FHSA with Aaron Hector | E106
The First Home Savings Account.
On today's episode, Jason Pereira is going to talk to Aaron Hector about Canada's newest registered account, the FHSA - The First Home Savings Account. Aaron Hector is a private wealth advisor for CWB Wealth. He works primarily with individual clients and family direct client relationships.
Episode Highlights:
01:48: The First Home Savings Account (FHSA) is a new type of registered account announced by the federal government in 2022. An FHSA is designed to help you save for your first home, tax-free. Like a registered retirement savings plan (RRSP), contributions to an FHSA will be tax deductible.
02:30: Aaron talks about the restrictions in the FHSA account. You can put up to $40,000 in your lifetime. But you can only put $8000 per year.
03:07: Jason explains how housing is a bigger concern in Canada than in US.
03:52: One of the things that always happens when new accounts come out is that invariably people don't understand the rules.
05:14: If you don't own a home or your spouse doesn't own a home, then you are eligible for the FHSA account as long as you are a Canadian Resident.
06:40: Aaron talks about the penalty and additional expenses associated with the FHSA account.
09.26: Before opening the FHSA account it is extremely important to read the small prints, eligibility criteria and guidelines, says Aaron.
11:05: If you start with making fresh contributions to your FHSA, maybe you marry someone who has a house already, that's hour on buying a home for whatever reason that homeownership gold doesn't come to fruition.
12:38: There is a lot more nuance than people are giving credit to the FHSA account, says Aaron.
13:15: You got 15 years from when you first opened the account up to December 31st of that 15th year, and you have two choices one are you can always just anytime you can take your money back and you can make a withdrawal. But if you get to the end of the 15-year timeline and you don't want to take the tax hit by withdrawing all the money then you shift it over into your RRSP and you push the tax.
15:22: You could look at again going into your RRSP and then just deferring that tax, says Aaron.
16:59: You can make a withdrawal so long as you have a purchase agreement to close on a home and government gives you a lot of lead time. In theory you could be January 2024 with the closing date of September 2025.
18:44: You can name a beneficiary successor holder, so successor Holder can only be your spouse or common law. If you pass, then your spouse assumes the count as an FHSA, rather than just liquidating the account and getting the money, but on the beneficiary side, this is interesting.
20:50 There are a bunch of wrinkles in FHSA and it's still new and will probably see some legislative changes when some of these realities start to come to bear.
22:04: As per Jason if he had FHSA, he would use that option to roll it over into a rift.
22:58: If you have to be a first-time home buyer when you open the account the only other time that it makes a difference is when you try and make it tax free.
24:49: If you had money in it's like how you get a double deduction so you get a deduction when you make an RRSP contribution and then the same money you could in theory withdraw through the home buyers plan.
27:14: High income earners looking to buy in the short term probably do make sense because the deduction versus the credit, the caring cost. People near the lower bracket make absolutely no sense because they will probably save as much tax as they do in carrying costs.
3 Key Points:
To open an FHSA account you need to be a Canadian Resident, not a Canadian Citizen. You have to be at least 18 years old, and you can't be older than 71.
Aaron shares few horror stories of kids in trust for accounts going sideways. He also shares the nuances and concerns of people that one should be aware of.
If you name someone who's not your spouse, as a beneficiary of your FHSA they get the money, but they pay the tax too. The tax leaves the original account holder not dealt with in the final tax return of the deceased. The beneficiary pays the taxes, so it's kind of the opposite tax treatment.
Tweetable Quotes:
"FHSA works both as an RRSP and a tax-free savings account." - Aaron
"FHSA is almost like the HSA in the US. The health savings account and it's tax deductible." - Aaron
"The timeline for FHSA is really the same timeline as an RRSP 1871 and you need to be deemed a first-time home buyer." – Aaron
"For someone who maybe doesn't have a lot of spare cash, that's a way to use the FHSA program without making kind of brand-new contributions." – Jason
"If you know for whatever reason, you can't contribute to both RRSP and FHSA throughout the course of the year, contributing to the wrong one makes a lot of sense, but it's still limited to 8 grand per year. "- Aaron
"If I do an RFP transfer cause maybe that's what I want to do, then I don't get 40, I don't get an additional deduction." – Aaron
"I am not big in putting money in the hands of young adults until they've proven that they can handle it." - Aaron
Resources Mentioned:
Full Trancript:
Jason Pereira: Hello and welcome. Today on the show, I have a repeat guest, Aaron Hector, who's come on to talk about Canada's newest registered account, the FHSA, the First Home Savings Account. Uh, and we'll get into how it works and why I'm not a fan shortly, and with that, here's my interview with Aaron. Aaron, thanks **** time.
