2024-1005791C6 2024 CALU RT-Q2-Taxation of FHSAs on Death

Principal Issues: After the death of an FHSA holder, who is subject to an income inclusion under subsection 146.6(14) at the end of the exempt period in the situations presented.

Position: Situation 1 - The deemed distribution under proposed paragraph 146.6(17(c) will result in an income inclusion of $10,000 to each sibling under subsection 146.6(14) in Year 2. Situation2 - The deemed distribution under proposed paragraph 146.6(17(c) will result in an income inclusion of $30,000 to the estate under subsection 146.6(14) in Year 2. Situation 3 - The deemed distribution under proposed paragraph 146.6(17(c) will result in an income inclusion of $30,000 to the estate under subsection 146.6(14) in Year 2. In all of the above situations, there will be no income inclusion to the deceased holder at the end of the exempt period.

Reasons: Wording of the legislation in subsection 146.6(14) and proposed paragraph 146.6(17(c).

Author: Chiu, Phyllis
Section: 146(1) - "beneficiary", 146.6(16), 146.6(14), 146.6(17)

CALU Roundtable - May 2024

Question 2 – Taxation of FHSAs on Death

A. BACKGROUND

The First Home Savings Account (FHSA) was introduced in 2023 to help first-time home buyers to save to buy or build a qualifying home. (endnote 1) It is similar to a Registered Retirement Saving Plan (RRSP) as contributions to an FHSA are generally tax deductible and income earned in an FHSA is generally not subject to tax. In addition, qualifying withdrawals from an FHSA that are used to purchase a qualifying home are not subject to tax.

An FHSA holder may make contributions to their FHSA and transfers from their RRSPs to their FHSA, up to their FHSA participation room for the year. Generally, a holder’s FHSA participation room for a particular year will be $8,000 plus any unused FHSA participation room from the prior year (max $8,000). A holder’s participation in their FHSAs is also subject to the lifetime FHSA limit of $40,000. While the holder’s transfers from their RRSPs to their FHSAs will not qualify for a tax deduction, this does allow the holder to access existing RRSP funds on a tax?free basis for a qualifying withdrawal.

To provide additional flexibility, an FHSA holder can directly transfer property from their FHSAs to their RRSPs or Registered Retirement Income Funds (RRIFs). Such transfers will not result in taxes being payable, but those amounts will be taxed when withdrawn from the RRSPs or RRIFs in the usual manner. Generally, direct transfers will also not reduce, or be limited by, the holder’s unused RRSP deduction room – in effect this represents an increase in the holder’s RRSP contribution room.

If the FHSA holder is not going to make a qualifying withdrawal by December 31st of the year of the 15th anniversary of opening their first FHSA, the holder should close their FHSAs by the end of that 15th year to avoid unintended tax consequences. In order to close the FHSAs, all of the property of the holder’s FHSAs need to be either directly transferred to the holder’s RRSPs or RRIFs, or received by the holder as a taxable withdrawal. The fair market value of any property remaining in the holder’s FHSAs at the end of that 15th year will be deemed to be received as a taxable withdrawal by the holder.

Given the ability to directly transfer property from an RRSP to an FHSA, and similarly directly transfer property from an FHSA to an RRSP/RRIF, it might be assumed that the tax rules governing an FHSA on death would be similar to those applicable to RRSPs and RRIFs. However, for a variety of tax and administrative reasons, the tax rules applicable on the death of an FHSA holder can be significantly different than those that apply on the death of an individual who owns an RRSP or RRIF.

The tax treatment of property held in an FHSA on the death of the holder is dependent in part on whether the property of the FHSA has been directly transferred or distributed before the end of the “exempt period”. The exempt period begins with the holder’s death and ends on December 31 of the first calendar year that begins after the holder’s death (or when the FHSA trust ceases to exist, if earlier). For example, if the holder dies on September 30th of Year 1, the exempt period could continue until December 31 of Year 2. The deceased’s FHSA will continue to be exempt from tax during the exempt period.

