Tax-Free Savings Account for First-Time Home Buyers (TFSA)

In Budget 2022, the government proposed the introduction of the Tax-Free Savings Account for First-Time Home Buyers (TFSP). This new registered plan would allow prospective first-time home buyers to save up to $40,000 tax-free. Similar to a Registered Retirement Savings Plan (RRSP), contributions would be tax-deductible, and withdrawals for first-time home buyers, including investment income, would be tax-free, as is the case with the Tax-Free Savings Account (TFSA).

Budget 2022 announced the key design features of the TFSP, including an annual contribution limit of $8,000 and a lifetime contribution limit of $40,000. Today, the Department of Finance is releasing, for public comment, legislative proposals that provide additional information on the design of the TFSA. This backgrounder provides a summary of this information.

The Government expects that Canadians will be able to open and contribute to a TFSA at some point in 2023. Regardless of when this occurs in 2023, Canadians would be eligible to contribute the full $8,000 annual limit in that year.

Opening and Closing Accounts

To open a TFSA account, an individual must be a resident of Canada and at least 18 years of age. In addition, an individual must be a first-time home buyer, meaning they have not owned and lived in a home at any time during the part of the calendar year before the account is opened or at any time in the preceding four calendar years. For this purpose, ownership is broadly defined and includes beneficial ownership, but excludes the right to acquire less than 10% of a qualifying home.

An individual’s TFSA would cease to be a TFSA, and the individual would not be eligible to open a TFSA, after December 31 of the year in which the earlier of the following occurs:

• the 15th anniversary of the date the individual opened a TFSA;
• the individual reaches age 71.

Any savings not used to purchase a qualifying home could be transferred tax-free to an RRSP or a Registered Retirement Income Fund (RRIF), or withdrawn taxably. An individual who makes a qualifying withdrawal from a TFSA could transfer the unused savings tax-free to an RRSP or a RRIF until December 31 of the year following the year of their first qualifying withdrawal.

Qualified Investments

A TFSA would be permitted to hold the same qualified investments as those currently held in a TFSA. In particular, taxpayers would be able to hold a wide range of investments, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates.
The prohibited investment rules and non-qualified investment rules that apply to other registered plans would apply, including the potential tax consequences described below. These rules prohibit investments in entities with which the account holder does not deal at arm’s length, as well as investments in certain assets, such as real estate, shares of private corporations, and partnerships.

Contributions

The lifetime contribution limit would be $40,000, including an annual contribution limit of $8,000. In other words, individuals would be subject to the lesser of their annual contribution limit and their remaining lifetime contribution limit. The full annual limit would be available starting in 2023.

The annual contribution limit would apply to contributions made in a given calendar year. Individuals would be able to claim an income tax deduction for contributions made in a given tax year. Unlike RRSPs, contributions made in the first 60 days of a given calendar year could not be allocated to the previous tax year.

An individual would be allowed to carry forward unused portions of their annual contribution limit, up to a maximum of $8,000. This means that an individual who contributes less than $8,000 in a given year could contribute the unused amount (i.e., $8,000 less their contributions made in that year) in a subsequent year in addition to their annual contribution limit of $8,000 (subject to their lifetime contribution limit). For example, an individual who contributes $5,000 to a TFSA in 2023 would be allowed to contribute $11,000 in 2024 (i.e., $8,000 plus the remaining $3,000 from 2023). Carry-forward contribution amounts would only begin to accumulate after an individual first opens a TFSA.

An individual could hold more than one TFSA account, but the total amount contributed to all of their TFSA accounts could not exceed the annual and lifetime contribution limits. Generally, taxpayers would be responsible for ensuring they do not exceed their limits in any given year. The Canada Revenue Agency (CRA) would provide basic information on TFSA accounts to help taxpayers determine the amount they can contribute in a given year.

Contributions made to a TFSA after a qualifying withdrawal (i.e., when purchasing a first home) would not be deductible from net income.

Contributions not deducted

An individual would not be required to claim a deduction for the tax year in which a contribution is made. Like RRSP deductions, these amounts can be carried forward indefinitely and deducted in a subsequent tax year.

Eligible Withdrawals

For a withdrawal from a TFSA to be an eligible (i.e., non-taxable) withdrawal, certain conditions must be met.

First, a taxpayer must be a first-time home buyer at the time of the withdrawal. Specifically, the taxpayer must not own a home in which they lived at any time during the portion of the calendar year preceding the withdrawal or at any time in the preceding four calendar years. There is an exception that allows individuals to make eligible withdrawals within 30 days of moving into their home.

