FHSA Withdrawal Rules and Rental Advice for First-Time Home Buyers

FHSA withdrawal rules on an investment property

Thanks for the questions, Priya. I’ll walk through each point so you can make an informed decision.

The account you’re referring to is the first home savings account (FHSA). If you contribute up to $8,000 this year and again next year, you can make up to $16,000 of tax-deductible contributions that may be withdrawn tax-free to buy an eligible home. That tax deduction can effectively increase the value of your contributions, depending on your marginal tax rate.

The Canada Revenue Agency requires that you “occupy or intend to occupy the qualifying home as your principal place of residence within one year after buying or building it” in order to use an FHSA withdrawal tax-free. That means a home you plan to live in but also partly rent could still qualify for an FHSA withdrawal, provided the property is primarily your residence and any rental use is secondary.

Can a rental property be considered a principal residence?

You can rent part of your home and still claim it as your principal residence, which would shelter the property from capital gains tax on sale, provided certain conditions are met:

• Your rental or business use is relatively minor compared with the property’s use as your principal residence.
• You haven’t made structural changes to tailor the property for rental or commercial use.
• You do not claim capital cost allowance (CCA) on the portion used for rental or business purposes.

CCA is the tax term for depreciation. While claiming CCA can reduce taxable income in the short term, doing so on a property you intend to treat as your principal residence can create complications later and may reduce or eliminate your principal residence exemption when you sell.

Be cautious: if the portion you rent out represents a large share of the home — for example, more than half the square footage if you live in the basement and rent the upstairs — you risk making some of the home’s future appreciation taxable.

Rental property income tax

Rental income must be reported and is taxable. You can deduct reasonable rental expenses from that income to arrive at net rental income. Typical deductible expenses include property taxes, utilities, insurance, condo fees, regular maintenance, and mortgage interest or line-of-credit interest used for the rental portion.

If you use part of a property for personal use and part for rental, you must prorate expenses based on a reasonable method such as square footage or number of rooms. The personal-use portion is not deductible.

Net rental income is taxed at your regular marginal rate, which will depend on your total income and province of residence. As a general guideline, many people see effective tax rates on rental income in the range of about 20% to 50%, depending on circumstances.

Do you need to create a business to operate a rental property?

No—you typically don’t need to set up a separate business to report rental income. Most landlords report rental income and expenses on their personal tax return. However, short-term rentals (for example, frequent Airbnb stays) can look like business activity rather than passive rental, and that can change how income is treated for tax purposes.

Short-term rental operations that generate more than a threshold amount of revenue may trigger GST/HST registration requirements. There can also be municipal rules, licensing, or additional levies that apply to short-term rentals. Depending on how the property is used and whether it’s ever treated as commercial, there may be GST/HST consequences on a future sale or if you convert the property back to full personal use.

When planning, add the following one-time and ongoing costs to your budget:

• Closing costs, such as land transfer tax and legal fees
• Financing costs, including mortgage loan insurance if applicable
• Furnishings, if you’re moving from a family home or need to outfit a rental unit
• Utility connection fees
• Minor renovations or repairs to prepare the unit for tenants
• Ongoing maintenance and periodic renovations
• Ongoing homeownership expenses: property tax, utilities, insurance and condo fees

Using all your savings for a down payment and borrowing to the maximum the lender allows can leave you “house rich and cash poor.” That can make it hard to cope with unexpected expenses or temporary income shortfalls, so plan for contingencies.

In short, the FHSA can be a useful tool if you plan to live in the home you purchase, even if you rent part of it. Rental income must be reported on your tax return and can create tax implications—such as partial loss of the principal residence exemption, GST/HST exposure for certain rental models, and ordinary income tax on net rental profits. Carefully consider how much of the property you will rent, whether you’ll claim depreciation, and your overall cash flow before making decisions.

Read more from Jason Heath:

• What can I hold in an FHSA?
• What expenses can you deduct when renovating a rental property?
• Will you make money on your rental property?
• Can you use the Home Buyers’ Plan to buy a foreign property?