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Canadian Income Tax – First Home Ownership Savings Account Project


Overview: First home savings account offered

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch PC, a Toronto-based tax law firm.

In the 2021 federal election, the Liberal Party of Canada proposed the introduction of a new form of tax-efficient account: the First Home Savings Account (FHSA). As the name suggests, this account is intended to provide tax incentives to Canadians saving for a down payment on their first home. Since the Liberals formed a minority government for the 44th Parliament, it is plausible that the FHSA will be introduced into Canadian tax law. As such, tax-savvy Canadians should take the time to consider how the Premier Home Savings Account might fit into their tax and financial planning. Note that if and when FHSA is actually introduced, it may take a different form than described in this article.

Basic features

The first home ownership savings account aims to combine the characteristics of the registered retirement savings plan (RRSP) and the tax-free savings account (TFSA). As with an RRSP, when a Canadian individual makes a contribution to the FHSA, they will be entitled to a corresponding deduction from their income for that year. Income earned on the first home savings account will not be taxed. Unlike a registered retirement savings plan, it is possible for the owner of the first home ownership savings account to withdraw funds without a corresponding income inclusion as long as those funds are applied towards the purchase of the owner’s first home. . This means that the contributions that are eventually withdrawn and used to purchase the holder’s first home will effectively benefit from the tax advantages generally associated with an RRSP (a deduction at the time of the contribution) and a TFSA (free investment income). ‘tax).

See also – Tax Shelter Information

Only Canadians under the age of 40 will be able to use a First home savings account. If funds in the First Home Ownership Savings Account are not used by the time the owner turns 40, those funds will be converted to Registered Retirement Savings Plan funds.

Existing descriptions of the FHSA imply that eligible individuals will have a lifetime threshold of $ 40,000 for which the tax-free withdrawal treatment applies. To date, there is no indication that this threshold depends on income (such as RRSP contribution room) or accumulates on an annual basis (such as TFSA contribution room).

Characteristics to be determined

Many aspects of how the first home savings account works are unclear. An important aspect that has not yet been clarified is how contributions to an FHSA will be limited. Since the funds in a first home ownership savings account are supposed to be converted to funds held by a registered retirement savings plan when the holder turns 40, one possibility is that the FHSA contributions share the same contribution limit for RRSPs.

If the first home ownership savings account does not share a contribution limit with the RRSP, another possibility is that the FHSA effectively allows eligible people to increase their RRSP limit when they reach the age of 40, or that there will be adverse tax consequences for individuals with an FHSA that exceeds their Registered Retirement Savings Plan contribution room when the plan is converted to an RRSP.

Another important aspect of the first proposed home ownership savings account that remains unclear is the extent of the assets that will be able to be held in an FHSA. Registered Retirement Savings Plans and the Tax-Free Savings Account allow a wide variety of securities to be held in them, with some restrictions to prevent abuse and with notable exceptions such as direct holding of cryptocurrency. . It has not yet been clarified whether such a wide range of eligible investments will be available for the first home savings accounts.

The fact that there is a deduction for contributing to a first home savings account means that the tax saved from the deduction depends on the holder of the FHSA marginal tax rate in the year the deduction is available. It is likely that the maximum contributions to the first home ownership savings account will be limited in one way or another. This means that it may be beneficial to adjust annual FHSA contributions to maximize tax savings.

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With over 30 years of experience as both a lawyer and chartered professional accountant, he has assisted start-ups, cryptocurrency traders, resident and non-resident business owners and corporations in their tax planning, with will and estate planning, voluntary disclosures and taxation. dispute resolution, including tax audit representation and tax litigation.

Visit www.taxpage.com and email David at [email protected] Read it original version of this article to Taxpage.com. Image by Nattanan Kanchanaprat from Pixabay.

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