The Withdrawal That Almost Counted as Income Twice

The situation

Angela had already been on the phone with her bank twice and her accountant once before she called our office, and none of those calls had gotten her anywhere. Her bank could confirm the account had been closed out but could not tell her what that meant for her taxes. Her accountant flagged the withdrawal as a potential problem but said the underlying rules were outside what he handled day to day and suggested she find someone who specialized in the area. Angela, a veterinarian who also owned two rental properties in Dunnville, was used to solving problems methodically, and the runaround was starting to wear on her.

The account in question was a first home savings account, opened two years earlier as part of a plan to buy a house with her partner Kenneth, a police sergeant, once their existing living arrangement no longer suited their growing family. The account had built up a meaningful balance through regular contributions, sheltered from tax the way the program intended, on the understanding that a qualifying withdrawal to fund an eligible home purchase would come out tax-free.

The purchase itself had gone reasonably well for months — an accepted offer, financing arranged, inspections cleared — until it collapsed during the closing process over a title issue connected to the seller's late father's estate. The estate, it turned out, had not been fully administered, and a dispute among the deceased's other heirs, a matter Angela and Kenneth had no part in and no visibility into, froze the sale entirely. By the time it became clear the deal was not closing, Angela had already withdrawn funds from her account in anticipation of the purchase, on the assumption the transaction would complete as scheduled.

With the purchase now dead and the funds already withdrawn, Angela was staring at a withdrawal that no longer matched an eligible use, and every call she made left her more confused than the last about what that actually meant for her taxes and whether there was still time to fix it.

The gap nobody had noticed

A first home savings account withdrawal is tax-free as a qualifying withdrawal when, at the time it is made, the account holder has a written agreement to buy or build a home with a closing or completion date falling before October 1 of the year after the year of the withdrawal, genuinely intends to live in that home as a principal residence within a year of acquiring it, and otherwise meets the program's first-time buyer condition. Those conditions are tested on the day the money comes out, not at any later point. Once they are satisfied, the withdrawal is locked in as tax-free, and unlike the RRSP Home Buyers' Plan, there is no mechanism that lets a taxpayer simply put the money back to undo a problem after the fact — but there is also nothing to undo, because a deal falling apart afterward, for any reason, does not retroactively change what already happened on withdrawal day. There is no separate test asking whether the buyer was stopped by something beyond their control; that question simply does not arise. Angela's accountant had flagged the withdrawal as a concern without explaining any of that, which left her thinking the fix depended on racing a deadline or proving what had gone wrong, when the real question had already been answered the day she withdrew the funds.

That was the first gap. The second surfaced once we pulled together exactly what Angela's situation had looked like on the day of the withdrawal itself. She had an accepted offer, financing in place, and inspections cleared — a written agreement to buy, with a completion date that fell comfortably inside the required window, sitting in front of her the day she took the money out. Nobody had gone back to confirm any of that on paper. Her accountant had reacted to the collapse of the purchase rather than to the state of the file on the day that actually mattered, and that reaction was what had put the wrong question in front of Angela in the first place.

The estate dispute among the seller's heirs, once we understood it, turned out to matter far less to Angela's tax position than everyone had assumed. It explained why the purchase had fallen through, but it had no bearing on whether her earlier withdrawal was tax-free, because that question had already been settled by the paperwork in place before the estate dispute ever became relevant. Angela had spent weeks treating the two problems as though solving one depended on the timeline of the other, when in fact they never touched at all.

Angela's earlier calls had each addressed half the picture, and both had pointed her the wrong way. The bank confirmed what had happened to the account without addressing the tax consequence. The accountant flagged the tax consequence without ever confirming what had actually been in place on the day of the withdrawal, leaving Angela believing she was racing a clock that, in reality, had already stopped mattering months earlier.

What we did

1. Pulled the original sale agreement, financing approval, and inspection records, rather than relying on Angela's recollection of dates. Because the tax treatment turned on exactly what was in place the day she withdrew the funds, we needed the documents that formally established that on paper — the accepted offer, the financing, the completed inspections — not Angela's general sense of how the deal had looked at the time, a distinction that mattered because an approximate memory would not hold up if the file were ever reviewed later.
2. Confirmed the completion date in that original agreement fell within the required window. Angela had reasonably but wrongly assumed her tax position depended on what happened to the purchase afterward; in fact, once the written agreement, her intention to live in the home, and her first-time buyer status were all in place on withdrawal day, the qualifying conditions were already satisfied and nothing that came later could change that.
3. Confirmed the estate dispute's own status directly with the seller's estate representative, not because it affected Angela's tax position, but because she and Kenneth still had real questions about their deposit and their options going forward. Separating that conversation clearly from the tax question stopped Angela from continuing to treat two unrelated problems as though solving one depended on the other.
4. Corrected the accountant's understanding of the qualifying-withdrawal rule directly, in writing. The accountant's instinct had been to treat the collapsed purchase as a reason to report the withdrawal cautiously as income; walking through the actual rule in writing made sure Angela's return reported it accurately as tax-free instead, rather than costing her real tax on money that was never taxable.
5. Assembled a complete written record of the state of the file on the day of the withdrawal. We gathered the accepted offer, the financing approval, and the inspection results dated before the withdrawal, because this was the record that established the qualifying conditions were already met when the money came out.
6. Documented the entire sequence of events in a written file memo, in case of a future review. Because the fact pattern involved two problems that looked connected but were not, we built a clear written record distinguishing the estate dispute's timeline from the withdrawal's qualifying conditions, so the reasoning would hold up if the tax authority ever asked questions later.
7. Advised Angela and Kenneth on their next purchase attempt, since Angela's FHSA participation could not be reopened. A qualifying withdrawal permanently closes the door on ever holding another first home savings account, so we walked them through saving toward a future purchase through an RRSP and ordinary savings instead, and through waiting for firmer closing certainty before treating any future withdrawal as final.

The outcome

No assessment was ever issued. When Angela's return went in for the year of the withdrawal, it reported the amount as a qualifying, tax-free withdrawal, supported by the written record confirming that the agreement, her intention to live in the home, and her first-time buyer status were all in place the day she took the money out. The collapse of the purchase afterward, and the estate dispute behind it, never actually entered into the tax question at all. Angela never had to argue her case after an assessment arrived, because the position was correct and documented before anyone at the tax authority had reason to look at it twice.

That result depended on going back to the day of the withdrawal itself rather than accepting the accountant's instinct to treat the collapsed deal as the trigger for a tax problem. Had Angela's return been filed the way her accountant was leaning — reporting the withdrawal as income out of caution, on the mistaken belief that the deal falling through mattered — she would have paid real tax on money that was never taxable to begin with, with no straightforward way to get it back.

Angela and Kenneth have since resumed their home search, more cautiously this time. Because a qualifying withdrawal permanently closes the door on ever holding another first home savings account, Angela is saving toward the next attempt through an RRSP and ordinary savings instead — a shift she says was one useful thing to come out of the file, alongside the habit it left her with of checking what a piece of paperwork actually says and when, rather than assuming a new complication must be reopening an old, already-settled question.

What you can learn from this