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Slip into something more comfortable and delve into personal finance with Josh Sheluk and Colin White, experienced portfolio managers at Verecan Capital Management. Each episode demystifies complex financial topics, stripping them to their bare essentials. From investment strategies and financial planning to economic headlines and philanthropic giving, delivered with a blend of insight, transparency, and a touch of humour. Perfect for anyone looking to understand and navigate their financial future with confidence. Subscribe now to stay informed, empowered, and entertained.
Verecan Capital Management Inc. is registered as a Portfolio Manager in all provinces in Canada except Manitoba.
Announcer:
You're about to get lucky with the Barenaked Money podcast, the show that gives you the naked truth about personal finance. With your hosts, Josh Sheluk and Colin White, portfolio managers with Verecan Capital Management, Inc.
Colin White:
Welcome to the next episode of Barenaked Money. Colin here with a very super special guest, Mitch. Hey, Mitch. Welcome to the podcast.
Mitch Silber:
Thanks for having me here today, Colin.
Colin White:
Mitch is in the Ontario region with our firm. He's been with us for a while here. And he's super keen. And we're excited to give him a shot here on this world-famous podcast. So today we're going to talk about First Time Home Savings Accounts or something. And just before we come on air, I was saying is there a special way to say that? Do we have to say FHSA? [inaudible 00:00:51]?
Mitch Silber:
It's a play on words, right?
Colin White:
Okay. Fair enough. I guess you'll have to explain that to me. I just hope that it's not like the TFSAs, which everybody calls it TSFA. Maybe we can keep this one straight, so... Maybe you can start by educating us on what these are. Can we start there?
Mitch Silber:
Yeah. Absolutely. So we've actually been hearing a lot on this in the news recently. I've been seeing it all over LinkedIn, Facebook, TV commercials. So I guess let's just go over the basics. The federal government created this new registered account type, as we just said, the First Time Home Savings Account, which is essentially to help prospective first time home buyers to save for their first home tax-free and help Canadians reach their vision of owning a home faster. However, similar to the RSP First Time Home Buyer Program, there is a caveat. There are certain criteria in order to be eligible. So as part of that criteria, again, similar to the RSP First Time Home Buyer Program, obviously you have to be Canadian, you have to be 18+, you haven't owned a home in the past calendar year or in the previous four calendar years and that your spouse hasn't owned a home as well. Additionally, with this type of account, you can make a maximum annual contribution of 8,000 and a lifetime limit of $40,000.
Colin White:
Yeah, but I think you missed the point of these accounts though, Mitch. The point of these accounts is for the Liberals to get more votes and get reelected. That's the purpose of these accounts. You seem to think it's about buying a house, but I thought it was about getting votes, but maybe, maybe buying houses. Maybe [inaudible 00:02:30]-
Mitch Silber:
I thought it was about housing affordability.
Colin White:
Well, yes, because that's how you make houses more affordable. You put more money into the system and don't increase the number of units. But I'm sorry. I'm just being a grumpy old man.
Mitch Silber:
You are, but lastly, just in addition, as a part of this program, so the First Time Home Buyer Savings Account, it can remain open for 15 years or until the end of the year in which you turned 71, similar to again, the RSP Buyers' Program, I will say there are a few benefits with this type of account. So similar to an RSP, you'll receive a tax deduction for the contribution that you make in the calendar year, and similar to a Tax-Free Savings Account, you can actually make withdrawals from the account tax-free. So that's a good benefit. And then lastly, unlike the first time RSP home buyer program, you do not have to pay the withdrawals over that 15 years. There's no repayment necessary. So I would say those are some key benefits to this type of account.
Colin White:
Well, yeah, I mean, the money comes out tax-free, which is the big deal, because the RSP Home Buyers' Plan, if you didn't put the money back into your RSP, then you would just gradually have to take that money into income over a period of time. So that's the big striking difference about this type of an account is that it is a tax-free withdrawal for the stated purpose if you get there, so... But what happens if you don't buy a house, Mitch?