Aaron Hector: Hey, Jason, thanks for havin' me.
Jason Pereira: My pleasure. Now, you've been here before, but for those who didn't listen to your, uh, your master class on old age security, tell us a little about yourself and, uh, what it is you do.
Aaron Hector: Sure, so I am a financial planner. Uh, I work with, uh, a firm called CWB Wealth. I work primarily with individual clients and family, direct client relationships I guess you could say, uh, in a financial planning, estate planning, tax prep, that kinda capacity, and then our firm also provides, uh, other services to kinda overlay the, the, the total offering to our clients.
Jason Pereira: Yeah, excellent, so brought you on today, uh, to talk about, uh, the newest registered account that we have even though there's not an R in front of it. Anything that's registered with the government's a registered account. The First Home Savings Account, so let's start off by talking to, talking about what it is.
Aaron Hector: Sure, so the FHSA is a **** designed to help people save for buying, buying their first house, so it pulls characteristics from both an RRSP and a TFSA essentially, so when you make contributions, you get a tax deduction on the front end, just like an RRSP. Following that, you can invest the money for up to 15 years, but up, really, up until the point you buy your home, all the investment return through that time period, through the holding period, is totally tax-free, and if you do ultimately buy a house, it comes out as a withdrawal tax-free as well, so you can kinda see how it operates both as an RRSP and a tax-free savings account, and there's, there's certain restrictions on how much you can put in. Uh, so you can put up to $40,000.00 in your lifetime, but you can only put $8,000.00 per year.
Jason Pereira: Right, so 8,000 a year gets deducted, gross tax sheltered, comes out tax-free. It's funny, when they named this thing, uh, the FHSA, I was, like, they pretty much, uh, it's almost identical to the HSA in the US, the Health Savings Account, in it's ta, in it's deductible, and it's tax-free, only they use it for health care not for housing, and course, they threw –
Aaron Hector: Hmm.
Jason Pereira: – an, uh, F in front of it, so it's, it's very **** American listeners, it is very similar to FHSA, to an HSA, except for the fact that we get our health care paid for, you don't, and housing's a bigger concern here than it is there. If you don't believe me, take **** look at a ****. Anyway, so, so basically that's the, that's the crux of it. Now, I will take a diatribe here and say this is my least favorite account ever because it coulda been, the same thing coulda been accomplished by expanding the RRSP limit and changing the Home Buyers' Plan, and we would have no need for the administration of a new account, and also, accessibility and affordability are two separate things. This does nothing for affordability. It does help accessibility, but that will potentially just add more pressure to pricing. Anyway, that's my diatribe, so let's talk about the, uh, things to be aware of ****, right? So this is, like, a TFSA, RRSP, investing's the same, no other catches there, right?
Aaron Hector: Yeah, yeah, the same investment options, uh, within the account. That's, that's true.
Jason Pereira: Now, one of the things that always happens when these new accounts come out is that invariably people don't understand the rules, open them when they shouldn't, fund them in ways they shouldn't. Let's talk about what happens and what people need to know about so that they don't go sideways on this or go wrong on this and what the penalties are. So, so first off, who's eligible for this?
Aaron Hector: Sure, so you need to be a Canadian resident, not a Canadian citizen, Canadian resident, which is, uh, important not to confuse those. Uh, you have to be at least, uh, 18 years old. Uh, you can't be older than 71, so the timeline is really the same timeline as an RRSP, 18 to 71, and you need to be deemed a first-time home buyer, which, uh, the definition on that isn't really that you've never owned a home. It means that in the current year or in the prior 4 years, you haven't owned a home that you're actually living in, so if you're a renter, but you also own a rental property, that's actually fine. It, it depends on where you live, and, and I guess one more thing on that, you get captured also if your spouse or common-law partner owns a property that you're living in as well, so it doesn't have to be your direct ownership. It could be a connected ownership in that way.
Jason Pereira: Yeah, that was a loophole in the original legislation is that basically looked like spouses who, who weren't on title were gonna be able to, to use this for a second home, right?
Aaron Hector: That's right.
Jason Pereira: Um, but luckily, well, luckily, depending on how you **** feel about it, it's, uh, it's basically, it's not a case anymore, so, so bottom line is, is that if you don't own a home or your spouse doesn't own a home, then you are eligible for this as long as Canadian resident. Keep that in mind. I once had a nonresident client contributing to a TFSA. That did not go over well with CRM, so you gotta be livin' here. Okay, so that's who's eligible for it, and also, you mentioned renter. Now, you said, uh, uh, renter. Uh, basically I can have, uh, owned one in the past, and then as long as I haven't owned one in 4 years, then I basically can do it. Now that said, so people won't get confused, you only have 40,000 in lifetime room, right? I can't go doing this twice, like, buy a house, use this –
Aaron Hector: Yeah.
