The Ins and Outs of the First Home Savings Account (FHSA)
Financial Planner Ines Iraoui joins the podcast to discuss the new first home savings account (FHSA), including:
- What is an FHSA?
- Who can open an FHSA?
- Who is considered a first-time home buyer?
- What if I am a joint owner of a property and want to buy one alone?
- How does a FHSA work?
- Are FHSA contributions similar to those in an RSP?
- Are withdrawals from your FHSA similar to those in a TFSA?
- Where can I open an FHSA?
- When will the FHSA be closed?
- What if I opened an FHSA, and I decided that I didn’t want to buy a home anymore?
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Chris Cooksey: Hello and welcome to the Advantaged Investor, a Raymond James Limited podcast. A podcast that provides perspective for Canadian investors who want to remain knowledgeable, informed, and focused on long-term success. We are recording this on September 5, 2023. I'm Chris Cooksey from the Raymond James Corporate Communication and Marketing Department, and today our friend Ines Iraoui returns to the podcast. Ines is a financial planner and has been on the podcast many times before, including last year around this time to discuss RESPs. Today, Ines will shed light on the new first home savings account. Welcome back to The Advantage Investor Ines - I hope you had a great last long weekend of the summer.
Ines Iraoui: Yes. Hi. Thank you, Chris. Thank you for having me as part of the podcast.
Chris Cooksey: Awesome. Now I'm glad you had a good one because you know, like I said here in Toronto the EX closed down, the national exhibition closed down on Monday, so that's the unofficial start of fall here and I always get a little sad and of course, all the kids are back to school now. So our summer of fun ends and we move forward. Now you don't have to look very far or very hard to find articles that talk about housing affordability or probably more accurately stories about how unaffordable housing is for many, many Canadians. The most recent federal budget announced the creation of the first home savings account, or FHSA. The purpose is obviously to help new homeowners, so I thought we'd have you on to discuss it. How's that sound?
Ines Iraoui: That's right. Yes, absolutely.
Chris Cooksey: So let's just start with the big easy one. What is an FHSA?
Ines Iraoui: You actually just said it. The FHSA , first of all, I do find this acronym quite hard to pronounce, maybe it's because of my French background, I don't know. But like you said, FHSA stands for first home savings account. It is a new registered account introduced by the federal government. It is designed to help Canadians save money for their first home, and it is also an account in which you can invest the funds, right? It's not like a bank account where you just deposit them.
Chris Cooksey: So who could open these accounts? Anyone? Or if you've owned a home before, does that disqualify you? What are some of these parameters?
Ines Iraoui: There are requirements to be able to open an account. So you have to be at least 18, you have to be a resident of Canada. You have, so you have to be at least 18, but there's also a max age in a way, so you cannot not be more than 71 on December 31 of the current year or the year you will open your FHSA and of course you have to be a first time home buyer. So someone who owns a property cannot open an FHSA. It is also important to know that it's an individual plan, so it cannot be open jointly.
Chris Cooksey: Okay. Now I know with the first home buyers plan, the old one, which I assume still exists, is it that one still exists as well?
Ines Iraoui: It does still exist, and you can actually use it with the first home.
Chris Cooksey: I know there were some qualifications around how you can become a first home b first-time buyer if you haven't owned a home for a while and that sort of thing, so maybe just get into who's considered a first time home buyer for the FHSA.
Ines Iraoui: Perfect, and it, it's similar, actually it's the same for both. You shouldn't have owned a qualifying home in the current year and the last year before that. So what is a qualifying home? It's owning equity interest in a housing unit located in Canada. Basically, a house, an apartment that is in Canada in which you own equity. And let's say you did own one. We're in 2023. So let's say you owned one in 2018 and happened to sell it then After four years plus the current year, you can be eligible again as a first time home buyer if you didn't own any other property in Canada.
Chris Cooksey: Okay, now say I own a property with someone, but now want to buy one alone. Am I able to?
Ines Iraoui: No. Right, good question. Now you are considered a homeowner even if you own a property jointly or with someone else, and obviously cannot use the first time home buyers advantages. But also, this is a great question because there is a very important note, and I don't think is very well known. It's that a person is not, is not eligible for the FHSA if their spouse or common law partner is the homeowner of where they live. So So if the principal residence of the family or the couple is owned by one spouse, the other one cannot, is not even eligible for the FHSA, even if they're not a actual homeowner.
Chris Cooksey: Oh, okay. That's an important notification there. Now let's get into the nuts and bolts. How, how does this work? I assume it's similar to our other registered plans, which obviously are all slightly different, but probably all part of the same vein.
Ines Iraoui: That's right. So when an FHSA is opened, each year you can contribute up to $8,000. So it's an annual limit of $8,000, and there is a maximum lifetime limit for the plan of $40,000. So if you open one to this year, you can contribute a thousand, and next year, another eight, another eight after it. Year after year until you can reach the $40,000 limit of contributions. But because I said earlier that the account, it can be an investment account, so if the funds are invested and they grow the value of the account can be more than $40,000. And the income and the gains that are generated in that account, also growth tax free in the FHSA.