Mitch Silber:
So if you don't buy a house, then you actually have the ability to transfer this money over to your RSP account and it will not affect your RSP contribution room available. So there's an added benefit from that sense.
Colin White:
So for the narrow few people out there who have maxed out their RSPs who are still working and have a desire for more tax deductibility and don't own a house, this could be used for an off-label purpose of putting more money into your RSPs. Is that part of what we're seeing?
Mitch Silber:
You're getting ahead of me. So there's two scenarios that I want to dive into. One scenario is related more to my peer group, in their early to mid-30s, and then another scenario is related more to your peer group, in the early 50s to late 50s.
Colin White:
Wow. Ageism. Okay. Fair enough.
Mitch Silber:
Not ageism. Just in terms of planning. As we know, part of financial planning is different life stages. So we're going to go over two different life stages. That's kind of how I want to think about this from this perspective, so-
Colin White:
Sure. I'll just sit here hurt. You can go on with your story.
Mitch Silber:
I still love you. So first scenario, a young couple, a husband and wife, they're great savers. Let's just say they each contribute the lifetime maximum into the First Time Home Savings Account, $40,000 each. They each receive the tax deductions, but they decided not to reinvest that into the Tax-Free Savings Account or their RSP. They plan to use it for discretionary spending. Additionally, they've each contributed $35,000 to the respective RSPs, also received the tax deductions, but again, decided not to reinvest those funds and use it towards discretionary spending. So combined between the couple for down payment, hypothetically, they have about $150,000 assuming no growth on these contributions.
And now again, what I talked before about housing affordability, now let's just say for hypothetical purposes, the home costs about a million bucks, your down payment is 150 from the funds you just saved, how does that help housing affordability? Because there's another factor that people always forget about mortgages. So the house is $1 million. You have $150,000 for a down payment. So now you'd have to apply for mortgage of about $850,000. Another caveat however, now you have to qualify for the mortgage. And as I'm sure we're all acutely aware, interest rates have risen quite drastically over the past 12 to 15 months. So now you have to qualify to even higher rates. So now just because you have this big lump sum of savings, they can be used towards your down payment. You still have to qualify. And then you also have to think about, "Can I still afford to live?" So again, how does this account type solve the housing affordability crisis in Canada?
Colin White:
I think it's important to keep it in its place. So I'm sorry. One more time for my benefit, as well as the listeners' benefit, what's the maximum amount you can put into a First Time Home Savings Account?
Mitch Silber:
So annually it's $8,000 and then lifetime, $40,000.
Colin White:
Okay. So let's just do the math. So you can basically tax defer $40,000. So if you're in a 50% marginal tax bracket, then that's basically giving you an extra $20,000 towards the purchase of a home. That's the net effect if you maxed out the usefulness of this account. So for somebody who is able to be that disciplined for that period of time and has an income at a level that attracts that kind of tax benefit, best case scenario, this is going to put an extra $20,000 in your jeans to buy a house. And if you're in a market where the houses are $1 million, I'm not sure $20,000 is going to make a whole lot of difference. But if you're in a market where housing prices are more modest, maybe $20,000 is important.
So my fear for younger users of the account would be that there's always a tendency or desire to get pulled along and stretch to buy a house that they could just barely afford and maybe over overstretch themselves a little bit because you can qualify to borrow more money in many cases than is really comfortable to owe. And so you can find yourself, the old expression, house poor. And you got to be a little bit careful about that. You don't want to put yourself in a position where you've locked yourself on a set of railway tracks where any small interruption in health, job, relationship, interest rates, anything is going to completely derail what you've done. So I think it's important for people to make sure they still behave prudently and give themselves a little bit of wiggle room even when they're using an account like this.
Mitch Silber:
So you agree with me then, that it doesn't solve the housing [inaudible 00:08:54]?