Jason Pereira: – buy a house –
Aaron Hector: **** one time.
Jason Pereira: Yeah, one time, so –
Aaron Hector: One time per ****. That's correct.
Jason Pereira: Exactly, so bottom line is you're only getting 40 grand in room total over your lifetime. Okay, so let's also talk about funding this. 'Kay? So **** penalty side for this, so let's say I, I open one of these things up, and I'm not eligible. What happens?
Aaron Hector: Right, so basically when you're found out, I'm confident you would be found out, the status of that account as being a First Home Savings Account would be revoked back to the date of your account opening. The result of that is that any deduction that you would have received is gonna get pulled back. Any income earned in the account is gonna get taxed for the year that you earned it, so think, uh, maybe, maybe it's a couple years until you figure out. You're gonna have to go backwards, report income on prior year returns. Uh, there could be some interest and penalties associated with that as well. I haven't seen anywhere where they actually apply, uh, like, a specific penalty other than the change in the taxation. The other thing, we, we haven't touched on this yet. I'm sure we will, but there's some kinda sideways transfer opportunities between registered accounts, so you can take money that's currently inside your RRSP and move that into your FHSA. You don't get a second deduction for that 'cause you already got one when you first made your RRSP contribution, but it does let you ultimately take money out of your FHSA tax-free, so for someone who maybe doesn't have a lotta spare cash, that's a way to use this program without making kinda brand-new contributions, but the reason I bring this up is in the situation where you shouldn't have opened a FHSA to begin with, and the status has been revoked –
Jason Pereira: Mm hmm.
Aaron Hector: – if you had transferred money from your RRSP into your FHSA, they're also gonna go back and ding you on that and deem that to be a taxable RRSP withdrawal, so the, the, those –
Jason Pereira: ****
Aaron Hector: – are kinda the, the main repercussions there.
Jason Pereira: And that's, uh, that's punitive, right? So, uh, is it a taxable withdrawal in the year you made it or is it taxable withdrawal in the year they, they discover it?
Aaron Hector: Uh, pretty sure it's the year that you made it.
Jason Pereira: Yeah, so, I mean, whatever tax savings you had, which is 53 percent or 50-ish percent **** grand, I mean, these are, these are $8,000.00 contributions, right, so won't get that huge, but, you know, you get, you get dinged with a $20,000.00 tax bill because you put money into an account that you shouldn't have, uh, no one's having a good day that day.
Aaron Hector: No, that's right.
Jason Pereira: Good stuff, so, so yeah, so –
Aaron Hector: **** so Questrade is the first –
Jason Pereira: Questrade is the first **** start off **** in Canada.
Aaron Hector: And –
Jason Pereira: ****
Aaron Hector: – you know, outta curiosity, I, I was, uh, I decided I'm, I was gonna go through the application process. Now, I own a home, so I was never gonna actually click that final button to submit it, but I was curious as to what that was gonna look like, and I was shocked by the fact that there was nowhere in plain language, uh, in any easy-to-understand way where they outlined what the eligibility criteria was so that again, Canadian resident, age 18 to 71, first-time home buyer. All they did was in a list of very small print, uh, it was, like, the second from the bottom bullet point, they referenced, uh, a specific part of the Income Tax Act to say confirm your ****, your eligibility. I mean, how many people do –
Jason Pereira: ****. Mm.
Aaron Hector: Yeah. Who's gonna, who's gonna get that far to actually read that, and if they even read it, are people gonna understand what they're looking at? So it was just surprising.
Jason Pereira: Uh, it's, uh, not that surprising. I mean, I also hope some of these institutions, although I doubt it 'cause I know how old their systems are, put in basically bumpers. Like, don't allow people to make, uh, more than $8,000.00 contribution, right? That's –
Aaron Hector: Yeah.
Jason Pereira: – that's, that's the concern, right? So, so yeah, so, uh, bottom line is, what you're saying is the first, the first vendor, I'm sure they won't be the only ones who don't take ownership over the due diligence to making sure that you are absolutely eligible and make it caveat emptor, but the reality is, is that it's gonna be very easy to run afoul of this, of this qualification rule if you don't read the small print, and you don't know for sure that you're exal, you're, you're eligible.