Chris Cooksey: So you can deposit up to $40,000, but then the growth is the growth and that doesn't affect the $40,000 basically.. Yeah. Okay.
Ines Iraoui: That's right.
Chris Cooksey: Now I heard there's a similarity to RRSP contributions, is that true? Or am I wrong?
Ines Iraoui: Yes, there are some similarities. Just so, just like in an RRSP, you can claim an income tax deduction for your contribution to an FHSA. So you know how in an RRSP you can contribute into it up until the first 60 days of the following year? The difference here is that you can only contribute up until December 31 of the same year, right? So I have until December 31, 2023 to claim it for my income of 2023. And also I did say it was an individual plan, so, unlike a spousal RRSP, only the account holder can contribute to their FSHA and claim the tax deduction on their income tax because in an RRSP, spousal RESPs exist and a person can contribute to their spousal RRSP to their spouse's RRSP In an FHSA you cannot do the same. So only the account holder can contribute to their own FHSA - you cannot contribute for your spouse's FHSA and claim the tax deduction on your own income.
Chris Cooksey: So I, and so that's obviously, it's different than our RESPs, where, I don’t know, grandparents or friends and family can contribute to the education as well. This one is on you.
Ines Iraoui: That's right. Yes. But it can, someone can contribute to another person's FHSA, but they cannot get the tax claim. The tax deduction. That's right.
Chris Cooksey: Yeah, that makes sense. Now, withdrawals, are they similar to RRSPs, where you get taxed on the withdrawal? Or are they similar to TFSAs where you get pre-taxed?
Ines Iraoui: Yeah, so they're I would say, A little bit of both, but more like TFSA. So I said before, the income and the gains that are generated in that investment account are tax free. And the withdrawals from an FHSA are not taxed, just like in a TFSA. There's also no maximum of withdrawal, just like in TFSA. But there are two types of withdrawals from the FHSA, so you have qualifying and non-qualifying withdrawals. A qualifying withdrawal would be used to purchase the home, so a down payment for the home. And when it's a qualifying withdrawal, you can absolutely withdraw it tax free. There is no limit to that amount. And that is where there is a similarity with the TFSA. But you can also withdraw money from your FSHA as a non-qualifying withdrawal, in which case you would have to pay taxes on that money.
Chris Cooksey: And that's because you're not using it to buy a house, which is the purpose.
Ines Iraoui: That's right. Exactly. So as long as you use it to buy a house, withdrawals are tax free.
Chris Cooksey: Okay, now where can I open this FHSA? I know we were pretty proud to announce recently that you can do it through Raymond James, but I assume we're not the only one.
Ines Iraoui: No, I would say all, all financial institutions across Canada can open an FHSA today in September 2023. And it is part of, you know, planning for your home ownership goals or like I said earlier if you. For example, we have clients that want to help their adult children towards their home ownership goals. They can open a an FHSA for their children. Obviously, I said earlier, you have to be at least 18. That's why I mentioned the adult children, right? So it is a great strategy to say for a down payment. And it can be used along with the HBP, the home buyer's plan, which is the first home buyers plan for the RRSPs And as mentioned earlier, the FHSA has a $40,000, you can, you can contribute up to $40,000 plus the growth, and in the HBP can withdraw $35,000, so that means there's $75,000 that you can withdraw towards a down payment with both programs.
Chris Cooksey: Okay. Now in terms of the FSHA, do they close? Like does the account close or how does that work?
Ines Iraoui: Yes, they do close. So it would be on the earliest of these dates. The first one is if the account has been open for 15 years, on the 15th anniversary, it will have to be closed. If someone turns 71, then the account again will have to be closed. And the year following, the first qualifying withdrawal. So when someone withdraws to buy the home, the year following that withdrawal, the account would have to be closed.
Chris Cooksey: Alright. Now if I opened an FSHA and I decided that maybe home ownership wasn't for me, I was actually talking to my son recently who's turning 21. I'm like, have you thought about this FHSA and he is like, yeah, I'm never going to own a own a home. It's sort of depressing to talk to him about that. Now, I hope that's not true. You know you decide you don't want to buy a home anymore, can you roll it up into anything? Roll it into our RRSPs? Or am I just being crazy?
Ines Iraoui: That's right. You can transfer the FHSA to an RRSP or RRIF, let's say someone turns 71 they can transfer their FHSA to their RRSP or RRIF tax free. And the transfer will also not impact the RRSP contribution room of that person, which is great. So it increases the value of the RRSP and, or also if someone wants to just take the cash out and use it for something else it would be considered as a non-qualifying withdrawal. And for those with kind of withdrawals, there is a tax So they can obviously take it as cash, but tax will have to be paid.
Chris Cooksey: The government's always going to get its money somehow. Right? Awesome. That's a lot of great information. I really appreciate you taking the time and I look forward to you joining us again in the future.
Ines Iraoui: Thank you very much, Chris. Always a pleasure.
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