).  The time at which the fair market value of an FHSA is to be determined and deemed to be received or distributed is the time of cessation.

Taxation of FHSA Distributions on Cessation of Plan.  It’s interesting that CRA will not require withholding taxes on payments out of an arrangement that ceased to be an FHSA.  However, it will still deem the fair market value of an FHSA upon cessation to be received or distributed, to one or more taxpayers for inclusion in their income for the year in which the cessation occurs.

Survivor:  Rules ae slightly different for survivors.  This is someone who, immediately before a FHSA holder’s death, was a spouse or common-law partner of that qualifying individual.  The FHSA holder may provide for a survivor to become the holder of the FHSA upon the individual's death. According to the legislation for this provision, determining whether the survivor is a qualifying individual takes place immediately after the time of death of the FHSA holder. 

When a survivor contributes or transfers an amount into an inherited FHSA, or makes a qualifying withdrawal from that FHSA, between the deceased holder's time of death and the end of the calendar year following the death, it will be deemed that the survivor has entered into a new arrangement immediately after the death of their spouse.

New legislation will also allow a survivor who is not a qualifying individual immediately after the deceased holder's death, to transfer the balance of the decedent's FHSA to an FHSA they opened in the past. In addition, the legal representative of a deceased holder's estate and the survivor may jointly designate (via a prescribed form) to have the FHSA proceeds that were paid to the estate, treated as having been transferred from the FHSA of the deceased holder to an FHSA, RRSP or RRIF of the survivor. 

New Forms required to record the lifecycle of FHSA transactions include:

• RC720 Direct Transfer from RRSP to FHSA
• RC721 Transfer from FHSA to FHSA, RRSP, RRIF
• RC722 Transfer from FHSA to FHSA, RRSP, RRIF after death of FHSA Holder
• RC723 Transfer to FHSA to another FHSA, RRSP, RRIF on marriage breakdown
• RC725 Request to make Qualifying FHSA Withdrawal
• RC727 Designate an Excess FHSA Amount as a Withdrawal from a FHSA or as Transfer to RRSP or RRIF

Excerpted from the Advanced T1 Tax Update Course.  You can register in this certificate course now and take it online for CE Credit – completion date is 3 months.  This course provides one full course credit in the DMA-Tax Services Specialist Program.  Recorded instructor presentations are included.

Don’t miss the next CE Summit on Retirement and Estate Planning on May 22, 2024.  This is an online event with a coast-to-coast network of advisors who join in.  You’ll find it incredibly stimulating.  It’s a good way to understand all the news from the Federal Budget this spring, as well.