Aaron Hector: Yeah, that's right.
Jason Pereira: Um, okay, so, all right, so we covered what happens when it goes wrong, and of course, when it goes right, it's straightforward. You take it out to basically buy your house, right? Now, let's talk –
Aaron Hector: Yeah.
Jason Pereira: – about funding this. I can always make a contribution, but I can also transfer money from an RRSP; is that correct?
Aaron Hector: That's right. Yeah, so again, if you, if you don't have a buncha just free cash lying around, but you do have, uh, like, maybe over the prior years, you've just been plowing all your savings into an RRSP, and then all of a sudden, there's this new account, uh, that you wanna take advantage of, but you just don't have the free cash to do it, and maybe you have a, a home purchase that's on the horizon. Well, now, you can basically get money out of your RRSP tax-free by going sideways, RRSP to FHSA, and then making a qualified withdrawal that way, so it's, it will help some people, I guess, who maybe don't want to use the Home Buyers' Plan because they don't want the repayments.
Jason Pereira: **** version of the backdoor Roth. Course, it has to do with housing. Uh, so yeah, so exactly, we'll be able to move that over, which is good, um, and especially if, you know, for whatever reason you can't contribute to both throughout the course of the year, contribute to the wrong, wrong one, makes a lotta sense, but it's still limited to 8 grand per year, right? I can't just go from, I can't just transfer 40 over from my RRSP.
Aaron Hector: Yeah, that's right, and, and if you do take money out of your RRSP to move it over, that does **** all of a sudden create more RRSP room. You know –
Jason Pereira: Yes.
Aaron Hector: – you kinda had your one shot to put it in your RRSP, and, and that's all you got. Now, you can, you can also go the other direction, so if you start with making fresh contributions to your FHSA, ultimately, you know, maybe you just –
Jason Pereira: **** someone who has a house –
Aaron Hector: Yeah.
Jason Pereira: – already, right?
Aaron Hector: Yeah.
Jason Pereira: Yeah.
Aaron Hector: Yeah, **** on, on buying a home or whatever reason –
Jason Pereira: Yeah.
Aaron Hector: – that home ownership goal doesn't come to fruition, ultimately the rules allow you to ship the money into your RRSP, kind of a tax-neutral basis, and then just to leave it in your RRSP until years down the road in retirement, you, it comes out as a regular RRSP or **** withdrawal.
Jason Pereira: Well, let's also face it. I mean, it's interesting because the, for someone who has no intention of buying this thing, a renter, right, they've just been handed $40,000.00 deductible room now that no one else is gon, that buyer, that owners don't.
Aaron Hector: Absolutely, yeah.
Jason Pereira: Yeah, and if anything, I would argue maybe the smarter move for them is to contribute to the, the FHSA first before an RRSP because the RRSP room will carry forward, and they could always catch up in the future in lump sums, whereas the 8 grand per, per year cap is much more limiting.
Aaron Hector: That's right. Yeah, I would agree with that, um –
Jason Pereira: Yeah.
Aaron Hector: – that sequence as well.
Jason Pereira: But I would say that it is unfortunate, though, that the, going back to your statement earlier about the fact that if I shift money from my RRSP to my TF, or to my FHSA, that counts as RRSP room not FHSA room, and if I now take money out, I'm never gonna benefit from that increased deduction amount.
Aaron Hector: Mm, yeah, yeah.
Jason Pereira: Yeah.
Aaron Hector: I think –
Jason Pereira: Yeah.
Aaron Hector: – ****. Yeah.
Jason Pereira: Yeah. I mean, it's ****. I think, yeah, if anything, it, uh, it's, it's unfortunate. Those who don't have the money at a time, they had the money earlier but not now, they basically are, uh, are gonna be denied of, of 40,000 worth of actual, uh, contribution room, which is unfortunate.
Aaron Hector: Yeah.
Jason Pereira: But, uh, so, uh, I mean, uh, it's, so there's, the thing is, is that there's a, there's a lot more nuance than people are, are giving credit to this thing, right? I mean –
Aaron Hector: Oh, there's so –
Jason Pereira: ****
Aaron Hector: – so much nuance I, I tell you. Yeah. There really –
Jason Pereira: Yeah.
Aaron Hector: – is.
Jason Pereira: I mean **** like people listening here must have been like wow, you're kidding me, like, first off I could easily screw this up, maybe I'm eligible, maybe I'm not, people aren't gonna tell me I'm not eligible, and I could get penalties for that and then it all gets reversed, and I pay tax and then if I do an RRSP transfer, 'cause maybe that's what I wanna do, then I, I don't get 40, I don't get an additional deduction. I lose that going forward, and it's, so let's also cover what happens if I never buy a house, right? If I never buy a house, uh, how long can this thing stay open?
