Principal Issues: An individual owns a house. Previously, he rented it in order to earn income. He decides to change its use and make of it its principal place of residence. According to paragraph 45(1)(a), there will be at that time a deemed disposition and a deemed acquisition of the house due to a change in use. Is there an acquisition for the purposes of paragraphs (c) and (d) of the definition of "qualifying withdrawal" of subsection 146.6(1)?
Position: No.
Reasons: As per paragraph 45(1)(a) there will be a deemed disposition and a deemed acquisition of the house due to the change in use. Those deemed disposition and acquisition however apply only for the purposes of subdivision c of Division B of Part I of the Act and do not apply to section 146.6.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 3 NOVEMBER 2023
2023 APFF CONFERENCE
1. First Home Savings Account ("FHSA") - Change of Use and Qualifying Withdrawal
Mr. X, a Quebec resident, signed on January 1, 2020 an offer to purchase a single-family home that he wished to rent. The offer to purchase stipulated that he would take possession on June 1, 2020. He therefore went to a notary to sign the deed of purchase on that date. He had never lived in the house as his principal place of residence, as it had always been rented to an unrelated third party since its acquisition and he had always lived with his parents.
On May 1, 2023, Mr. X, who met all the conditions for opening an FHSA, opened an FHSA account and made a contribution of $8,000.
His tenant informed him that he did not wish to renew his lease, so that Mr. X wished to move into his house permanently to make it his principal place of residence from November 1, 2023.
Pursuant to paragraph 45(1)(a) of the Income Tax Act (footnote 1), given this change in use of the property, Mr. X will be deemed to have disposed of the house for its fair market value ("FMV") and to have immediately reacquired it at that value.
Mr. X wishes to make a withdrawal from his FHSA on November 15, 2023 and has therefore completed Form RC725 (footnote 2) in order to make a qualifying withdrawal from his TFSA.
Questions for the CRA
In such a situation, would Mr. X meet all the conditions for the purposes of the definition of "qualifying withdrawal" set out in subsection 146.6(1) I.T.A. in order to make a qualifying withdrawal, i.e., a non-taxable withdrawal? In particular:
(a) Is the date of the change in use, which results in a deemed acquisition, the acquisition date for the purposes of paragraph (d) of the definition of "qualifying withdrawal" in subsection 146.6(1)?
(b) For the purposes of paragraph (c) of the definition of "qualifying withdrawal" in subsection 146.6(1), Mr. X entered into an agreement in writing (January 1, 2020) before the date of the withdrawal (November 15, 2023) to acquire the qualifying home before October 1 of the calendar year following the calendar year in which the amount was received (October 1, 2024). Does paragraph (c) of the definition of "qualifying withdrawal" in subsection 146.6(1) require a link with the deemed acquisition pursuant to paragraph 45(1)(a)?
CRA Response
An individual who is the holder of an FHSA, where the individual wishes to make a qualifying withdrawal from that account for the acquisition of a qualifying home, must ensure that the amount the individual will receive as a benefit satisfies the conditions described in the definition of "qualifying withdrawal" in subsection 146.6(1).
One of those conditions, set out in paragraph (d) of the definition of "qualifying withdrawal", is that the individual did not acquire the qualifying home more than 30 days before the particular time.
According to the facts described, Mr. X acquired a single-family home on June 1, 2020. On November 1, 2023, he moved into the house on a permanent basis to make it his principal place of residence. He wishes to withdraw from his FHSA on November 15, 2023.
Based on the facts described and pursuant to paragraph 45(1)(a), since Mr. X will cease to use the house to earn income and will commence to use it for personal purposes as a place of residence, he will be deemed to have disposed of the property for proceeds equal to its FMV at that time and immediately thereafter reacquire the property at a cost equal to that FMV.
As indicated in the preamble to subsection 45(1), however, these deemed disposition and deemed acquisition rules apply only to subdivision c of Division B of Part I of the Income Tax Act, i.e., the subdivision relating to "Taxable capital gains and allowable capital losses". The rules set out in subsection 45(1) are therefore not applicable in the context of section 146.6, which is found in Division G of Part I of the Income Tax Act, dealing with "Deferred and other special income arrangements", in a context unrelated to the realization of a capital gain or loss.
For the purposes of the definition of "qualifying withdrawal" in subsection 146.6(1), applied at the time of the withdrawal of an amount from the FHSA, i.e., on November 15, 2023, the only acquisition of the qualifying home that Mr. X had made occurred on June 1, 2020, i.e., more than 30 days before November 15, 2023. The condition set out in paragraph (d) of the definition is therefore not met. The change in use that he made of his house on November 1, 2023 does not constitute an acquisition for the purposes of section 146.6, despite the deeming rules set out in paragraph 45(1)(a), for the purposes of subdivision c of Division B of Part I of the Income Tax Act.
As to whether paragraph (c) of the definition of "qualifying withdrawal", relating to the existence of an agreement in writing for the acquisition of the qualifying home, should relate to the deemed acquisition of the home under paragraph 45(1)(a) or could relate to another acquisition, there is no need to answer this question since the change of use will not result in a deemed acquisition of the home for the purposes of section 146.6. In the context of the question as asked, there is only one acquisition, which occurred on June 1, 2020, and, in this case, the acquisition referred to in paragraph (c) of the definition can only relate to that acquisition.
Michel Ostiguy
November 3, 2023
2023-097691
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 R.S.C. 1985, c. 1 (5th Supp.) ("I.T.A.").
2 CANADA REVENUE AGENCY, Form RC725, "Application to make a qualifying withdrawal from your TFSA" ("Form RC725").