First Home Savings Account (FHSA)
It is never too early to consider taxation and estate implications when considering a new account.
A First Home Savings Account (FHSA) is a new registered plan allowing a prospective first-time home buyer, to save for their first home tax-free (up to certain limits) with contributions being generally tax deductible. It can remain open until the end of its 15th anniversary, the FHSA holder turns 71, or the end of the year the FHSA holder makes their first qualifying withdrawal.
But what happens if the account has to be closed early or transferred due to death?
Below are a few points to keep in mind regarding FHSA beneficiary designations and tax treatment of a FHSA on death.
Survivor as successor holder
As with a TFSA, the FHSA owner can name a spouse or common-law partner as the successor holder.
Only a spouse or common-law partner can be a successor holder, which comes with different rights than a sole beneficiary.
If the successor is also an "eligible person" at the time of the FHSA owner's death, they can effectively take the deceased's place as the new FHSA owner. Meaning the successor receives the FHSA and the funds can remain in it tax-free. An eligible person is at least 18 years old, a Canadian resident and a potential first-time homebuyer.
If the successor is an eligible individual who already has an FHSA, the deceased FHSA will not affect their FHSA contribution room. However, the maximum participation period will still apply to the transfer.
If the eligible successor did not have an FHSA, they are considered to have opened an FHSA on the date of death of the original account holder.
The successor, either an eligible person or not, can also choose to roll the FHSA funds into a RRSP or RRIF on a tax-deferred basis. This must be done before the end of the exemption period, which is the end of the year after the year of death. As per the CRA, generally, the amount that is transferred directly from a FHSA to a RRSP or RRIF will not impact your unused RRSP deduction room.
Another option is to receive the funds within the FHSA as a taxable income at the end of the exemption period (withholding tax will be taken by the issuer and is the same rate as for lump sum RRSP payment).
Survivor as beneficiary
A beneficiary cannot become the new owner of the FHSA. Instead, if they are an eligible person they can open an account and make a direct transfer of their portion of the funds on a tax-deferred basis directly to their new account. Or they can transfer their portion on a tax-deferred basis to their RRSP or RRIF or receive the estate as a taxable distribution at any time during the exemption period.
A beneficiary who is not the survivor
A beneficiary other than a survivor (spouse or common-law partner) must include any funds received from the FHSA during the exemption period in their income for the year they received it.
Province and Territory nuances
It is important to note that since this account is new, both Provinces and Territories have yet to update their laws to recognize FHSA beneficiary names outside of a will. At this time, we would suggest not only having the account forms state the beneficiary but also having your will reflect the new account and its beneficiary.
Additionally, Quebec does not recognize beneficiary names in registered plans, only in wills.
More details on how FHSA will be taxed in certain situations will be released by the government as time goes by.
No named beneficiary?
If the owner of the FHSA did not name a successor or beneficiary designated in the account documents or their will, the property in the FHSA is distributed to the deceased person's estate. Most likely assets will be taxed as income from the estate unless the family is a beneficiary of the estate and the executor can jointly decide on a tax-deferred option such as a transfer to an RRSP or a qualified individual named in the family estate.
What happens after the exemption period?
If the FHSA is not closed by the end of the exemption period, it will cease to be a FHSA. The fair market value of any funds remaining in the account will then be included in the beneficiary’s income for the year. No tax-deferred transfers can occur after the exemption period.
bottom line
Designating beneficiaries is an important part of all registered accounts as there are future taxation and estate implications. The FHSA has a variety of taxation implications on death that should be considered when opening an account and due to the nature of the plan, beneficiary designations should be reviewed regularly. Any questions about FHSAs, please give us a call.