The new FHSA is designed to help first-time buyers own a home.

An early look at the new federal Tax-Free First Home Savings Account

Luc Godbout

While only preliminary details have been released at this stage, some important policy issues arise from what we know so far.


The new Tax-Free First Home Savings Account (FHSA) — a registered account set up to allow individuals to save for the purchase of their first home — is certainly the most significant personal tax change in the 2022 federal budget.

Will it do what it’s intended to do for first-time home buyers? Will it impact housing prices? Will it benefit higher-income and older Canadians more than others? Is there a better alternative?

The Liberals promised during the 2021 election campaign to implement an FHSA, which was then intended to be limited to taxpayers under 40. At that time, they described it as a plan combining the benefits of a Registered Retirement Savings Plan (RRSP) and either the deductibility of contributions or, like a Tax-Free Savings Account (TFSA), the non-taxation of withdrawals. At that time, the estimate made by the Parliamentary Budget Officer (PBO) at the request of the Liberals indicated that the contributions made in this FHSA would be counted towards the limit of a taxpayer’s RRSP contributions, which no longer appears to be the case.

What exactly is the FHSA? At first glance, it is a registered savings plan that appears as a hybrid vehicle between the RRSP and the TFSA. It would be introduced in 2023 and would be limited to Canadian residents who are at least 18 years of age and who haven’t lived in a home that they owned in the year the account was opened or in the previous four years. Maximum contributions of $8,000 per year, up to a lifetime limit of $40,000, are tax-deductible while withdrawals made to purchase a first home are not taxable. The withdrawal can only be made once, and no later than 15 years after the account is opened.

The following table lists the main parameters for RRSP, TFSA and FHSA savings vehicles, allowing them to be compared at a glance.

At the time of writing, it should be noted that the government has disclosed only key elements of the FHSA design. As the legislative text has not yet been unveiled, additional contours will be specified later before its implementation next year.

Comparative table of the main parameters of the RRSP, TFSA and FHSA

 

RRSP

TFSA

FHSA

Nature of the plan

Individual

Individual

Individual

 Plan manager

Financial institutions

Financial institutions

Financial institutions

Objective of the plan

Savings vehicle for retirement

Savings vehicle for different life needs

Savings vehicle for purchase of a first property

Year of beginning of the plan

1957

2009

2023

Interactions between plans

Only with Registered Pension Plan, via the pension adjustment

No

Not specified, except for the choice between a Home Buyers Plan (HBP) and withdrawal for the same property

Opening condition

Canadian resident

Canadian resident

Canadian resident

Additional opening condition

No

No

Did not live in a home they owned in the year of opening or four previous years

Maximum time

No, except maximum age

No

Within a year from the first withdrawal, or at the latest 15 years after the opening of a first account

Minimum age

None

18 years

18 years

Maximum age

Age 71, but contributions remain possible to a spousal RRSP to age 72

No

No

Contribution

Tax-deductible

Not deductible

Tax-deductible

Deadline to contribute

In the year or first 60 days of following year

December 31 of the year

Not specified but probably like the RRSP

Deferral of the deduction of a contribution

Yes

N/A

Not specified

Annual contribution limit

18% of earned income up to a maximum of $29,210 in 2022, less the pension adjustment

Fixed amount

$6,000 in 2022

Fixed amount

$8,000 per year

Lifetime contribution limit

No

No

$40,000

Indexation of the contribution limit

Average wage increase

Inflation, adjusted for multiple of $500

No

Threshold of allowable excess contributions

$2,000, if 18 years and over

No

Not specified

Tax on excess contributions

1% per month above the threshold

1% per month

Not specified

Unused annual contribution

Cumulative since 1990

Cumulative since the age of 18

Not cumulative

Yield

Non-taxable

Non-taxable

Non-taxable

Qualifying and prohibited investments

Similar

Similar

Not specified

Withdrawal

Taxable, unless for Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP)

HBP condition: don’t have home belonging to person or spouse in the year of opening and four previous years

Non-taxable

Non-taxable, if used for the purchase of a first eligible home and limited to one home for life. Taxable, otherwise

Adjustment of the balance of contributions when withdrawing

No

Yes

No

Transfer of money from an RRSP

N/A

Withdrawal is taxable

No tax consequences, subject to annual and cumulative limits

Transfer of sums from a FHSA

Possible (or RRIF) without tax or contribution room implications

No

N/A

Conversion of the plan

Possible, to RRIF at the latest to 71 years

No

No, but before the expiry of the maximum term, transfer possible to an RRSP/RRIF

Impact on selected income-based benefits and credits

Yes: contributions and withdrawals

No: contributions and withdrawals

Yes: Contributions

No: Withdrawal for first home

Yes: If taxable withdrawal

Consideration in the family patrimony (Quebec)

Yes

No

No

Quebec specific rules of matrimonial regimes (acquest, separation of property, etc.)