Colin White:
Yeah, [inaudible 00:08:55]. That was a really long way to say yes. I don't think it makes as much of a difference. I mean, for people who are looking at this and saying, "This is going to solve all the problems," best case scenario is going to put an extra 20 grand in tax savings in your pocket to do something with and for many people they're not going to be completely efficient with using this. So yeah, given the magnitude of the problem and what it cost to buy a house, I don't think it's going to solve much. But for those people who want to take advantage of every possible idea or way to make a difference, yeah, absolutely. I can't wait for the second scenario. [inaudible 00:09:28].
Mitch Silber:
So I want to stick with this scenario. So again, same scenario. Couple, great savers, have the ability to max out each the First Time Home Savers... Sorry. First Time Home Savings Account, still play on words for me, as well as max out their RSPs for the First Time Home Buyers Program. Now, let's say you have a couple who's unsure if they can even afford a house or maybe three years down the line they decided, saying, "Hey. A house is not for me," now again, I still think it's a great type of account where they receive the tax deductions, like you said, they're in the highest tax bracket, max out.
Now the question is in terms of investing, typically when a person would tell me that they're looking to buy home in the next three to five years, I would say, "Let's make sure that your principal's protected and we have minimal risk," because the reality is that you work so hard for your money, the goal is to preserve it but also grow it at the same time steadily. And typically a house is the largest purchase a person will ever make during their lifetime. So from an investment perspective, what do you say for people who are unsure if they want to buy a house in the next three to five years? To invest a bit more aggressively towards a longer time horizon? Or-
Colin White:
Well, it depends on your personality type for sure. So yeah, if somebody is, "Yeah, we're going to buy a house in three years' time," put it in a high interest savings account. Don't mess around. Just make sure the money's available for you. If it's more of an abstract goal, it's like, "I might buy a house," then you have a choice. You can lock it into a high interest savings account and get the 4 or 5% that's currently available out there and know that the money's available there for you and there's going to be... That's not a variable. That's locked in. The other way to play it is to take a bit more risk. And if you're not sure, invest the money long-term. Long-term investing typically will give you better rates of return over the long-term, but you're opening yourself up to the opportunity that we could see a market correction over the next two, three, four, five years. And we will. Sometime over the next five years, we'll see some kind of correction. So you'll watch the account drop in value.
Now, if you're the kind of person that says, "Well, but I want to buy a house. I want to buy a house. I'm just going to cash the account out," then that's probably not a good strategy for you. If you're the kind of person that says, "Well, market conditions aren't really great right now, so I'll let this account recover before I buy a house," if you are willing to surrender some of the control over the conversation, then maybe invest for the long-term, because clients who take money out when things are up and leave money in when things are down have more money to spend over the lifetime. That's not an easy thing to do because most people have priorities that they put ahead of where the value of an account is at any point in time.
So typically I would tell people, if you're going to spend the money in the next couple of years and you're pretty sure of it, leave it in the daily interest account. If you invest long-term, you open yourself up to the opportunity that that money could diminish in value significantly when you go to use it. And that's probably not a risk that's worth taking. If you have the money to do what you want to do, don't gamble. Just keep it in the daily interest account and do your thing. If you invest longer term, you open yourselves up to, yeah, the account could go down in value and/or you're not going to have enough money to do what you want when you want to do it.
Mitch Silber:
Yeah. No. I agree with you for sure. The other scenario that I thought about where I think this could be a great planning tool is the scenario is a retired couple in their late 50s, recently sold their home, decided to downsize to a condo and invest the leftover proceeds. And to continue with this scenario, they've maximized their RSP contribution room available. They have each maxed out their Tax-Free Savings Account. So these leftover proceeds have now been invested in a non-registered account. And the other caveat to this scenario is that it's been a few years and now they've met the eligibility criteria for the First Time Home Savings Account. So they have the opportunity to maximize the 8K annual contributions to this type of account. So now let's just say it's an additional five years later, they each max out the lifetime limit of 40K, as you mentioned earlier. Again, let's just assume they're in the highest tax bracket. They each get back a 20K tax deduction. And this account can be open for additional 15 years and then they can transfer the proceeds over to their account.
