Insights & Resources

Tax-Free First Home Savings Account

Budget 2022 proposes to create the Tax-Free First Home Savings Account (FHSA), a new registered account to help individuals save for their first home. Contributions to an FHSA would be deductible and income earned in an FHSA would not be subject to tax. Qualifying withdrawals from an FHSA made to purchase a first home would be non-taxable. Some key design features are outlined below.

Eligibility

To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. In addition, the individual must not have lived in a home that they owned either:

• at any time in the year the account is opened, or
• during the preceding four calendar years.

Individuals would be limited to making non-taxable withdrawals with respect to a single property in their lifetime. Once an individual has made a non-taxable withdrawal to purchase a home, they would be required to close their FHSA within a year from the first withdrawal and would not be eligible to open another FHSA.

Contributions

The lifetime limit on contributions would be $40,000, subject to an annual contribution limit of $8,000. The annual contribution limit would be available starting in 2023. Unused contribution room cannot be carried forward, meaning that an individual contributing less than $8,000 in a given year would still face an annual limit of $8,000 in subsequent years.

An individual is permitted to hold more than one FHSA, but the total amount that an individual contributes to all their FHSAs should not exceed their annual and lifetime FHSA contribution limits.

Withdrawals and transfers

Amounts withdrawn to make a qualifying first home purchase would not be subject to tax. Amounts withdrawn for other purposes would be taxable.

To provide flexibility, an individual could transfer funds from an FHSA to a registered retirement savings plan (RRSP) at any time before the year they turn 71, or to a registered retirement income fund (RRIF). Transfers to an RRSP or RRIF would not be taxable at the time of transfer, but amounts would be taxed when withdrawn from the RRSP or RRIF in the usual manner. Transfers would not reduce or be limited by the individual’s available RRSP room. Withdrawals and transfers would not replenish FHSA contribution limits.

If an individual has not used the funds in their FHSA for a qualifying first home purchase within 15 years of first opening an FHSA, their FHSA would have to be closed. Any unused savings could be transferred into an RRSP or RRIF or would otherwise have to be withdrawn on a taxable basis.

Individuals would also be allowed to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the $40,000 lifetime limit and the $8,000 annual contribution limit. These transfers would not restore an individual’s RRSP contribution room.

Home Buyers’ Plan

The Home Buyers’ Plan (HBP) allows individuals to withdraw up to $35,000 from an RRSP to purchase or build a home without having to pay tax on the withdrawal. Amounts withdrawn under the HBP must be repaid to an RRSP over a period not exceeding 15 years, starting the second year following the year in which the withdrawal was made.

The HBP will continue to be available. However, an individual will not be permitted to make both an FHSA withdrawal and an HBP withdrawal with respect to the same qualifying home purchase.

Effective date

The government will work with financial institutions to have the infrastructure in place for individuals to be able to open and start contributing to an FHSA at some point in 2023.

Home Buyers’ Tax Credit

First-time home buyers who acquire a qualifying home can obtain up to $750 in tax relief by claiming the First-Time Home Buyers’ Tax Credit (HBTC). Any unused portion of the HBTC may be claimed by an individual’s spouse or common-law partner if the combined total does not exceed $750 in tax relief.

Budget 2022 proposes to double the HBTC amount to $10,000, which would provide up to $1,500 in tax relief to eligible home buyers. Spouses or common-law partners would continue to be able to split the value of the credit if the combined total does not exceed $1,500 in tax relief. This measure will apply to acquisitions of a qualifying home made on or after January 1, 2022.

Residential property flipping rule

Property flipping involves purchasing real estate with the intention of reselling the property in a short period of time to realize a profit. Profits from flipping properties are fully taxable as business income, meaning they are not eligible for the 50% capital gains inclusion rate or the Principal Residence Exemption.

The Government is concerned that certain individuals engaged in flipping residential real estate are not properly reporting their profits as business income. Instead, these individuals may be improperly reporting their profits as capital gains and, in some cases, claiming the Principal Residence Exemption.

Budget 2022 proposes to introduce a new deeming rule to ensure profits from flipping residential real estate are always subject to full taxation. Specifically, profits arising from dispositions of residential property, including a rental property that was owned for less than 12 months, would be deemed to be business income.

The new deeming rule would not apply if the disposition of property is in relation to at least one of the life events listed below:

• Death, household addition (e.g., birth of a child, adoption, care of an elderly parent), separation, personal safety, disability or illness, employment change, insolvency or involuntary disposition.

Where the new deeming rule applies, the Principal Residence Exemption would not be available. Where the new deeming rule does not apply because of a life event listed above or because the property was owned for 12 months or more, it would remain a question of fact whether profits from the disposition are taxed as business income.

This measure would apply to residential properties sold on or after January 1, 2023.

Reporting requirements for RRSPs and RRIFs

Financial institutions are currently required to report to CRA annually the withdrawals and contributions into each RRSP and RRIF that they administer. By comparison, financial institutions file a comprehensive annual information return with respect to each Tax-Free Savings Account they administer, which includes the fair market value of property held in the account.

Budget 2022 proposes to require financial institutions to annually report to CRA the total fair market value, determined at the end of the calendar year, of property held in each RRSP and RRIF they administer. This information would assist Canada Revenue Agency in its risk-assessment activities regarding qualified investments held by RRSPs and RRIFs. This measure would apply to the 2023 and subsequent taxation years.

Corporate Tax Matters

Corporate income tax rates Apart from extending accessibility to the temporary measure to reduce corporate income tax rates for qualifying zero-emission technology manufacturers and extending the upper limit to the taxable capital threshold to the small business limit (see details below), there were no proposed changes to federal corporate income tax rates or the small business limit for 2022. The table below shows federal tax rates and the small business limit for 2022