Registered Plans: From First Home to Tax Wins

Photo Credit: The Mortgage Advisors

All references to the ‘Act’ mean the Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended. All references to the ‘Regulations’ mean the Income Tax Regulations. The following should not be construed as legal nor tax advice. Consultation with your usual tax/legal professional is advised.

Before we start, you may find these words helpful:

• FHSA - First Home Savings Act
• ITA - Income Tax Act: References to the 'Act' mean the ITA
• RRSP - Registered Retirement Savings Plan
• RRIF - Registered Retirement Income Fund
• TFSA - Tax Free Savings Account

Good morning Toronto! Last week, we explored, in depth, the workings of the RRSP. This article will build on last week by examining the regulations of the FHSA – a newly introduced Registered Plan. We will also take a close look at how the three Registered Plans – TFSA, RRSP, and FHSA – can be used in tandem to form a robust approach in personal and family tax planning.

A Registered Plan is an account that is registered with the government, that offers special tax benefits. An individual may only hold Qualified Investments in these accounts. In terms of eligibility, the Act requires that any individual opening any Registered Plan be a tax resident of Canada and 18 years of age*, in addition to other requirements which vary from plan-to-plan.

*Note that the individual must be of the age of majority to enter into contracts (such as opening Registered Plans). Because of this, one must be 19 in BC, NS, NL, YT, NT, and NU to open these Plans.

As a quick recap, the RRSP is a savings plan which provides that all capital gains will be tax-deferred. Income is only taxed at withdrawal, at the prevailing income tax rates for employment income. Contribution room is income-based (18% of earned income, to a maximum of $31,650 in 2025), but these contributions are reduced by any workplace retirement benefits (DC/DB pension). Contribution rooms (and the resultant tax deductions) can be carried forward. For an in-depth explanation of Qualified Investments and about the RRSP in general, see our previous post ‘RRSP: Really Radical Savings Plan?’ for more information.

On the other hand, the TFSA, as the name suggests, is tax-free, meaning that any growth in the account would not be subject to capital gains tax. However, while annual contributions ($7000 for 2025; indexed to inflation, to the nearest $500) can be carried forward, they are not tax-deductible.

In combining the best of each plan (that is, tax-free growth and tax deductions), one would end up with the FHSA. With the FHSA, the individual can contribute is capped at $8k in the first year the plan is open, and uncapped in subsequent years, to a total lifetime contribution limit of $40,000.

In terms of additional requirements, the TFSA imposes none, while the RRSP has the de facto requirement that the individual have earned income. In this vein, the reader would be fair to assume that FHSAs, as the name suggests, require the individual to have never owned a home. Somewhat misleadingly, the definition of a Qualified Individual, contained in ITA §146.6(1), reads that:

[The individual] did not, at any prior time in the calendar year or in the preceding four calendar years, inhabit as a principal place of residence a qualifying home (or what would be a qualifying home if it were located in Canada) that was owned, whether jointly with another person or otherwise, by [...] the individual, or [...] a person who is the spouse or common-law partner of the individual at the particular time.
– §146.6(1), Income Tax Act

A Qualifying Withdrawal is also defined under ITA §146.6(1), which further imposes that, in addition to the individual’s principal residence status (described above), a written agreement to buy (or build) the home was signed before the withdrawal. The home must then be ‘acquired’ or built before 1 October of the year following the withdrawal. This same passage also allows that the home to have been ‘acquired’ before the withdrawal, provided this happened in the 30 days before withdrawal. If these conditions are met, the individual shall hence submit Form RC725 to the managing institution to facilitate the withdrawal.

Note that the wording in the Act uses the word ‘acquired’, and not purchased. The CRA, in conference with Le Association de Planification Fiscale et Financière (Association of Tax and Financial Planning), has stated that:

Version originale française / Translated English version follows
Si l’on fait le parallèle avec le régime d’accession à la propriété (« RAP ») ainsi qu’avec le compte d’épargne libre d’impôt pour l’achat d’une première propriété (« CÉLIAPP »), l’ARC a mentionné que la date d’acquisition de l’habitation est la date où la propriété devient habitable (eau courante, électricité, chauffage, salle de bain fonctionnelle, etc.).
– APFF Financial Strategies and Instruments Roundtable Q.3, 2024-1027801C6 - Revente précipitée et auto-construction

Translated English Version / Version originale française précède
Drawing parallels with the Home Buyers' Plan (HBP) [and] First Home Saving Account (FHSA), the CRA has stated that the date of acquisition of the dwelling is the date the property becomes habitable (running water, electricity, heat, functional bathroom, etc.).
– APFF Financial Strategies and Instruments Roundtable Q.3, 2024-1027801C6 - Revente précipitée et auto-construction

Refer to CRA Technical Interpretation 2023-0960541E5 for how the spouse/common law partner’s residency and ownership affect the ‘Qualifying Individual’ and ‘Qualifying Withdrawals’ condition(s).

Nonetheless, legislation dictates that the FHSA must be closed on the achievement of the earliest of these dates:

• In the event a qualifying withdrawal was made, the end (December 31) of the next calendar year; or
• The date the individual turns 71 years old; or
• On the 15th anniversary of opening the account.

To maximize tax incentives, the individual should aim to use all the funds for its specified purpose (buying a house) by the first of the above dates. Otherwise, they always have the option (at any time) of rolling over amounts to an RRSP/RRIF (no contribution room needed) or withdrawing the funds as cash, which would be taxed at the prevailing rates for (regular) employment income. For obvious reasons, these described scenarios should be avoided as much as possible.

In regard to tax deductions, FHSAs work similarly to RRSPs, such that tax deductions can be carried forward to future tax years. However, the CRA does not allow FHSA-to-RRSP rollovers to be deducted, as the taxpayer would have already been eligible to claim a deduction on initial contributions. Furthermore, FHSA contributions made in the first 60 calendar days of a year cannot be deducted on that year’s tax return, unlike the RRSP.

To the second point of the article, these three plans each have unique properties that should be maximized. In my experience, one of the main goals in tax planning is to reduce the client's tax liability. For individuals, this is generally achieved through maximizing deductions. In this regard, the FHSA offers a strong value proposition. When used to buy a house, the contribution and its growth can be withdrawn tax-free, while offering tax deductions – something the RRSP and TFSA do not offer on their own.

Therefore, it is my (personal) opinion that if the reader had enough funds, they should prioritize contribution to the FHSA. It is in their best interest to contribute as early as possible and give the investments time to grow, while delaying the deductions until their income is high. Even if the 15 year window is exhausted, once the funds roll over into the RRSP – much preferred over a taxable withdrawal due to tax brackets – individuals can take advantage of the newly raised HBP limit, which now allows Canadians to withdraw up to $60k for the purchase of a home from their RRSP, although this amount must be repaid to the RRSP within 15 years.

I must also realize that considering the audience of these articles, most people at this stage of life will not have much RRSP contribution room for there to be a significant tax benefit. In these cases, the TFSA is the next best option due to its unmatched flexibility in accessing funds – albeit at the expense of tax deductions. For those with modest income, a practical and balanced strategy would ideally focus on contributing the majority of their spare income to the FHSA and RRSP, while allocating some funds to the TFSA to preserve liquidity. In any sense, I urge every single eligible Canadian to open and contribute to something as soon as they can.

A bit about us: KLee Tax specializes in filing tax returns for individuals, businesses, and corporations. Whether you are working your first job, running a business, or an NPO looking to make a difference, you can be sure that KLee Tax will be there for your tax needs, when and where you need us.

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