Principal Issues: Where a decree, order or judgment of a competent tribunal, or a written agreement, provides for the division of property from an FHSA between the FHSA holder and an individual in settlement of rights arising out of a marriage or common-law partnership, or on its breakdown, will the transfer for the benefit of the individual (1) possibly be a tax-free transfer into an FHSA even if the individual does not already have an FHSA and does not otherwise qualify as a qualifying individual? Or (2) possibly be a tax-free transfer into an RRSP or RRIF?
Position: (1) No, because the individual cannot open a FHSA at the time of the transfer to receive the amount to be transferred if the individual is not a qualifying individual at that time. (2) It should be possible to do the tax-free transfer directly into an RRSP or a RRIF.
Reasons: See subsections 146.6(7) and (8) and the definition of "qualifying arrangement" under subsection 146.6(1).
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 10 OCTOBER 2024
2024 APFF CONFERENCE
6. FHSA - separation and specified individual
The First Home Savings Account ("FHSA") rules provide that an amount from an individual's FHSA may be transferred tax-free to the individual's spouse or former spouse if that person is entitled to the amount under a decree, order or judgment of a competent tribunal, or under a written agreement, relating to a division of property between the holder and the individual, in settlement of rights arising out of, or on a breakdown of, their marriage or common-law partnership.
In such a case, the transfer will be non-taxable if it is limited to the value of the FHSA less the excess FHSA amount, if any, and the transfer is made directly to the spouse's or former spouse's FHSA, or to a registered retirement savings plan (“RRSP”) or registered retirement income fund (“RRIF”) under which that person is the annuitant.
To be able to make a tax-free transfer to the spouse's or former spouse's FHSA, the spouse or former spouse must already have a FHSA or must open a FHSA.
Questions to the CRA
(a) Will an individual who does not have a FHSA and who does not qualify as a “qualifying individual” at the time of the transfer be able to open a FHSA to receive the transfer from the individual’s spouse's or former spouse's FHSA?
(b) If not, can the CRA confirm that the only options available would be a tax-free transfer to the spouse's or former spouse's RRSP or RRIF?
CRA Response
General Comments
Generally, the holder of a FHSA cannot transfer FHSA property to a spouse or common-law partner without tax consequences.
However, in certain circumstances provided for in subsection 146.6(7) of the Income Tax Act (footnote 1), it is possible for the holder of a FHSA to make a direct transfer of an amount from the holder’s FHSA to the FHSA, RRSP or RRIF of the holder’s spouse or common-law partner, or former spouse or common-law partner, without any immediate tax consequences, pursuant to subsection 146.6(8). To do so, the following two conditions must be satisfied:
1) a spouse or common-law partner or former spouse or common-law partner of the holder of the transferor FHSA is entitled to the amount under a decree, order or judgment of a competent tribunal, or under a written agreement, relating to a division of property between the holder and the individual, in settlement of rights arising out of, or on a breakdown of, their marriage or common-law partnership.
2) The maximum amount that is transferred to the FHSA, RRSP or RRIF of the holder's spouse or common-law partner, or former spouse or common-law partner, is the total FMV of all of the holder's FHSAs minus any “excess FHSA amount”, as defined in subsection 207.01(1).
Where those two conditions are satisfied, the transfer has no impact on the unused FHSA contribution room (footnote 2) of the spouse or common-law partner, or former spouse or common-law partner, or on the unused RRSP deduction room (footnote 3).
CRA Response to Question 6(a)
Subsection 146.6(1) defines a “qualifying individual” at a particular time as an individual who is at least 18 years of age, who is a resident of Canada and who generally meets certain conditions relating to occupancy and ownership of a housing unit during the period preceding the opening of the FHSA.
If, at the time the transfer is to be made, the individual to whom the transfer is to be made does not already hold a FHSA and is not a “qualifying individual” within the meaning of subsection 146.6(1), the transfer cannot be made to a FHSA.
Indeed, even in the situation described above where the individual is entitled to an amount in settlement of rights arising out of, or on the breakdown of, a marriage or common-law partnership, if the individual wishes to have that amount transferred to a FHSA of which the individual is the holder but has not yet opened a FHSA, the individual would have to open a FHSA and, to do so, enter into a “qualifying arrangement” (footnote 4) with an “issuer” (footnote 5). However, the individual can only enter into a qualifying arrangement to open a FHSA if the individual is a qualifying individual at that time.
CRA Response to Question 6(b)
If it is not possible to transfer an amount tax-free from one FHSA to another FHSA because the individual for whose benefit the transfer is made does not already have a FHSA and cannot open one, the amount may be transferred directly, within the specified limits, tax-free to the individual's RRSP or RRIF.
If the individual does not already have an RRSP or RRIF, it should generally be possible for the individual to open an RRSP or, if age 71 or over, a RRIF.
The only direct, tax-free transfers from a FHSA to a spouse's or common-law partner's or former spouse's or common-law partner's plan are those provided for in subsection 146.6(7).
Michel Ostiguy
October 10, 2024
2024-102330
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.) (the "Act").
2 The expression “unused FHSA participation room” does not appear in the Income Tax Act, but it is commonly used. A definition can be found at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account/definitions.html.
3 The expression “unused RRSP deduction room” is defined in subsection 146(1).
4 Within the meaning of subsection 146.6(1).
5 Within the meaning of subsection 146.6(1). Generally speaking, a person authorized to enter into a qualifying arrangement with a qualifying individual.