The taxpayer must also have a written agreement to purchase or construct a qualifying residential unit before October 1 of the year following the year of withdrawal and must intend to occupy the qualifying residential unit as their principal residence within one year of its purchase or construction.

A qualifying residential unit would be a residential unit located in Canada. A share in a cooperative housing corporation that gives the taxpayer the right to own and hold an equity interest in a residential unit located in Canada would also qualify. However, a share that only grants the right to rent the unit would not qualify.

Provided the taxpayer meets the conditions for a qualifying withdrawal, the entire amount of available funds in a TFSAIP can be withdrawn tax-free in a single withdrawal or in a series of withdrawals.

Non-qualifying withdrawals

Withdrawals that are not qualifying withdrawals would be included in the income of the individual making the withdrawal. Financial institutions would be required to collect and remit withholding taxes on non-qualifying withdrawals, consistent with the treatment that applies to taxable RRSP withdrawals.

Non-qualifying withdrawals would not restore the annual or lifetime contribution limit.

Transfers

An individual could transfer funds from a TFSA to another TFSA, an RRSP, or a RRIF tax-free.

Funds transferred to an RRSP or RRIF would be subject to the usual rules applicable to these accounts, including tax liability upon withdrawal. These transfers would not reduce, nor would they be limited by, the individual’s RRSP contribution limit. These transfers would not reset the individual’s lifetime TFSA contribution limit.

Individuals could also transfer funds from an RRSP to a TFSA tax-free, subject to the annual and lifetime TFSA contribution limits and the qualified investment rules. While these transfers would be subject to TFSA contribution limits, they would not be deductible and would not reset the individual’s RRSP contribution limit.

Treatment of TFSA Income for Tax Purposes and Income-Tested Benefits

Contributions to a TFSA would be deductible in calculating income for tax purposes. Furthermore, income, losses, and gains related to investments held in a TFSA, as well as eligible withdrawals, would not be included (or deducted) in calculating income for tax purposes or taken into account in determining eligibility for income-tested benefits or credits available under the income tax system (for example, the Canada Child Benefit and the Goods and Services Tax Credit).

Eligible Issuers

Any financial institution that can issue RRSPs and TFSAs could issue TFSAs. This includes Canadian trust companies, life insurance companies, banks, and credit unions.

Interaction with the Home Buyers’ Plan (HBP)

The HBP would remain available under the existing rules. However, individuals would not be entitled to make both a TFSAPP withdrawal and an HBP withdrawal for the purchase of the same eligible home.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account.html

CELIAPP Basics (First Home Savings Account – FHSA)

• Annual contribution limit: $8,000.

• Lifetime limit: $40,000.

• Unused room carry-forward: if you don’t contribute the full $8,000 in a year, the unused portion (up to $8,000) can be added to your limit for the following year. This means you could contribute up to $16,000 in one year if you had enough carry-forward room.

Example: “Marie” contributes the maximum each year

Let’s assume Marie opens her FHSA in 2023 and always contributes the maximum allowed.

Year 1 – 2023

• Contribution room: $8,000.

• She contributes $8,000.

• Carry-forward to 2024: $0.

Year 2 – 2024

• Contribution room: $8,000.

• She contributes $8,000.

• Total cumulative: $16,000.

• Carry-forward: $0.

Year 3 – 2025

• Contribution room: $8,000.

• She contributes $8,000.

• Total cumulative: $24,000.

Year 4 – 2026

• Contribution room: $8,000.

• She contributes $8,000.

• Total cumulative: $32,000.

Year 5 – 2027

• Contribution room: $8,000.

• She contributes $8,000.

• Total cumulative: $40,000 → lifetime maximum reached.

After this, no further contributions are allowed because she has hit the $40,000 lifetime limit.

Variant with carry-forward

Suppose Marie only contributes $5,000 in 2023.

• 2023: contribution = $5,000 → unused room = $3,000.

• 2024: available room = $8,000 (new) + $3,000 (carry-forward) = $11,000. If she contributes $11,000, her total is $16,000 by the end of 2024.

• She can continue until she reaches the $40,000 lifetime cap, possibly faster than 5 years if she uses carry-forward.

Summary Table (no carry-forward case)

Over five years, by contributing $8,000 each year, Marie reaches the lifetime maximum of $40,000.

Key points to remember

• The annual contribution limit is strictly $8,000 (except for carry-forward amounts).

• Unused contribution room can be carried forward, allowing for larger contributions the following year (up to $16,000).

• The lifetime contribution limit is $40,000.

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