Aaron Hector: Right. So you've got 15 years from when you first opened the account, well, up to the, to the, December 31st of that 15th year, I guess, and you have two choices, I guess, one is you can, you can always just, anytime, you can take your money back, you can make a withdrawal and if you're, if it's not, kind of, in combination with the home purchase, uh, it's not gonna come out tax free, it's gonna come out as a taxable withdrawal, but you do always have that choice but if you get to the end of the 15-year timeline, and you don't want to take the tax hit by just withdrawing all the money, then you shift it over into your RRSP, and you push the tax down the road. Fair enough?
Jason Pereira: Yeah. So I mean it becomes effectively for anyone who's not gonna buy, it's an effectively a new RRSP 40K altogether, really. Now, the, that's for people who get to that age. The, the 15 year was an interesting one 'cause I feel like it's, it, it's probably enough room for most. I mean I can already see that and already had clients inquire about this, about their kids, who are like 18 opening these things up or gonna be 18 opening these things up, which is, which is true and do-able, right? Which we'll get into one of the dangers of that in a second but that gives them until they're about 33, right?
Aaron Hector: That's right.
Jason Pereira: There are plenty of people I know, who for various career choices and what not, wouldn't buy their house for, for, at 33 for the first year. I mean, like, I think the people I know were in academia, right, like they, they basically did undergrad with their graduate degree and then basic –, worked for a little bit and then went back to, went back to do a, a PhD and when you're, when you're doing a PhD you're kind of nomadic for a while, right or, or sorry when you've done the note in PhD you're kind of nomadic trying to find a university that's gonna take you in for a long period of time, so I feel like we're gonna have, in 15 years' time, a bunch of people who are, you know, not at, not the majority of the population but a big se – but a segment who are gonna be forced to make that decision because hey, it, the clocks ran out.
Aaron Hector: Yeah, and, and I would say that that's even more true in your neck of the woods or Vancouver, Victoria areas than in Calgary where I am, just because of general affordability.
Jason Pereira: Absolutely. Absolu – I mean yes, so even if they're not, even if they're just like average– to low-income earners in their –
Aaron Hector: Yeah.
Jason Pereira: – career choice, right, like building up –
Aaron Hector: ****.
Jason Pereira: – to buy that –
Aaron Hector: It's just gonna take a while.
Jason Pereira: So and what happens, I mean, and, and if they basically miss that 15-year cutoff, it'll probably lead to deregistration and a full taxation of that amount.
Aaron Hector: Yeah. Yeah. Exactly or, or, or I guess you just, you could look at, again, going into your RRSP and then just deferring that, that tax and then maybe I guess the saving grace is that as of now, you can still participate in the home-buyer plan.
Jason Pereira: Yeah, you can do both and for – you know, that's a $35,000.00 loan from your house that you have to pay back over 15 years, sorry, from your RRSP but, I mean that's assuming that people catch the fact the 15-year clock ran out, right, like –
Aaron Hector: Yeah.
Jason Pereira: The question is how much leeway and grace are they gonna be given?
Aaron Hector: I don't know. ****.
Jason Pereira: This is **** I wonder about.
Aaron Hector: Yeah. Yeah.
Jason Pereira: I mean it's a problem for 15 years from now but, nevertheless. Now, let's talk about, I said there's, there's reason maybe why you wouldn't want to give an 18 year old 8 grand a year into an account. I don't know about you, but I'm not big in putting money in the hands of young adults until they've proven that they can handle it. Ever, you, I'm curious, you have any horror stories of kids in, in Trust 4 accounts going sideways?
Aaron Hector: Mm, not yet, luckily enough I, it hasn't come across my desk, but I, I know there's plenty of risks there. Yeah, I, I haven't had any, haven't had any, you know, 18 year olds demanding access to money in, in Trust 4 accounts or anything like that, up, up until now.
Jason Pereira: Neither have I, but I've, I've seen it happen elsewhere, uh, at least **** not my practice but so just what we're alluding to is at the end of the day, you give your kids 8, you give your kids money to put in that account –
Aaron Hector: It's theirs.
Jason Pereira: – it's theirs and in addition to that, I know people say well, yeah, but it's from my advisor, you're advisor can't legally tell you about it after 18, if they do that's a privacy violation, and your kids got their head, that's the reality of it and so it's theirs, like I always say, never, never put a penny in their hands until you're ready to see it disappear.
