As more financial institutions roll out tax-free first home savings account (FHSA) offerings in the months ahead, Canadians who are considering opening such an account should pay close attention to the qualifying rules, especially if they are considering moving in with a partner who may already own their own home.

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How these rules work was highlighted in a new technical interpretation released in June by the Canada Revenue Agency. Before reviewing the CRA’s recent comments, let’s begin with a quick refresher of FHSA basics.

FHSA basics

The FHSA is a new registered plan that gives prospective homebuyers the ability 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 combines the best feature of the registered retirement savings plan (RRSP), a tax-deductible contribution, with the most attractive feature of the tax-free savings account (TFSA), the tax-free withdrawal of all contributions, investment income or growth earned in the account, when used to buy a first home.

Just like RRSP contributions, you don’t have to claim the FHSA deduction in the year you make the contribution. The contribution can be carried forward indefinitely and deducted in a later tax year when you may be in a higher tax bracket. If you don’t have the cash to contribute this year, you can transfer funds from an existing RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits.

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by this time can be transferred on a tax-deferred basis into an RRSP or registered retirement income fund (RRIF), or withdrawn on a taxable basis.

This means that for qualifying first-time homebuyers, contributing to an FHSA is truly without risk (ignoring any risk taken on by how the funds in the FHSA are invested) since if you don’t end up buying a home, you effectively get another $40,000 (plus growth) of RRSP room and you enjoyed up to a 15-year tax deferral.

Who qualifies

To open an FHSA, you must be a resident of Canada and at least 18 years of age. The FHSA’s definition of a first-time homebuyer is that you don’t live in a home as your principal residence that is owned, jointly or otherwise, either by you or by your 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.

It’s this definition that was the subject of the recent CRA technical paper. A taxpayer who wrote to the CRA requesting a technical interpretation explained that he owned a townhouse in which his spouse has “no ownership interest under a prenuptial agreement,” and that the home is his principal residence. He asked whether his spouse, who doesn’t own the home, would be eligible to open an FHSA.

The CRA responded that since the taxpayer currently owns a home that he lives in as his principal place of residence, his spouse would not be eligible to open an FHSA in 2023. According to the CRA, the fact that his spouse has no interest in his home under the couple’s prenuptial agreement doesn’t change the result. If the taxpayer were to sell his home in 2023 and begin renting, then the earliest date he or his spouse could open an FHSA would be Jan. 1, 2028.

The CRA was also asked about a scenario where an individual, the “spouse,” who is already an FHSA holder, enters a spousal or common-law relationship with a homeowner. In this case, the homeowner’s plan was to sell his home at some future date in order to acquire another home to be owned jointly by him and his spouse as a principal residence. At that time, the spouse would like to make a tax-free withdrawal from their FHSA to help pay for the couple’s new home.

To make a tax-free withdrawal from an FHSA, the individual must still be a first-time homebuyer at the time the withdrawal is made. Interestingly, the requirements for being considered a first-time homebuyer for the purposes of opening an FHSA (as described above) are slightly different than for the purposes of making a tax-free withdrawal.

To make a tax-free withdrawal, a first-time homebuyer is defined as an individual who did not live in a qualifying home as their principal place of residence that they owned (or jointly owned) at any time during the calendar year of the year of withdrawal (prior to the purchase) or at any time in the preceding four calendar years. What’s critical to note is that for purposes of this first-time homebuyer requirement, the home ownership history of the individual’s spouse or partner is irrelevant.

In other words, the spouse could access the funds in their FHSA and make a tax-free qualifying withdrawal to help fund the couple’s new home despite having lived with their spouse in his previous home.

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

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