Transfers out of your FHSA
Not every way out of an FHSA is a withdrawal. Direct transfers move property between plans without immediate tax consequences, but only to certain destinations, and only if the transfer is done directly between institutions. Getting this wrong is expensive: a transfer done the wrong way is taxed twice over in effect, once as an FHSA withdrawal and once as a new contribution that uses room.
Direct transfers that are tax-free
| Destination | Tax treatment |
|---|---|
| Your RRSP or RRIF (you are the annuitant) | Tax-free if it is a direct transfer and you have no excess FHSA amount; it does not use RRSP deduction room or FHSA participation room. Use Form RC721. |
| Another of your FHSAs | Tax-free as a direct transfer, without reducing your FHSA participation room. Use Form RC721. |
| Designated transfer to your RRSP or RRIF | If you have an excess FHSA amount, a designated transfer (Form RC727) can eliminate the excess without being included in income. |
The direct-transfer rule
A direct transfer is completed directly between the financial institutions of the two plans. You must not withdraw the property yourself and contribute it to another plan: those transactions are not a direct transfer. If you do it yourself, the FHSA withdrawal is taxable income for the year, and the amount becomes a new RRSP contribution that reduces your unused RRSP deduction room and can create an RRSP excess. The same applies in reverse: you cannot move money from your FHSA to your TFSA by direct transfer at all. To put FHSA money into a TFSA you must make a taxable withdrawal and then make a new TFSA contribution, which uses TFSA room.
Transfers that are not allowed directly
Direct transfers out of an FHSA can only be made to your RRSPs, RRIFs, or other FHSAs. They cannot be made directly to a TFSA, a registered pension plan, an RESP, an RDSP, a pooled registered pension plan, or a specified pension plan. Any amount moved to one of those plans is treated as both a taxable FHSA withdrawal and a new contribution to the receiving plan. If you have an excess FHSA amount at the time of a transfer to an RRSP or RRIF, the maximum you can transfer without immediate tax consequences is the total fair market value of all property in your FHSAs minus your excess amount; anything above that is a taxable withdrawal and a new RRSP contribution.
The no-home route, done properly
If you reach the end of your maximum participation period without buying, ask your institution for a direct transfer of the whole balance to your RRSP or RRIF on Form RC721, and close the FHSA once the transfer is complete. Done this way, there are no immediate tax consequences and no RRSP room is used, so the FHSA effectively becomes extra RRSP room you never had. Done by withdrawing and re-depositing yourself, the same money is taxed as income and eats RRSP room.
Sources: Canada Revenue Agency, Withdrawals and transfers out of your FHSAs (direct transfers, Form RC721, excess limits, prohibited destinations).