Earlier this month the federal government tabled its 2022 Budget. After massive spending on combating Covid-19 and its economic fall out, this year’s budget focuses on increased spending on healthcare, national defence, climate measures and housing. Notably, there were no changes to personal tax rates or the capital gains inclusion rate.
The budget contains a variety of new tax measures for homeowners, the one that stood out to me is the new Tax-Free Home Savings Account (FHSA), here are the details.
The FHSA is a new registered account that will be available starting in 2023, its intention is to help individuals save for their first home. Contributions will be tax deductible, any investment income earned within the plan will not be subject to tax, and withdrawals to buy a qualifying first home will be tax free.
You must be a Canadian resident and at least 18 years old to open a FHSA. In addition, individuals can only participate in the plan once in their lifetime. As with The Home Buyers Plan (HBP) you can not have lived in a home that you own, in the year in which you open the account or the previous four calendar years. Once a qualifying redemption is made, the account must be closed within one year.
Starting next year, the annual contribution limit will be $8000, to a life-time maximum of $40,000. Unlike an RRSP or TFSA, if you do not contribute the maximum amount each year, the unused contribution room does not carry forward.
As with other registered accounts, you can have multiple accounts at various financial institutions as long as you do not exceed the annual or lifetime contribution limits.
If you open an FHSA and start saving, but never purchase a qualifying home, you will be able to transfer the funds from your FHSA to your RRSP on a tax deferred basis. This means that the transfer to an RRSP will not be taxable at the time of the transfer, however when the funds are withdrawn from the RRSP they will be taxed in the usual manner. The transfers to your RRSP will not affect your RRSP contribution room in any way.
If you have been saving within an RRSP with the intention of withdrawing the funds under the HBP, you can transfer the funds to an FHSA on a tax deferred basis, subject to the annual $8000 and lifetime $40,000 contribution limits. Your RRSP contribution room will not be restored if you transfer funds from your RRSP to your FHSA.
If you have not used the funds in your FHSA for a qualifying home purchase within 15 years of opening the account, it must be closed, and the funds can be either transferred to your RRSP or withdrawn and will be subject to tax.
Home Buyers Plan (HBP) The existing HBP which allows first time home buyers to redeem $35000 tax free from their RRSP to purchase a qualifying first-time home – is not going away. Amounts withdrawn from the HBP must be repaid to your RRSP over the following 15 years; after a 2-year grace period. One of the biggest differences between the FHSA and the HBP is that you will not have to ‘repay’ any money withdrawn from the FHSA.
Unfortunately, there is always a catch, you will not be permitted to make both an FHSA withdrawal and a HBP withdrawal for the same home purchase.
Have a great week,
Tracey
Sources: Federal Budget 2022 Original articles by Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC Private Wealth, posted on jamiegolombek.ca, and Sun Lie Global Investments Tax & Estate Planning Team on Sunlifeglobalinvestments.com
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