Colin White:
So a couple comments. Number one is it's still going to depend, as with all RSPs. It's a tax deferral, so you want to make sure the tax deferral still makes sense. Typically, you need to have a high tax rate at the time of contribution and expected in the future that you're going to have the same or lower tax rate. So that math still absolutely makes sense. The other thing is you're talking about an off-label use. This is not why the program was launched. So you could face an administrative change at some point in the future that makes that somehow a little bit less attractive because if it's seen as people are doing something with this account that was not intended or doing something with this account that's not helping to address the housing issue, that there could be an administrative change. So I would hesitate, and actually with this account in general, I would hesitate to make an eight year projection with it because it does open itself up to being changed. Every federal budget that comes out, they can announce an additional change to this.
Mitch Silber:
So I don't think that this helps the housing crisis or the affordability, but I do think that it's a great planning tool because the way I look at it, you get the tax deduction, you can then use that tax deduction or the money you received back and then use that to contribute to whether it's your TFSA the following year or if you have RSP contribution room available or use that towards discretionary expense that you have in mind.
Colin White:
Due to all of my spreadsheet friends out there, this is a great tool. You could spreadsheet the piss out of this and you could optimize and shave some nickels around the corners and have all kinds of fun with it. The only thing that's going to address the housing issue is more houses. So adding more money to make housing affordable is not going to fix the problem. It's nice that we're trying to help and the government's trying to do something, but really we just need to build more houses. But to Mitch's point, yeah, this is a planning tool. If you're going to keep track and if you're going to be trying to completely maximize everything you're doing, yeah, this is something. It doesn't seem... And maybe you can correct me if I'm wrong here, Mitch, there's no real down. There's no way you can really screw up. There's no way that you would suffer any kind of a penalty or potentially end up worse off for using an account like this?
Mitch Silber:
Yeah. I haven't read anything that would make me think otherwise. I just think that it's a great planning tool for, again, people in your peer group who have the ability and the excess cash or the non-registered accounts to be able to take advantage of this account type.
Colin White:
Yeah. And we are seeing now more of the firms are actually offering this account because, again, it's one thing for the government to announce something exists, but then it's up the industry to actually make these accounts available. So I think we're starting to see that open up going into next year, that there's going to be a few more providers offering this type of account. So yeah. No. I think it's a legit planning tool. The basic premises of planning on tax deferrals still apply. What is the tax rate you're putting the money in? And what's the projected tax rate of it coming out? If it's coming out as zero tax, then that's automatically good, but if it's going to potentially come out at another tax rate, you need to keep that in mind. And it also has the basics of what timeline are we investing for? Are we investing to have this money available, leave it in a daily interest account, or are we going to do something longer term with it and be willing to-
Mitch Silber:
You got ahead of me because in terms of investing, if you have a longer time horizon now and you have the willingness and the ability to take on risk, would you invest quite aggressively trying to achieve-
Colin White:
Completely depends on the individual. So, yeah, if you want to open yourselves up to the volatility of the markets... Because if this money is going to come out tax-free at some point for a home purchase, well, yes, the more money you make tax-free, the tax-free earnings just tastes better. So there's that kind of motivation. But I would suggest that anybody who takes part in one of these plans don't risk the purpose. Don't put yourself in a position that an investment loss is going to completely derail or wipe out your chances to buy a house. If you're going to take chances, make sure that there are chances in the margin that are not going to... Because I think it would be unnecessary for somebody who's sitting in a situation where they could potentially buy a house but then make it a investment decision that takes them out of the game. I don't think that that would be smart.
So whenever you're talking about the level of risk somebody has in their portfolio, it's like, "Okay. What's the downside here? If I suffer a 20% loss in this account, does that mean I won't be able to afford to buy any house?" And if that's the case, then I would suggest very few people would want to put themselves in that situation.
Mitch Silber:
One thing that I haven't read and not entirely clear on is for those individuals who are contributing to this account type and who decide that they no longer want to purchase a home, but don't want to transfer these funds tax deferred over to the RSP, what the penalty will be for withdrawing the funds, have you read anything?
Colin White:
I have not read, but I would intuit that it just becomes a taxable withdrawal.