Aaron Hector: Yeah, that's a very good point.
Jason Pereira: Yeah. Yeah. So what other nuances or concerns should people be aware of and worried about?
Aaron Hector: So, so one thing, just timing is pretty important when you actually do buy your house. So you, you can make a withdrawal, so long as you have a purchase agreement to close on a home, and they give you a lot of, a lot of lead time here. They give you until October of the next year, so in theory you could be January 2024, with a closing date of September 2025 and like I've never seen a purchase agreement that extends that far but that, that's the possibilities that we're talking about but on the side where you could maybe make a mistake is if you are rushing and it's, it's a quick sale, and you get possession, and the funding of it is, is maybe an afterthought, like you got other, other sources. If you wait longer than 30 days after you've closed, you're no, no longer eligible for a tax-free withdrawal. So there's, there's a lot of stuff going on in your life at, in those moments. I mean, geesh, you're working with a mortgage broker. Lots of people know how stressful that can be. Movers packing up all your stuff, you know, getting, getting new place rekeyed. I mean there's so much going on, if you weren't, like, strictly relying on this money for a down payment or something, it might just slip through the cracks and then you're, you're more than 30 days after, and you've lost your opportunity, like, that, that's one that I think will happen to people and aw, it's gonna be, it's gonna be rough.
Jason Pereira: Well, yeah, exactly. I mean the timing, ooh. Yeah 'cause I mean you might not be looking for that money to be used specifically for the down payment, right? It's simply the, all the additional costs that go with it, right; to renovate something, to buy furniture, moving is my single, least favorite thing in the world to do, and I gotta tell ya that, that is, that is very easy to slip by 30 days, like very easy, so –
Aaron Hector: Thirty days ****.
Jason Pereira: – it's a difficult one, it's a difficult one.
Aaron Hector: Yeah.
Jason Pereira: So.
Aaron Hector: Another nuance is just on the estate side, so you can name a beneficiary, successor holder. So successor holder can only be your spouse or common law but, um, and, and that's probably the, what you want to do so that if you pass then your spouse assumes the account as an FHSA rather than just liquidating the account and getting the money but on the beneficiary side, this is really interesting, very surprising that they set this up. Most people are familiar with how beneficiaries work with RRSPs, so if, if it's not your spouse, the named beneficiary, they get the full-market value of the account, and the tax is dealt with by the deceased, on the deceased's final tax return. So there's a mismatch of –
Jason Pereira: Yeah.
Aaron Hector: – the money goes one way, the tax goes the other way, um –
Jason Pereira: This happens all the time when people leave an RRSP behi – to one kid and something else to another kid and now they think it was, like, they were both were 250, uh uh because now the estate, that other kid has to clear, has the tax bill for that one kid's 250, so.
Aaron Hector: So if you name someone who's not your spouse as the beneficiary of your FHSA, they get the money, but they pay the tax, too. The tax leaves the original account holder, not dealt with in the final tax return of the deceased. The tax is paid by the beneficiary, so it's kind of the opposite tax treatment here. I think that's gonna throw people for a loop when they're doing –
Jason Pereira: It's a weird one.
Aaron Hector: – their –
Jason Pereira: – because it could very well be that the tax situation is worse, right? It could very well be that someone, you know God forbid, a, a young adult basically whose got this in there, leaves it to their parents, parents in prime-earning years and now suddenly, the tax bill on the estate would have been 20 percent, and it gets taxed at 53 or 55, whatever promise they're in, –
Aaron Hector: Yeah.
Jason Pereira: – that is, yeah, I mean from an admin standpoint, I kind of get it being a little bit easier, and it'll prevent – you just traded one estate problem for a different type of estate problem.
Aaron Hector: But now you have to consider which way is which, so if just, –
Jason Pereira: Yeah.
Aaron Hector: – it's one of those things, it's a wrinkle.
Jason Pereira: Well, that's interesting because if you then in turn just default to the estate then suddenly you're back to the original treatment of an RRSP, and it's, well it's gotta be probated, sure but at the same time now, you may actually, it might be a tax advantage to leave it to your estate. It's just a weird one to say.
Aaron Hector: Yeah ****. Mm hmm, that's right
Jason Pereira: Yeah, no, there's, there's a bunch of wrinkles to this, and it's still new and probably see some legislative changes when some of these realities start to come to bear, so yeah. So any, any last thoughts of, uh, big things we should be aware of?
Aaron Hector: Well, how nitty gritty into, like, weird stuff do you wanna get?
Jason Pereira: Let's get weird.