Yes

Yes

Yes

Can be seized in case of bankruptcy?

No, in some cases

Yes

Yes

Liability to tax at the time of death

Yes, but possible postponement to the spouse or a minor dependent child or grandchild if designated as a beneficiary

No, If spouse is a beneficiary, adding money to their own TFSA without impacting their contribution room

Not specified

Tax liability for withdrawals when a taxpayer becomes a non-resident

Yes

No

Not specified

Contribution by spouse

According to the contributor’s contribution room

Not allowed

Not specified

Offer to loan security

No

Yes

Not specified

Discussion

If during the last election campaign this plan was described as combining the advantages of an RRSP, i.e. the deductibility of contributions, and of a TFSA, i.e. the non-taxation of withdrawals, from the tax policy perspective, this constitutes a break in the symmetry in previous savings plans between deduction/taxation or non-deduction/non-taxation. While the Registered Home Ownership Savings Plan (RHOSP) — a similar savings vehicle that existed from 1974 to 1985 — also had this characteristic, it is still a striking distinction with the others savings vehicle.

Considering the current state of the real estate market, it is necessary to question the impact that FHSA will have. Will this new regime worsen or ease the pressure on house prices? At first glance, it may be thought that it will increase demand. But the issue was raised in the campaign that the creation of the RHOSP — knowing that this could be used only once in a lifetime — could encourage some taxpayers to delay the purchase of the first property to fully benefit from the new FHSA offered.

While the FHSA is intended to facilitate home ownership, the past experience of the RHOSP has shown that the implementation of a new savings plan for the purchase of a first home can lead to unwanted indirect effects through all kinds of tax planning and that over time will certainly require some adjustments for equity or efficacity implications.

For example, under the current parameters, even a taxpayer who has no intention of buying a first home will be able, if eligible, to open a FHSA and contribute to it. Within the limits of the 15-year period, the taxpayer will then be able, at any time, to transfer the balance of his FHSA to his RRSP without immediate tax consequences and without affecting his RRSP contribution room. Thus, unless rules prohibit it, a taxpayer over 71 years of age who is no longer entitled to contribute to his RRSP, could still contribute to his FHSA, if he has not been an owner of a home in the year of creation of the FHSA or in the previous four years. This contribution could then be transferred to his RRIF.
In such a context, it would have been simpler to adapt an existing vehicle, such as the HBP, to achieve the main objective of the FHSA. A revised HBP, instead of a FHSA, would certainly have minimized the risk of unintended effects, while also avoiding the creation of a new regime by financial institutions, in addition to not creating an additional savings opportunity with tax treatment favourable to the wealthiest.

In addition to adapting the HBP, other options could also be influenced, such as the one put forward by Robson and Smart who propose to take inspiration from the Registered Education Savings Plan (RESP). On this basis, instead of offering deductibility for the contribution, the government could have offered to pay a subsidy proportional to the amount contributed, such as 25 per cent, or even with a subsidy rate which decreases as the taxpayer’s income increases.

FHSA will add to existing RRSP and TFSA contribution room. For those who can afford it and can maximize their contributions, there is no denying that FHSA will benefit them more. These include non-homeowners who have a greater savings capacity and those whose RRSP contributions are limited by their pension adjustment.

Regarding the cost of the FHSA, the PBO estimated it at $3.2 billion over four years in its most recent analysis, while in the budget, the federal government estimated it at only $725 million over the same horizon. Notwithstanding the forthcoming clarifications on the FHSA, the sources of this discrepancy will need to be better understood. Also, Robson and Smart estimated an additional $520 million in lost revenue to provincial governments, for a total cost around $1.36 billion annually.

The FHSA is likely to pave the way for several tax-planning strategies. Obviously, it will be the role of tax and financial advisers to make the best combinations of the distinctive characteristics of the RRSP, TFSA and FHSA to the benefit of their clients.

That said, the FHSA may clarify the message that the RRSP is a savings vehicle designed for retirement, and the TFSA is a savings vehicle designed for different savings needs throughout a person’s life, while the FHSA is a savings vehicle designed for the purchase of a first home.

Until it’s set up at some point in 2023, it will be necessary to read the legislative texts carefully to better understand the true contours of the FHSA.


Editor’s Note: A longer version of this text was first published in French as Regard at the Chair in Taxation and Public Finance . The author would like to thank all those who provided comments to improve the text, while noting that he takes full responsibility for any errors, especially Martin Dupras, Natalie Hotte, Daniel Laverdière, Michael Smart and Suzie St-Cerny. He also thanks the Research Chair in Taxation and Public Finance for the financial support that made it possible to produce this text.

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About Luc Godbout

Luc Godbout is professor and chairholder of the Chaire de recherche en fiscalité et en finances publiques (CFFP) at Université de Sherbrooke.