Mitch Silber:
I know it becomes a taxable withdrawal, but the question is at what rate?
Colin White:
Well, and this is when these new programs come in... I'm not even sure that if you read all the literature that they would have all of that. That's the kind of stuff that's going to become available over the next little bit. Yeah. I'm comfortable enough that the worst case scenario, you move it in theo RSP and then you have to pull it out at the current tax rate. So if it's eligible to be moved to RSP, I don't think it's going to be another one like the RESPs that have an additional tax payable and growth if it's withdrawn for non-education purposes. I don't think they're going to do that because otherwise they wouldn't have made it rollable into an RSP, which would just attract normal taxation.
Mitch Silber:
That's a good point.
Colin White:
But that's common sense.
Mitch Silber:
That's common-
Colin White:
That's assuming it moves in a straight line and sometimes it doesn't, so... But I would be careful. I mean, for somebody who is a good saver, who has a spreadsheet, who's tracking everything, this could be something that helps optimize. And those kinds of people who typically have the ability to roll things into an RSP fairly quickly or easily also would avail themselves of that. This really is a planners tool. This is for people who really take their shit seriously. [inaudible 00:20:48]-
Mitch Silber:
So we both agree that that's a great planning tool then, this new account type is great?
Colin White:
It can be. All tools can be great. I mean, a hammer can build a house or it can be a murder weapon, depends on how you use it. So I think that it is a tool that could be used for good. You think it's going to revolutionize saving for a home?
Mitch Silber:
That's a good question. I think it will make people think more about saving for a home and think about saying, "Okay. Let me try to maximize the $8,000 annual limit and get the tax deduction." But on the flip side, they might say to themselves, "Will this even make a significant impact in even trying to purchase a home?"
Colin White:
Well, I think for some people, it'll put some structure around the conversation because some people are saving towards buying a host, but it's kind of a nebulous thing. They may or may not have an account set up for it. And it's kind of an ad hoc thing. So this is a specific account type that you have to specifically go and open that is specifically for a certain purpose. So it's kind of forcing some structure around it.
Mitch Silber:
I think there's structure around it, but I think the challenge more specifically for my peer group is liquidity. So typically people want to have access or want to at least know that they have access to these funds. And then the follow-up question becomes... Just again for pure access purposes, doesn't make sense to max out my TFSA a first and then once that's maxed out, then start to look at the First Time Home Savings Account.
Colin White:
Well, but then it comes into a whole conversation about priority of goals because TFSAs, you get no tax break on the way in, but longer term, they can be as effective or more effective than RRSP for building long-term retirement wealth. So they don't have the upfront hit that these accounts have. So I think that TFSAs have a role in most people's financial plan at some level or another. It's a matter of prioritizing, "Here are the five things I want to get accomplished and here's the percentage of my disposable income on a monthly basis I'll put towards each of these goals."
Mitch Silber:
So I agree with everything that you're saying. I guess what I'm trying to emphasize is the mindset. So you mentioned structure, discipline, but the challenge is that for people want to know that they have immediate access to these funds and if you contribute these funds to your First Time Home Savings Account, yes, you get the tax deduction, you get the tax break, a great account type, but they know that if they put it towards their Tax-Free Savings Account that they have more peace of mind.
Colin White:
Yeah. And that comes with balancing everything. So I mean, one of the basic tenets of financial planning is to have an emergency fund, so that there's no short-term emergency that's going to show up, that you need a new fridge, need a new roof, need to get a car repair, that you're looking to your other accounts to get that money. So you should either have money sitting in your checking account or you should have a short-term savings account or the ability to take on debt to pay those kinds of things depending on the circumstance.
So any longer term goal that you set out to achieve needs to as a matter of process make sure that the short-term functioning of your financial world is not impaired. You don't want to say, "I've got $5,000 in savings that I'm keeping on hand in case something goes wrong. I'm going to put that into this." Well, you just change the purpose of the money. It's gone from being short-term, easily available money to something that's a longer term goal. So you no longer have the short-term money. And that's a shift in your planning and you need to be aware of what that is doing to your financial situation. You've made it more fragile when you get rid of short-term liquid money. You've made your financial situation more fragile. It's more likely there's going to be an event that's going to cause you to have to make some lifestyle choices.
