Introducing Canada’s “First Home Saving Plan”
.@IRS_Medic, @Expatriationlaw and @Keith__Redmond discuss: "How To Use Canada's First Home Savings Account – #FHSA – Even When You Are A US citizen living in Canada https://t.co/m9n19VmAwA via @YouTube
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 29, 2023
The purpose of this post is NOT to provide an extensive analysis of the FHSA. Rather the purpose is to acknowledge the U.S. tax issues for U.S. citizens resident in Canada. My conclusion is that U.S. citizens resident in Canada SHOULD consider the FHSA.
A Tweet by Tweet Explanation Of The FHSA
The following twitter thread introduces the FHSA and includes thoughts on the advisability on the plan for Canadian residents who are U.S. citizens.
Canada’s new #FHSA has different kinds. US citizens resident in Canada should avoid those administered by trustee (possibly creating foreign trust for US tax purposes). Stick with the basic “bank account” FHSA with no trustee and no (#PFIC) mutual funds. https://t.co/Ul1VuuusMq https://t.co/b8mx2QOTBQ
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 29, 2023
https://threadreaderapp.com/thread/1640892103592124416.html
Into The Weeds …
On March 28, 2023 Canada’s Finance Minister Chrystia Freeland confirmed Canada’s new FHSA (“First Home Savings Account“).
In summary tax residents of Canada who are over the age of 18 have the opportunity to make a a tax deductible contribution of $8000 per year to a lifetime maximum of $40,000 which will (1) grow on a tax deferred basis inside the plan and (2) not be taxed on distribution if used to purchase a first home. This is in addition to Canada’s RRSP and TFSA programs (borrowing features of each of those programs). Generally speaking this is a good opportunity for Canadian residents.
This is one more example of how tax legislation policy is about incentivizing the way people live and save and the creation of investment and retirement planning opportunities. To put it simply: taxation is no longer ONLY about taxation.
Canadian residents who are U.S. citizens
As always, Canadian residents who are U.S. citizens (mostly because of a U.S. place of birth) will find it much more difficult to benefit from this program. This is because of the U.S. extra-territorial tax regimes which allows the United States to govern ALL aspects of the life of a U.S. citizen wherever they may live in the world. (Generally the US Internal Revenue combined with the “saving clause” in US tax treaties makes it difficult for US citizens to take advantage of non-US tax advantaged programs.)
In the same way that the United States Internal Revenue Code fails to recognized other Canadian registered plans as having special tax status under the U.S. code (RRSP, TFSA, RESP, RDSP) Canada’s new FHSA will have the same problems.
The RRSP is the only Canadian registered program that appears to have protection under the Canada U.S. Tax Treaty. This leaves the FHSA with the same status as the TFSA, RESP, RDSP with respect to the U.S. taxation of income inside the plans. This means that U.S. citizens should avoid the inclusion of Canadian mutual funds in FHSA – PFIC anyone? (As is the case with the TFSA, it should be easy to hold a FHSA that is NOT a “foreign trust” under the U.S. tax rules.)
For Canadian residents who are U.S. citizens, the question is: “To FHSA or NOT FHSA, that is the question …”
As always, the answer is: It depends. In a recent post I considered whether it makes sense for Canadians with U.S. taint to hold TFSAs, I concluded that in many cases TFSAs DO make sense. I suggest that the same reasoning would apply for the FHSA. To understand how and why Canadian residents with U.S. citizenship SHOULD consider opening a FHSA see:
U.S. Citizens Resident In Canada And The FHSA – A Summary:
1. The contributions will NOT be tax deductible on the your U.S. tax return. Your contributions are made with “after tax income” for the purposes of your U.S. tax return but “before tax income” on your Canadian return. This may or may not result in an actual tax liability on your U.S. tax return.
2. The income earned inside the FHSA WILL be taxable on your U.S. tax return. It will not be taxed on your Canadian return. This may or may not result in an actual tax liability on your U.S. tax return.
3. No distribution from the plan will be taxable income on your U.S. return. The distributions are potentially taxable on your Canadian return (depending on how the distributions) are used.
Conclusion: For the same reason that Canadian residents with U.S. citizenship should include TFSAs in their investment plans, they should consider having the FHSA as part of their investment plan. Of course this decision should be made in consultation with your financial advisor.
John Richardson – Follow me on Twitter @Expatriationlaw
How to know if a particular FHSA account is a “trust” or not?
For example, the TD FHSA (https://www.td.com/ca/en/personal-banking/personal-investing/products/registered-plans/fhsa) opening documents has language like:
“You hereby request that the Trustee file with the Minister of National Revenue an election to register the qualifying arrangement as a First Home Savings Account (“Account”) under section 146.6 of the Income Tax Act (Canada). You understand that all references in the Account Declaration of Trust to the application are to be read and understood as references to this application. You agree on behalf of yourself, your executors and administrators to be bound by the terms of the Account. All contributions to the Account are to be invested by the Trustee as directed by you in accordance with the terms of the Account and held in your account subject to the terms of the Account.”
that seems pretty “trusty”.
Would the Questrade FHSA, since it’s “self-directed”, not be a “trust”? Unfortunately I don’t know what the opening document language is like for that one. https://www.questrade.com/learning/investment-concepts/fhsa-101/first-home-savings-account-sign-up