Advantages of the FHSA

Ashleay: Welcome to the “In Your Interest” podcast. My name is Ashleay and this week Sébastien and I are accompanied by our colleague Pablo Carrera, Regional Sales Director, who will join us to discuss the end of the year. And, you know, I think it's the right time to talk about FHSAs. What do you guys think?

Pablo: Absolutely, yes. Thank you for having me. Always a pleasure to be back.

Sébastien: It's always a pleasure to have you, Pablo. And here we're going to be talking about interest rates and the housing market. Two of my favorite topics, of course. And you know, Ashleay, we've been discussing since last June, I think, the Bank of Canada's decisions to start cutting interest rates. We've made lots of progress already, and we think that there is more to come by the end of the year and in 2025. And of course, with lower interest rates comes the question, well, will that just perk up the housing market again? So, if you have lower interest rates, it costs less to buy the same house. So, of course, that means that there's going to be more buying and selling activity, so higher prices overall. And so, we're back into this conundrum of how can we help Canadians purchase their first home. The mistake that we've seen in 2021 and in 2022, when interest rates were low, was that some households, you know, they just bought houses that were maybe too expensive for their means. And when you buy a weekly term or a monthly payment, then maybe you're buying something that is too large for your needs. And then after that, well, when interest rates start picking up again because of the economic cycle or inflation, then you find yourself with some difficult choices. So again, the solution might be to buy a little bit smaller, buy a smaller house, just thinking about your ability to pay if interest rates rise by 4% or 5% like we've seen in the past. But also one solution, and an obvious solution, is to have more money saved for a larger down payment. And then you can have, you know, an easier process to purchase your first house. And this is where the FHSA comes into play here. So, Pablo, you're here to help us understand the dynamics of this program.

Pablo: Absolutely. Yes. So, the First Time Home Buyers Savings Account, the FHSA, is really designed to help with the down payment or the accumulation of the down payment for the purchase of the home. Obviously, it's a program that is added on top of other existing programs like the Home Buyers’ Plan. The idea behind the FHSA is to be able to put aside up to $8,000 per year in this account. Now, obviously those contributions are tax deductible—and we'll talk in a minute about the importance of that aspect— but up to $8,000 per year, a lifetime maximum of $40,000, and the plan can be open for up to 15 years. Now, there are certain conditions to having an FHSA. One of the more important ones is this notion of eligibility. Because it's designed for the first-time home buyer, there are some eligibility requirements that need to be met, both at the time that the account is opened and at the time that the withdrawal is made. For example, when the account is open, you cannot have been a homeowner during the current year or the previous four calendar years. Now, at the time of the account opening, that condition also extends to your spouse. So, if the spouse was a homeowner in the current year or the previous four years, that invalidates the person from having an FHSA or being able to open that type of account. That condition is lifted when it comes time for the withdrawal. At the time of the withdrawal, only the account holder is subject to the eligibility requirement. The spouse is no longer subject to that requirement at that point. So there are little conditions, and sometimes seen as little traps, that a client needs to be aware of in order to navigate through all the advantages of the FHSA. And obviously, that's what we're trying to clarify today.

Ashleay: Hence the advisor role that we need you guys.

Sébastien: Yeah, exactly. We need advisors. And you say there are some traps, but there are also some opportunities if someone helps you use the program to its utmost.

Pablo: Absolutely. So for example, in some of the advantages or the opportunities, as you say, the ability to be able to set money aside in a tax-free environment and having that money grow tax free. The FHSA does not impose any limits on the withdrawals like the Home Buyers’ Plan does. So one of the main features is that $40,000 that I spoke about earlier as a maximum, that $40,000 can grow over time. And if it becomes $45,000 or even $50,000, you are able to withdraw that entire amount tax free. There is no limit on the withdrawal, only limits on the deposits. Another one of the advantages or the opportunities is the fact that you don't need to refund that money, as you do with a Home Buyers’ Plan. The FHSA is designed as a withdrawal without the obligation of paying that money back. And it can absolutely be used in conjunction with the Home Buyers’ Plan. And when you think about a Home Buyers’ Plan that has a withdrawal limit of up to $60,000, and an FHSA that could allow for $40,000 or maybe $45,000 or even $50,000, you're starting to talk about $100, $110, $120,000 available for one individual. As a couple, you can put aside over $200,000 as a down payment for a home! That's starting to move the needle. And obviously, we're talking about ideal conditions, but it is possible.

Sébastien: Yeah. In the intro, Ashleay, you mentioned that it's time to talk about the FHSA now, before the end of the year. So this is one of the important differences with the RRSP: the difference between the two in terms of contributions that can be made in the first 60 days of the year for the RRSP—the first 60 days of the following year, which is even more important, whereas the FHSA, it's by the end of this year. So there's a risk here if you don't plan accordingly.

Pablo: Exactly. So the FHSA does combine some of the features of an RRSP with the features of a TFSA. One of the main features regarding the dates is the fact that in a RRSP situation, you do benefit from the first 60 days of the following year. Any contributions done during that time can be allocated to your income from the previous year. That is not so with an FHSA. Your deadline contribution date is December 31st of the actual year, so obviously you can carry forward contributions that have not been made to future years. But if you want to get a deduction, you need to make the contribution in the current year, and you cannot do so in the subsequent 60 days of the following year.

Sébastien: And if you want to help your kids purchase their first house, there are some strategies there that are interesting as well.

Pablo: Absolutely, yes. In a scenario where an FHSA cannot be done either as a joint program or as a family program, there is nothing that prevents a parent or a grandparent from basically giving the money to their child or grandchild, and in so contributing and helping them to become first time homeowners. Obviously, the contribution will be made in the name of the child. We'll be using the limits of that child, and the child will take the deduction. But it's still a way for the parent or grandparent to help out. And so, in that regard, these types of programs, obviously they're designed more for the first time homebuyer, but it's also very important to let the other family members, the other generations know, because it's an opportunity for them to be able to help out.

Ashleay: And are there any other things that we should know about the FHSA?

Pablo: Yes, actually, quite a few. For example, you're able to carry forward any contributions that have not been maximized from previous years. I mentioned before there's an $8,000 per year limit. However, in order to be able to carry forward any unused contributions, the account must have been opened. Another interesting feature if you were to contribute the full $8,000 in one year, you have the option of not using the entire amount as a deduction for that year, so you can carry forward deductions indefinitely in time. There are little tricks like that that you need to be aware of. And that's where some advice comes in very handy.

Ashleay: Absolutely. And if you can go above that famous 5% too, you know, if you can make a bigger contribution, a bigger deposit, when you're buying your first home, you know, you can save mortgage insurance right there. So then again, you're putting it directly onto your house instead of paying insurance for your mortgage. So, the FHSA is a beautiful and flexible additional tool. You know it increases your tax-sheltered savings, and buying a home is probably one of the most important projects of our lives. So, I would suggest you contact your financial advisor to help you make the best choices with your situation and your needs. And so that concludes this week's episode. Thank you once again, Pablo, for sharing your knowledge and helping us understand more clearly. And thank you, Sébastien as well.

Sébastien: Thank you Ashleay. Thank you Pablo. And once again, I think we demonstrated the importance of having good advice.