The Underused Housing Tax, introduced by the Canadian government, represents a strategic initiative aimed at…
The tax-free first home savings account will commence in 2023. Draft legislation was introduced in November 2022 with anticipated in force date of April 1, 2023. This plan provides excellent tax incentives, with deduction for contributions and tax-free withdrawals.
The registered account allows perspective first time home buyers the ability to save up to $8,000 per calendar year to a maximum contribution of $40,000 over a lifetime. You can carry forward any unused contribution room from the time you open a FHSA. Over contribution penalties are 1% per month.
The contributions can be deducted from income (like an RRSP) while withdrawals (including any income earned in the account) can be made tax-free (like a TFSA) when made to purchase a home.
To be eligible for the FHSA, you must be an individual resident of Canada, at least 18 years of age and be a first-time home buyer.
A first-time home buyer means you or your spouse or common-law partner (“spouse”) did not own a qualifying home that you lived in as a principal place of residence at any time in the year the account is opened or the preceding four calendar years. If you are no longer the spouse of someone who owned a home at the time you contribute to the plan, you may qualify.
When selecting your investment in a FHSA – you likely do not want your HFSA to hold investments in foreign dividend type of income because treaties (such as the tax treaty between Canada and the US) have no withholding tax deducted from those dividends. However, a withholding tax to the foreign jurisdiction is paid on investments held in RESPs. As such, you do pay some tax on this type of investment.
Effective investments for tax purposes within your FHSA would include Canadian interest generating income (although these are not necessarily investments that net you the most return).
To qualify for a tax-free withdrawal, the following conditions must be met:
- You must be a first-time home buyer when you make the withdrawal. There is an exception to allow individuals to make qualifying withdrawals within 30 days of moving into a qualifying home.
- You must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal, and you must intend to occupy the home as a principal place of residence within one year after buying or building it.
- A qualifying home is a housing unit located in Canada (or a share in a cooperative housing corporation that entitles the taxpayer to possess and have an equity interest in a housing unit located in Canada).
Where balances remain, amounts may be transferred to an RRSP or RRIF without penalty and without reduction to available RRSP room. This may provide a loophole for increased contributions to an RRSP.
Non-qualifying withdrawals must be included in income in the year the withdrawal is made and will be subject to withholding tax by the plan administrator.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2023 Shajani CPA.
Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning services.