First Home Savings Account (FHSA)

In Budget 2022, the federal government announced the introduction of the Tax-Free Savings Account for First-Time Home Buyers (hereafter “TFSA”) for a maximum amount of $40,000. TFSA accounts will be available as of March or April 2023 and the maximum allowable contribution for the 2023 tax year is $8,000. An individual must be at least 18 and under 71 to open this account. Like RRSPs and TFSAs, returns are tax-sheltered.

Contributions

The maximum annual contribution is $8,000 and there is a lifetime contribution limit of $40,000. If the contribution is not made in full for a calendar year, it can be carried over to the following year. For example, if you contribute $3,000 in 2023, you will have $13,000 in contribution room for 2024 ($8,000 + $5,000). Please note that for the contribution room to carry over, the TFSA account must be open.

The contribution is deductible like an RRSP. However, you do not have to deduct it in the year it is made and you can carry it forward indefinitely. Unlike an RRSP, contributions made in the first 60 days of the year cannot be deducted in the previous calendar year.

An excess contribution to the TFSAPP will be subject to a tax of 1% per month, just like the RRSP. However, unlike the RRSP, there is not a $2,000 relief for overcontributions. This means that if you contribute $10,000 to your TFSA for the first year, a tax of 1% per month will be calculated on the excess, or $2,000.

Contributions to a spouse's TFSA are not permitted. On the other hand, you can give the necessary sums to your spouse so that he can invest it in his TFSA, without the attribution rules applying (an exception is provided for this account). It is the same reasoning for an adult child.

Withdrawals

Withdrawals are eligible for an individual who is a first-time home buyer. “An individual is considered to be a first-time home buyer if at any time during the part of the calendar year preceding the account opening or at any time during the preceding four years, he has not lived in a qualifying home (or what would be a qualifying home if it were in Canada) (i) owned by them or (ii) owned by their spouse or common-law partner (if the individual had a spouse or de facto spouse at the time the account is opened).”

In other words, you must not have been an owner in the last 5 years to withdraw from your TFSAAPP and not have been an owner in the last year to open it.

Also, under this definition, the spouse can “contaminate” your eligibility for the TFSAPP. Indeed, at the time of opening the account, if your spouse has owned a home for the last 5 years AND you have occupied this home while you were spouses, you are ineligible to open a TFSA. . On the other hand, the spousal test does not apply at the time of withdrawal.

As with the HBP, it does not mean that the sums withdrawn must be used to buy the house, there is no condition of use linked to the withdrawal.

The full amount or a series of withdrawals can be made from the TFSAPP, as long as the taxpayer meets the withdrawal conditions.

You must also be a Canadian resident to be able to withdraw. In this sense, a non-resident could not make a withdrawal from the TFSA.

An ineligible withdrawal from the TFSAPP would be, like an RRSP, taxable for the individual according to the same deductions.

Transfers

Unused funds following a withdrawal from a TFSA can be transferred to an RRSP or a RRIF without tax impact, as long as the transfer takes place before December 31 of the following year, the date on which the TFSA ceases to operate. to be one. A transfer would not restore the member's contribution room.

Other reasons that could “force” a transfer would be the end of the TFSA or the year the taxpayer turns 71. Indeed, the TFSAPP has an eligible life of 15 years and is no longer eligible the year the individual turns 71. In these cases, transfers to an RRSP or RRIF are possible, regardless of the RRSP contribution room. If the transfer is not made, the sums become taxable for the holder.

You can transfer money from your RRSP to your TFSA with no tax consequences (within the allowable annual amount of $8,000). However, this transfer would not create new RRSP rights for you and would not allow you to deduct the amount transferred on your tax return.

Death

Like the TFSA, the spouse can be named as the beneficiary of the TFSAPP. If the surviving spouse satisfies the criteria, then the account could retain its nature and therefore, its status of non-taxation of returns. This bequest would have no effect on the contribution rights of the surviving individual. If the surviving spouse is not eligible at the time of death, the amounts can, again, be transferred to the RRSP or RRIF without tax impact (or be withdrawn on a taxable basis).

If the spouse is not the person designated for the TFSA, it is not the deceased, but the beneficiary, who will have to tax on the balance paid in the account. The payout will be subject to withholding tax at that time.

Differences with HBP

The HBP allows you to save tax-sheltered funds for the purchase of a first home. Contributions are also deductible and withdrawals for the purchase of a first home are not taxable. The main difference is in the refunds. In fact, the HBP must be repaid over a period of 15 years (beginning from the second year following the withdrawal). Otherwise, these amounts become taxable in the taxpayer's income for the year. Also, the maximum possible to save for the HBP is $35,000.

For the TFSAPP, there is no 90 day rule, you can make a contribution and if you are eligible for withdrawal, make a withdrawal the next day.

Good news, the two plans can be combined for the purchase of the same eligible property, therefore a maximum potential amount of $75,000.

Am I better off investing in my TFSA, RRSP or TFSAAPP?

It depends on your situation. For example, if you have a spouse who "contaminates" you at the time of opening, you will have no other choice but to use the RRSP to eventually RAPER (if you are eligible at this time).

Another example, if you have little or no RRSP rights, the FHSA allows you to contribute $8,000 per year if you are eligible.

The deduction rights resulting from a contribution to the FHSA can allow you to maximize certain socio-fiscal credits, such as the GST/HST credit or the solidarity tax credit. At any time, you can transfer your amounts accumulated in the TFSA into your RRSP or your RRIF, regardless of your available contribution room.

Please note that it is not advantageous to open a FHSA if you do not intend to contribute to it, because you "burn" certain years of life, we remember that the FHSA has a lifespan 15 years old.

We can help you make this decision by analyzing your personal financial situation, do not hesitate to contact us!