Aaron Hector: Okay. So the, there's just some situational things you could look at. Like you could even look at this account from a income-splitting standpoint. There's really no attributions, so if, if you gift your lower-income spouse money, they invest it in their FHSA, ultimately, it could come out tax free if you buy a house but if you don't and it's taxable, it's taxed to them. All, all the income earnings over that period of time goes back to **** –
Jason Pereira: Goes back to the original contributing spouse.
Aaron Hector: Yeah, it, to the, to the, it – there is no tax attribution, so you can, kind of, just, just –
Jason Pereira: Oh, sorry. It, it's, it's the owning, the spouse that owns it, not the contributor?
Aaron Hector: Yeah, there is no attribution here, so –
Jason Pereira: Huh, so that is, that's interesting 'cause normally other situations it would go back to the contributing spouse, so you're non-income-earning spouse, in theory, –
Aaron Hector: Yeah.
Jason Pereira: – I mean, yeah, I mean it's an **** case because, like, odds are you're probably gonna use the place to buy a place –
Aaron Hector: Correct.
Jason Pereira: – but if not, then you've just found a way to move from high income, high tax to no tax. Hmm.
Aaron Hector: Correct. Yeah. Uh, for, for older people to, if you went, um, – say, say you're 64, between 65 and 70, if I put money in my FHSA, I'd have that option to roll it over into a, into RRIF; I'm 65 and over, I make a withdrawal from my RRIF, all of a sudden, 50 percent of that withdrawal becomes eligible for income splitting, so again there's $40,000.00 over 5 years that you could look at splitting, so you, you kind of off – you get the deduction for 40,000, your spouse ends up taking half of that as income when it's withdrawn, so, again there's a couple, ****, there edge cases, but there's some income-splitting opportunity here, depending on how important that is to, to your situation and yeah, so this is a, this is just a weird one. I was talking to someone on Twitter about this today, actually, but the way that they've set this up is the only times that really matter for you to be a first-time home buyer is one, when you open the account, so you would have to be a first-time home buyer when you open the account. The only other time that it makes a difference is when you try and make a tax-free qualifying withdrawal, okay. So let's just think about that. If you are 2 years into this and you buy a home, but you don't do the tax-free withdrawal, you can keep your FHSA account open, continue –
Jason Pereira: Right.
Aaron Hector: – to make further contributions, even after you become a home owner and then, eventually you, you move it into your RRSP, right? So it's like so weird that they've **** this.
Jason Pereira: Ooh, that is ****. I've got one. I've got one for, another one for you, right? So first off, again, that is a loophole that needs to be closed down, right? It should be based on –
Aaron Hector: Oh, yeah, I agree.
Jason Pereira: – contribution. Now, here's the other piece of this. In theory, you could buy a place, keep the account, sell the place, wait 4 years, buy another place and then make the withdrawal. Now, I mean –
Aaron Hector: You could.
Jason Pereira: – that sounds a little bit farcical but let's not forget that some people get relocated a lot for work, right? And maybe they're, in some cases, – well, we'll look at own, some members of my own family who basically got moved to the U.S. for a period of time and **** for the U.S. but you know, got moved some place for a period of time, company was willing to basically put a floor into the value of their home for sale and pay for all the moving costs 'cause they were an executive, so, and they weren't sure how long they were gonna be there but in theory, in a situation like that, it would basically work out fine or like they, they would be able to, you know, I'm, this is not gonna be our forever home. We plan on moving back to wherever it is, they'd be able to use it, so that is, that, that one's less of a loophole, right? It's moreso the continued contributions while you're there, that is a big loophole.
Aaron Hector: Yeah, and I, I have not, I've looked, I haven't seen a single thing that would restrict you from doing that, so just really peculiar.
Jason Pereira: That's gonna be a tax **** at some point. So yeah, it's like, that is a peculiar one.
Aaron Hector: The other thing, I was talking to you off, offline, uh, a couple days ago, and you called me a money launderer 'cause I, I thought of this idea where –
Jason Pereira: What?
Aaron Hector: – if you had money in your R – it's like how do you get a double deduction?
Jason Pereira: Yeah.
Aaron Hector: So you get a deduction when you make an RRSP contribution and then on the same money, you could, in theory, withdraw through the home-buyer's plan, it's in your bank account, then you take that money, deposit it into your FHSA, get a second deduction –
Jason Pereira: Yup.
Aaron Hector: – and then withdraw it through the FHSA program, tax free, two deductions on the same money. You could then take that money –
Jason Pereira: That's gonna be ****.
