Discover the Tax-Free First Home Savings Account – TFFHSA

This new registered plan would help first-time home buyers save $40,000 on a tax-free basis.  Contributions are tax deductible (Like a Registered Retirement Savings Plan – RRSP), and withdrawals to purchase a first home – including from investment income – would be non-taxable, like a Tax-Free Savings Account (TFSA).  The Budget 2022 announced key design features of the TFFHSA, including an $8,000 annual contribution limit in addition to a $40,000 life income contribution limit.

TFFHSA expected to be available at some time in 2023, with Canadian clients able to contribute the full annual limit of $8,000 regardless of the implementation date in that year.

What is First Home Savings Account? 

Key Points for opening and closing this account 

To open an TFFHSA, an individual must: 

• Be a Resident of Canada
• Have Minimum 18 years old
• Must not have owned a home in year account is opened and 4 previous years

An TFFHSA of an individual would cease to be an TFFHSA, and the individual would not be permitted to open an TFFHSA, after December 31 the year in which the earliest of these events occurs: 

• The fifteenth anniversary of the individual first opening an TFFHSA; or
• The individual turns 71 years old.

Any savings not used to purchase a qualifying home could be transferred on a tax-free basis into an RRSP or Registered Retirement Income Fund (RRIF) or would otherwise have to be withdrawn on a taxable basis. 

Individuals that make a qualifying withdrawal could transfer any unwithdrawn savings on a tax-free basis to an RRSP or RRIF until December 31 of the year following the year of their first qualifying withdrawal. 

Qualified Investments 

• Will work like TFSA
• Rules on prohibited and non-qualified investments will mirror other registered plans, including penalties These rules are intended to disallow investments in entities with which the account holder does not deal at arm’s length, as well as investments in certain assets such as land, shares of private corporations and general partnership units.

Contributions 

The lifetime limit on contributions would be $40,000, with an annual contribution limit of $8,000. In other words, individuals would be subject to the lesser of their annual limit and remaining lifetime limit. The full annual limit would be available starting in 2023. 

• Annual calendar limit of $8000 – Unlike RRSPs, contributions made within the first 60 days of a given calendar year could not be attributed to the previous tax year.
• Can hold more than one TFFHSA but the total amount that an individual contributes to all of their TFFHSAs could not exceed their annual and lifetime contribution limits
• Contributions made to an TFFHSA following a qualifying withdrawal being made (i.e., when buying a first home) would not be deductible from net income.

Qualifying withdrawal 

To be a qualifying withdrawal (non-taxable): 

• Taxpayer must not have owned a home at any time during the year of the withdrawal or FOUR prior years. Exception: can make withdrawal within 30 days of moving into new home
• Must have written agreement to buy or build a qualifying home before October 1 of the year following withdrawal and occupy as principal residence within 1 year after buying or building
• If qualified, withdrawal may be a single withdrawal or a series of withdrawals

Non-Qualifying withdrawal 

If withdrawal is not qualified as above, the withdrawal is taxable and subject to withholding rates consistent with RSP withdrawals 

Transfers 

• TFFHSA funds can be transferred tax-free into TFFHSA, RRSP or RRIF
• Transfers do not affect individual’s RRSP limit and do not reinstate TFFHSA limit
• Can transfer from RSP to TFFHSA tax-free, subject to annual and lifetime TFFHSA limits. These are not deductible and do not reinstate RRSP limit room.

Other considerations 

• HBP will continue to exist. Individual may not both TFFHSA and HBP withdrawal for same house purchase
• No spousal accounts or contributions allowed. Spouse may provide funds for TFFHSA contribution without any spousal attribution.
• Upon marital breakdown, an amount may be transferred from TFFHSA into TFFHSA, RRSP or RRIF tax-free
• Like TFSAs, 1% tax per month for over-contributions.
• Upon death, treatment will be like TFSAs. Tax-Free to spouse as successor annuitant or tax-free spousal rollover to TFFHSA/RRSP/RRIF. All other cases, payments are to beneficiary, subject to withholding tax and taxable to the beneficiary.
• If TFFHSA holder becomes a non-resident, they may continue to contribute, but cannot make a qualifying withdrawal. Withdrawals by non-residents are subject to withholding tax.
• TFFHSAs would not be afforded creditor protection under the Bankruptcy and Insolvency Act.
• Like TFSAs, TFFHSAs will be reported annually to CRA. Withdrawals (qualifying and non-qualifying) must be reported on a tax slip.