HomePersonal FinanceDeep dive into CRA rules around using the tax-free FHSA to buy...

Deep dive into CRA rules around using the tax-free FHSA to buy a home


Jamie Golombek: Here are answers to common questions, including what to know when one spouse already owns a home

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Spring and prime house-hunting season are just around the corner, so some Canadians may soon start a search for their first home.

Fortunately, they can now take advantage of the new tax-free first home savings account (FHSA) to help pay for that home.

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Since the FHSA’s launch in 2023, the Canada Revenue Agency has answered a number of common questions that potential contributors have been asking. Before sharing a few of them, let’s quickly recap the FHSA basics.

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The FHSA is a registered plan that allows prospective homebuyers to contribute $8,000 per year, up to a $40,000 lifetime limit, to save on a tax-free basis towards the purchase of a first home in Canada. The FHSA provides contributors with a tax deduction for their contributions, there’s no tax on the account’s income and growth for up to 15 years, and it allows for the tax-free withdrawal of all contributions, investment income and growth earned in the account when used to buy a first home.

To open an FHSA, you must be a resident of Canada, at least 18 years of age and a first-time homebuyer, defined as someone who doesn’t live in a home as their principal place of residence that is owned, jointly or otherwise, by either them or their spouse or common-law partner in the calendar year in which the account is opened (prior to the home purchase) or in the preceding four calendar years.

The FHSA can remain open for up to 15 years or until the end of the year you turn 71. Any funds in the FHSA not used to buy a qualifying home by this time can be transferred on a tax-deferred basis into a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF), or withdrawn on a taxable basis.

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This means opening up an FHSA for qualifying first-time homebuyers is truly a no-risk proposition (ignoring any investment risk): if you don’t end up buying a home, you effectively get another $40,000 (plus growth) of RRSP room and you’ve enjoyed up to a 15-year tax deferral.

One of the most common questions about opening up an FHSA concerns situations where one spouse or partner already owns a home.

For example, let’s say Noah, who has never owned a home, opened an FHSA in September 2023 and contributed $8,000 that same month. He put in another $8,000 in January 2024. In February 2024, Noah married Rachel, and subsequently moved in with her, living in a condo she has owned as her principal place of residence since 2021 (Noah is not a co-owner). That same month, Noah signed a purchase agreement to jointly buy a qualifying home with Rachel. The written purchase agreement stated that both Noah and Rachel will be the owners of the house, and the possession date will be Aug. 18, 2024.

Noah and Rachel were living in the condo that Rachel owned as their principal place of residence at the time they signed the written purchase agreement to buy their new home. The good news is that Noah will be permitted to withdraw the $16,000 (plus any growth) tax free from his FHSA to help fund the down payment. That’s because for purposes of withdrawing funds from an FHSA, the home ownership history of one’s spouse or partner is irrelevant.

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Another FHSA scenario the CRA recently commented on involved an individual who purchased an income property in 2020 and rented it out to various tenants to earn income. In November 2023, when his most recent tenant decided not to renew his lease, the owner decided to change the home’s use and make it his principal residence. Prior to this, he had never lived in the house, having always lived with his parents.

He felt he should be able to withdraw funds from his FHSA when he moved into the home since, under the “change of use” rules in the Income Tax Act that apply when a principal residence is converted to a rental property and vice versa, you’re considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount.

The general rule is that upon such a change in use, you are required to report the resulting capital gain in the tax year this change of use occurs (unless you make a special tax election.)

The CRA responded that based on the wording of the Tax Act, the change-of-use rules are only applicable for the purposes of calculating a capital gain (or loss) on the deemed disposition and reacquisition of property, and simply do not apply to the FHSA regime.

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As a result, the taxpayer would not be eligible to withdraw funds from his FHSA tax free upon moving into his rental property since he had already “acquired” the home in 2020. The “change in use he made of his house as of November 2023, does not constitute an acquisition for the purposes of (the FHSA rules),” the CRA said.

The CRA was also asked about a variety of scenarios where an individual who has an FHSA wanted to make a qualifying tax-free withdrawal to purchase a home jointly, with one or more people.

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For example, the taxpayer, a first-time homebuyer and two of his friends signed an offer to purchase a duplex in equal shares. The taxpayer will live in one of the two apartments of the duplex as his principal residence, while the other unit will be rented out. The CRA said the taxpayer would be eligible to withdraw funds tax free from his FHSA since “he is a party, with one or more other people” to an agreement to buy a home.

The CRA said the answer would be the same had the taxpayer instead bought a condo with his father in equal shares, but only the taxpayer lived in the condo as his ​principal residence.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto.Jamie.Golombek@cibc.com.


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