FHSA and Reporting (Canadian Non-Resident and US Tax IRS 1040)

A note: the FHSA is a relatively new account, and the IRS has yet to review, issue guidance, or challenge in anyway. So Canadians who are moving to the US or are already in the US should understand the risks associated with maintaining Canadian FHSA and consult with their tax advisor to get guidance. 

The FHSA, First Home Savings Account offers several advantages for Canadian residents saving for their first home purchase, but once you become a non-resident of Canada and a resident of the US, the tax reporting of FHSA can become complex. Get a more in-depth understanding of FHSA for non-resident Canadian and US tax reporting. 

• Tax Deductible Contributions: Similar to Registered Retirement Savings Plans (RRSPs), contributions to your FHSA are generally deductible from your income tax for the year you contribute or a future year. Contributions reduce your taxable income and lower your tax bill.
• Tax-Free Growth: All investment earnings within your FHSA grow tax-free. Contribution allows your savings to compound faster than a regular savings account where interest earned is taxed.
• Tax-Free Withdrawals for Qualifying Home: When you use the funds in your FHSA to purchase a qualifying home in Canada, the withdrawal itself is tax-free. Tax-free withdrawal provides a significant tax advantage when you access your savings for down payment or closing costs.
• Flexible Investment Options: FHSAs allow you to hold various qualified investments, similar to Tax-Free Savings Accounts (TFSAs). Investments include options like cash, Guaranteed Investment Certificates (GICs), mutual funds, and even some types of stocks. This flexibility allows you to tailor your investment strategy to your risk tolerance and time horizon.
• Higher Contribution Limits Compared to TFSAs: While TFSAs offer tax-free withdrawals on contributions, the annual contribution limit is lower than FHSAs. As of 2024, the maximum annual contribution for an FHSA is $8,000, with a lifetime limit of $40,000. A higher contribution limit allows you to save a larger sum for your down payment than a TFSA. TFSA annual limit is $7000.
• Contributions to your FHSA will not impact your TFSA or RRSP contribution limits.

Overall, the FHSA is a powerful tool with combined benefits of both RRSP and TFSA, such as tax-deductible contributions, tax-free growth, and tax-free withdrawals for first home purchases.

Here are some additional points to consider:

• Eligibility: To qualify for an FHSA, you must be a resident of Canada and at least 18 years old (or the age of majority in your province). You must also be a first-time homebuyer, meaning you haven’t owned or lived in a qualifying home in the past five years.
• Carry-Forward Unused Contribution Room: Any unused contribution room from previous years can be carried forward to future years to maximize your tax deductions.
• 15-Year Maximum Account Lifetime: You can keep your FHSA open for a maximum of 15 years or until the end of the year you turn 71.
• Unused Funds: If you don’t use the funds in the FHSA to purchase a home the funds will be taxable upon distribution.

FHSA for Non-Residents Canadians:

• Existing FHSAs: If you already have an FHSA and become a non-resident, you can keep it open. However, there are limitations:
  • Withdrawals: You cannot make withdrawals for buying a qualifying home in Canada while you’re a non-resident. These withdrawals are typically tax-free for residents but not for non-residents.
  • Contributions: You can still contribute to your FHSA even as a non-resident. However, there’s likely no tax benefit from those contributions to your new country of residence.

Tax Implications for Non-Residents Canadians:

• Withholding Tax: As a non-resident, withdrawals from your FHSA will be subject to a 25% withholding tax in Canada. Withholding tax applies to all withdrawals, not just those intended for home purchases.
• Tax Treaties: Canada has tax treaties with many countries. These treaties may reduce the withholding tax rate for FHSA withdrawals.

US Tax Reporting of FHSA on IRS Form 1040:

• Reporting on Form 1040: The IRS does not have an official guideline for reporting FHSA for US tax purposes. However, based on how similar TFSA, RRSP, and RESP are treated, we can take some steps based on the following assumption. First, we must assume that FHSA will not be considered foreign trusts for US tax purposes, which include filing forms 3520 and 3520a. Second, if FHSA is not a trust, then the impact for US tax purposes should be relatively simple and straightforward in comparison along with a Form 8275 disclosure.
• Reporting of Earnings: Report all earnings through investments in the FHSA, including but not limited to interest, dividends, and capital gains on applicable schedules and form 1040.  
• Additional Reporting Requirements: You might need to report the following on your 1040:
  • FBAR (Foreign Bank and Financial Accounts Report): If the total value of your foreign financial accounts exceeds $10,000 at any point during the year, you may need to file an FBAR.
  • Form 8938: You might need to file Form 8938 to report specified foreign financial assets exceeding certain thresholds.
  • Form 1040 Schedule B: You must complete Part III Foreign Accounts and Trusts information to report a financial interest in or signature authority over a financial account in a foreign country. 

Seeking Professional Help:

• Consulting a tax professional specializing in cross-border taxation is crucial. They can provide specific guidance on reporting your FHSA on your US tax return based on your situation and potential tax implications.

Remember, this information is for general guidance only. It’s vital to consult with a qualified tax professional to ensure you comply with all relevant tax regulations in Canada and the US.