What Happens to Your FHSA if You Don’t Buy a Home?

Posted on by Tax Partners
30
Dec

Introduction:

The First Home Savings Account (FHSA) was introduced as a tax-advantaged savings plan to help Canadians purchase their first home. However, not everyone who opens an FHSA ends up buying a home. 

What happens to your FHSA if you change your plans or decide not to purchase a property? Here's everything you need to know.

What is an FHSA?

Introduced on March 1, 2023, the FHSA (First Home Savings Account) combines the benefits of a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP) to provide Canadians with a unique way to save for their first home. 

Here’s how it works:

  • Contributions: You can contribute up to $8,000 per year to your FHSA, with a lifetime contribution limit of $40,000.
  • Tax Benefits:
    • Contributions are tax-deductible, just like RRSP contributions, meaning they reduce your taxable income.
    • Investment growth and returns are tax-free while in the account.
    • Withdrawals used for purchasing your first home are also tax-free.
  • Individual Account: Since the FHSA is individual, both you and your spouse can open accounts, enabling a combined contribution of $80,000.

What Happens if You Don’t Buy a Home?

If you don’t end up purchasing a home within the FHSA's time limits, you have two primary options:

1. Transfer FHSA Funds to Your RRSP or RRIF

  • Tax-Free Transfer: You can transfer the balance in your FHSA directly to your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) without triggering any taxes.
  • No Impact on RRSP Contribution Room: The transferred amount does not use up your available RRSP contribution room, making this a seamless option for preserving your savings.
  • Deadline for Transfer:
    • The FHSA can stay open for 15 years from the date you open the account.
    • You must transfer the funds by December 31 of the year you turn 71, as FHSAs cannot remain open after this age.

2. Withdraw the Funds

  • If you choose not to transfer your FHSA balance, you can withdraw the funds. However:
    • Taxable Withdrawal: The withdrawn amount will be taxed as income in the year it’s withdrawn.
    • Tax Implications: This option may push you into a higher tax bracket depending on your other income, so it’s crucial to plan carefully.

Example: FHSA Timelines and Transfers

Scenario:

  • Year Opened: 2024
  • Age: 30
  • You can contribute to your FHSA and keep it open until 2039 (15 years after opening) or until 2055 (the year you turn 71), whichever comes first.
  • If you haven’t purchased a home by 2039, you can either transfer your balance to an RRSP/RRIF or withdraw it (with tax consequences).

Can You Open an FHSA if You Own a Rental Property?

Yes, you can still open an FHSA if you own a rental property, provided you qualify as a first-time home buyer. This means you must meet the following conditions:

  • You have not lived in a qualifying home that you owned or jointly owned as your principal residence:
    • At any time in the current calendar year before the withdrawal (except for the 30 days immediately before the withdrawal); and
    • At any time in the preceding four calendar years.
  • A qualifying home is typically a property that would meet the Canada Revenue Agency’s (CRA) definition of a residence.

Key Points to Remember

  1. Flexibility with Funds: The FHSA’s design ensures your contributions won’t go to waste. Transferring to an RRSP or RRIF keeps your savings tax-sheltered, even if your plans change.
  2. Tax-Free Withdrawals: Withdrawals remain tax-free only if used to purchase a qualifying first home. Otherwise, withdrawals are taxed as ordinary income.
  3. Time Limits: Be mindful of the 15-year account limit and the age-71 transfer deadline.
  4. First-Time Buyer Criteria: Ensure you meet the eligibility requirements if you plan to open an FHSA, especially if you own other properties.

Pro Tax Tips for FHSA Holders

  1. Maximize Contributions Early: By contributing the annual maximum of $8,000, you allow your funds more time to grow tax-free.
  2. Avoid Taxable Withdrawals: Plan ahead to transfer unused FHSA funds to your RRSP or RRIF rather than withdrawing them and paying taxes.
  3. Track Deadlines: Keep a clear record of your FHSA timeline to avoid last-minute decisions that may lead to higher taxes.
  4. Coordinate with a Spouse: Both you and your spouse can open FHSAs, doubling your savings potential to $80,000.

Conclusion

The FHSA is a powerful tool for first-time home buyers, offering both tax advantages and flexibility. If you decide not to purchase a home, transferring your FHSA funds to an RRSP or RRIF ensures that your savings remain tax-advantaged. However, withdrawing the funds may trigger taxes, so careful planning is essential.

Always consult with a tax professional or financial advisor to maximize the benefits of your FHSA and ensure compliance with CRA regulations.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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