Mitch Silber:
I agree with you completely surprisingly.
Colin White:
I know you're sitting there waiting to disagree with me and I'm waiting for you to disagree with me as well because I'm so old, I can't possibly understand what the younger generation is going through. But no, I think you're onto it. This is a tool and it's a tool that needs to be properly used and understood, and I think there's enough out there that I won't call it benign.
Mitch Silber:
I think another scenario I just thought of right now can be a great planning tool is for parents looking to help their children out in terms of a down payment for a house. So to my understanding, there are no attribution rules. So if a parent gifts their child $1000 a year annually, take advantage of the count, there's no attribution rules back to the parent. Money can be invested however-
Colin White:
Well, yeah, I mean, it would be tax-deductible in the kids' names. Now parents, be careful. The number of times in my career I've seen this kind of stuff go sideways because the parent all of a sudden stops stops agreeing with the plan the kids are making or there's matrimonial issues between the child and their spouse and the animosity that kicks up. So just be careful. Don't have too high. When you give somebody money, it's best to just treat it as a gift and walk away. That's absolutely the best. But yeah, it could be used in that way, but it'll still be an account in the child's name. The parents wouldn't be able to go in and take the money out or have [inaudible 00:26:21] -
Mitch Silber:
No, it's still be an account in the child's name, but I guess what I didn't elaborate on is that let's say the child doesn't have that excess cash flow to max out the First Time Home Savings Account and the parent would like to help their child purchase a home. Well, then this, we're going over the tax deductions before, the child may be in a lower tax bracket, but again, you're still getting that tax deduction government and potentially helping being able to afford a modest home.
Colin White:
No. Absolutely. Absolutely. As with many things in life, many things, I used to say all things, but I now say many things, there's a place and time for this. Now, I think it'll be interesting to see, and it's only going to come out of having a whole bunch of real-world conversations with real-world people to figure out where it actually fits in the zeitgeist as far as how much it's going to be used, how often it's going to be used. And I think that there's a whole bunch of moving parts to that that it'll be interesting to watch it play out. Maybe we should diarize doing a retrospective on the FHSA accounts in five years' time just to dig into them to find out how they actually were used.
Mitch Silber:
Five years? I'm more interested in what's going to happen next year at this time.
Colin White:
Well, next year this time, we could have a new government who comes in and wipes out the program altogether and has a better plan for housing. Who knows?
Mitch Silber:
Also a good point. Who knows?
Colin White:
We forget that, again, just before the Liberals got in power this time, the Tax-Free Savings Account contribution limit was $10,000 for a year, and there was a change in government and they rolled it back right away. So again, these programs do change from year... And this is the value of having a financial advisor or financial planner going through your stuff with you, because at every moment in time, you should take a look at where your priorities currently are, where you are on the path to accomplishing all your various goals and the best way to use all the programs that are out there to your advantage, but recognize that doing a five-year projection is probably pointless because many of these programs can change over that time. And I guarantee you that your objectives are going to change over that five year period. You're going to have different priorities. Everybody does as they grow.
Mitch Silber:
Absolutely.
Colin White:
Life is going to throw things at you.
Mitch Silber:
Not going to agree more.
Colin White:
So have you exhausted all of your bullet points, Mitch?
Mitch Silber:
I've exhausted all of them for now, Colin, but we're going to have to revisit.
Colin White:
Can't wait to hear the comments. So if you have a comment there's something we didn't talk about or something you want us to explore, then by all means, reach out. We do take requests. We have done many podcasts based on requests. So feel free to reach out. But until next time, this is Colin and...
Mitch Silber:
Mitch.
Colin White:
Thanks for tuning into Barenaked Money. Like and Share. And hope we're going to hear you again soon, or hope you hear us again soon.
Speaker 4:
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