The Canadian government is introducing several policies to help residents buy homes. It is in the process of passing a bill to introduce a new tax-free account called the First Home Savings Account (FHSA). It could come into effect on April 1, 2023. As the name suggests, FHSA will help Canadians save for the down payment of their first home while getting tax benefits. While a Canadian resident can avail of the benefits of the FHSA, can U.S. citizens, immigrants and those who also emigrated avail of FHSA benefits?
How Does a First Home Savings Account (FHSA) Work?
The FHSA is a mix of a Tax-Free Savings Account (TFSA) and a Registered Retired Savings Plan (RRSP). You can invest $8,000 annually up to $40,000 in a lifetime in an FHSA and deduct your contribution from your taxable income. You can use the money in the FHSA to invest in publicly traded stocks, bonds, and ETFs. And when buying your first house, you can redeem, complete or partial amount, without showing the withdrawal in your taxable income. In short, both contributions and qualified withdrawals are tax-free in FHSA.
Once the FHSA comes into effect, you can open an FHSA and start contributing and saving tax if you meet the below requirements:
- You are an individual resident of Canada who is above 18 years of age.
- You and your spouse do not own a house. It means individuals or couples living in rented apartments can open an FHSA even if they have no intention of buying a house.
But to ensure a tax-free withdrawal, you should use FHSA money to buy the first home. The Canada Revenue Agency (CRA) would identify a property as your first home if you or your spouse didn’t own a home at any time during the calendar year withdrawal was made or any time in the preceding four calendar years.
FHSA will cease to exist in 15 years or when you turn 71. If you don’t buy a home in that time, you can transfer the FHSA amount into RRSP tax-free.
This article will show how FHSA works for immigrants, non-residents, and U.S. citizens.
How First Home Savings Account (FHSA) Works For Those Who Emigrated From Canada?
While Canadians can avail all the benefits of FHSA, it is not the same for Canadian residents that have emigrated. There are two aspects of FHSA, tax-free contribution and tax-free withdrawal, where rules change if you are not a resident of Canada. Let’s understand with the help of an example.
John is a resident of Canada and is eligible for FHSA. He opens an FHSA, and makes contributions but later emigrates and becomes a non-resident. He can continue making tax-free contributions to FHSA while staying in another country. However, he cannot make tax-free withdrawals as a non-resident.
As per FHSA’s eligibility for a qualifying withdrawal, the person must be a resident of Canada at the time of withdrawal and till the house is bought or built. If you withdraw money from FHSA while being a non-resident for tax purposes (you stayed in Canada for less than 183 days in the tax year), your FHSA provider will deduct withholding tax from your withdrawals.
How Does First Home Savings Account (FHSA) Work For Canadian Immigrants?
While the FHSA is for Canadian residents, it is also available for immigrants if they meet the above eligibility criteria for FHSA. The CRA determines your residency status as an immigrant if you left another country to settle in Canada and developed significant residential ties (like a home, spouse, and dependents).
To be eligible for FHSA, you should be a resident and a first home buyer. Immigrants should also consider any home property in their earlier country and whether it would be a qualifying property if it were located in Canada. Immigrants shouldn’t own such a foreign home in the preceding four calendar years when opening an FHSA. If you meet this eligibility, you can open FHSA and start contributing tax-free.
Immigrants can withdraw FHSA tax-free when buying a home in Canada and using it as a primary residence within a year of purchasing or constructing the house.
How Does First Home Savings Account (FHSA) Work For U.S. Citizens?
While FHSA works differently for non-residents and immigrants, it doesn’t work for U.S. citizens. Under U.S. tax rules, U.S. citizens are subject to tax on their worldwide income, including the investment income earned from Canadian registered accounts. The only exception is the RRSP and RRIF, where contributions are tax-deductible (per the Canada-U.S. income tax treaty).
FHSA is a mix of RRSP and TFSA, so that the taxpayer will be subject to U.S. and Canadian tax rules. And under U.S. rules, U.S. citizens would have to pay tax on FHSA income.
While the CRA brings FHSA as a new way to save tax, the rules get complicated depending on your residency status. It is better to talk to a professional tax advisor and get clarity on the tax implication of FHSA.
Contact Glenn Graydon Wright LLP in Oakville to Help You With Tax Planning
Talk to a professional tax advisor to help you determine your residency status and the possible tax implications coming from the new government rules. At Glenn Graydon Wright LLP, our tax advisors can provide tax planning and investment planning. To learn more about how Glenn Graydon Wright LLP can help you save tax on investments, contact us today at 905-845-6633, or connect with us online, to set up an initial consultation.