Where no successor holder has been designated for the deceased holder’s FHSA, and all of the property of the FHSA has not been directly transferred or distributed from the FHSA by the end of the exempt period, the proportion of the fair market value of the FHSA immediately before the end of the exempt period that each beneficiary is entitled to receive will be deemed to have been distributed to each beneficiary and will be subject to tax in their hands. (endnote 2)

The term “beneficiary” is defined to mean an individual (including an estate) or a qualified donee (endnote 3) that has the right to receive a distribution from the FHSA after the death of the holder of the FHSA. (endnote 4) While not expressly stated, we believe the term “beneficiary” is intended to apply to an individual or qualified donee that has been designated as a beneficiary of the FHSA under the applicable provincial law. We also assume that an estate is a “beneficiary” where there has been no express beneficiary designation.

Questions

Assume Individual A is the holder of an FHSA and dies on September 1st of Year 1 without a surviving spouse or common-law partner. Assume that no distributions were made from the FHSA as of December 31 of Year 2 and the property in the FHSA has a fair market value of $30,000 at that time. Can the CRA confirm the following:

Situation 1 – Individual A has designated their three siblings as equal beneficiaries under the FHSA in accordance with provincial law. As a result, each of the siblings will be required to report $10,000 in Year 2.

Situation 2 – Individual A has designated their estate as beneficiary under the FHSA in accordance with provincial law. As a result, the estate will be required to report $30,000 in Year 2.

Situation 3 – Individual A has not designated any beneficiary under the FHSA in accordance with provincial law and the FHSA proceeds will therefore be payable to the estate of Individual A. Individual A’s three siblings are the residual beneficiaries under the will. As the siblings are not beneficiaries under the FHSA, the estate will be required to report $30,000 in Year 2.

CRA Response

The income inclusion rule in subsection 146.6(14) applies to a beneficiary of an FHSA. According to subsection 146.6(1), a “beneficiary” under an FHSA means an individual (including an estate) or a qualified donee that has a right to receive a distribution from the FHSA after the death of the FHSA holder.

To determine if an individual (including an estate) is a beneficiary under an FHSA or has a right to receive a distribution from an FHSA after the death of the FHSA holder, it is necessary to consider the operation of the applicable provincial or territorial laws. In situations 1 and 2, the facts provide that a beneficiary designation has been made in accordance with provincial law. As such, for purposes of situation 1 and 2 we will assume that the beneficiary designation is permitted and valid under the applicable provincial law, and that the designated beneficiary will be the beneficiary under the FHSA. In situation 3, the facts provide that there is no designated beneficiary and accordingly we will assume that pursuant to the applicable provincial law the estate will be the beneficiary under the FHSA. Therefore, the beneficiaries under the FHSA are the siblings in situation 1, the estate in situation 2, and the estate in situation 3.

Where, pursuant to subsection 146.6(16), an FHSA ceases to be an FHSA at the end of the year following the year of death of the last holder, proposed paragraph 146.6(17)(c) (endnote 5) provides that the proportion of the FMV of all the property of the arrangement that a beneficiary is entitled to, determined at the time the arrangement ceases to be an FHSA, is deemed for purposes of subsection 146.6(14) to be distributed at that time from the FHSA to the beneficiary. Consequently, the amount deemed distributed in the year from the FHSA to a beneficiary has to be included in computing the beneficiary’s income for the year under subsection 146.6(14) with the following results for each situation:

Situation 1 – The deemed distribution under proposed paragraph 146.6(17)(c) will result in an income inclusion of $10,000 to each sibling under subsection 146.6(14) in Year 2.

Situation 2 – The deemed distribution under proposed paragraph 146.6(17)(c) will result in an income inclusion of $30,000 to the estate under subsection 146.6(14) in Year 2.

Situation 3 - The deemed distribution under proposed paragraph 146.6(17)(c) will result in an income inclusion of $30,000 to the estate under subsection 146.6(14) in Year 2.

In all of the above situations, there will be no income inclusion to the deceased holder at the end of the exempt period.

Phyllis Chiu
2024-100579C6
May 7, 2024

ENDNOTES

1 The rules governing FHSAs are contained in section 146.6.

2 Paragraph 146.6(17)(c) and paragraph 56(1)(z.6).  

3 Qualified donee is defined in subsection 248(1) and has the meaning assigned by subsection 149.1(1) , which includes a registered charity as well as a number of other non-taxable entities.

4 Beneficiary is defined in subsection 146.6(1).

5 Proposed amendment, s. 46(11) of Bill C-59 (2023), First reading: November 30, 2023.

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