Aaron Hector: – and pay off your home-buyer's plan, if you wanted to. I mean it's, it's, –
Jason Pereira: Yeah.
Aaron Hector: –it's kind of a weird one.
Jason Pereira: It's a weird one. I mean like here's the thing, these are edge cases, and the reality is that the vast majority of people are gonna use it for the intended cause. Uh, I do believe that the contribution loophole is a, is a weird one that really needs to be closed but otherwise, everything else, I think, has a bit of an inherent flexibility to it. Let's also discuss one last topic before we, before we finish up and that's, what happens to American citizens? One of my favorite topics. Um, –
Aaron Hector: ****.
Jason Pereira: – **** with these things, sorry people.
Aaron Hector: So no deduction. I can't see you getting a deduction ****.
Jason Pereira: On your U.S. tax return, yeah.
Aaron Hector: Right. No chance on your U.S. taxes. I would expect your, you'd have to be careful what you invest in, so **** likely to be an issue, would be my guess, um, –
Jason Pereira: Same rules **** with taxable accounts?
Aaron Hector: Yeah. Yeah. They're not gonna consider this in the same way that they do as an RRSP, I, that's gonna take –
Jason Pereira: No ****.
Aaron Hector: – it'll take like 25, 30 years for them to recognize it. So the, that'd be the main thing, I guess. If, if you ex-patriot and you leave Canada, you're no longer a resident, uh, make a withdrawal, you're gonna have your withholding, your non-resident withholding tax issues, maybe not issues **** –
Jason Pereira: Well, all the income every year, too, will be taxable, right? And then it'll, it'll likely require trust filing. So now we're back in the **** –
Aaron Hector: Like a TFSA.
Jason Pereira: It's like a TFSA. Now, that's not to say you shouldn't use it, right, like, and I've published on this before, look, it's a cost benefit, right, like cost is – it's gonna cost you a couple hundred bucks to file a return, it's not taxable in the U.S., but it's not taxable in Canada, but it is taxable in the U.S. but odds are you probably already have enough foreign tax credits, so you're not gonna pay a penny on it, so it's really the filing fee is the big issue. A filing fee on an $8,000.00 account of $200.00 is a pretty substantial incremental cost. On $40,000.00 it's still a pretty substantial incremental cost, right, so –
Aaron Hector: Mm hmm.
Jason Pereira: – I don't know that it makes sense for anyone who is looking to buy in the short term because –
Aaron Hector: I would, I would totally agree with that, yeah.
Jason Pereira: Yeah. Well, I'll, let me refrain that. High-income earners looking to buy in the short term, probably does make sense 'cause of the deduction versus the credit, the carrying costs, people knew the lower bracket makes absolutely no sense 'cause they'll probably save as much in tax as they do in carrying costs.
Aaron Hector: Yeah.
Jason Pereira: Yeah.
Aaron Hector: Maybe, maybe there's some **** merits if you were thinking about holding it for 15 years, at the 40,000 level, but I don't know, it, it's a complication, it –
Jason Pereira: Yeah, it's, uh, yeah, I mean like we don't, we don't even open up our TFSAs for clients until they're probably well north of 50,000 in room, **** costs and it's like, well, we're not gonna add and MER or, you know, it's like I always say, it's like adding another measurement expense ratio, with kind of a couple of percentage points on it, not worth it.
Aaron Hector: Yeah. Yeah, that's fine.
Jason Pereira: Yeah. So Aaron, thank you so much for your time. I appreciate this. Where can people find you if they want to learn more about your stuff?
Aaron Hector: Uh, you can follow me on Twitter, Aaron Hector CFP. I'm on LinkedIn, but my corporate website has my bio, too, uh, CWB Weld.
Jason Pereira: Excellent. And like, just like myself, Aaron does his best damage on Twitter. Anyway, thank you so much for your time.
Aaron Hector: Yeah, thanks Jason. Cheers.
Jason Pereira: So that was today's episode of Financial Planning for Canadian Business Owners. Hope you, uh, enjoy that, and I hope you understand that this very simple looking account actually has a lot of complexities. It is very easy to go sideways, so use it when you qualify. Be careful with it when you are looking to take money out. Make sure you do it right. Get the right advice, and I will unfortunately say in this case, the right advice is gonna be hard to find right now because it's so brand new but give it time, by the time you probably go to – if you start one today and looking to buy in a few years, I'm sure we'll worked out these bugs but, uh, be careful. As always, if you enjoyed this podcast, please review on Apple Podcast, Sound Cloud, Stitcher, Spotify or wherever is your podcast. Until next time, take care.