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How to get the most out of the First Home Savings Account (FHSA)

If you're in the market to buy your first home, you'll soon be able to open a First Home Savings Account to help you get there — tax-free!

Canadians will have a new savings tool at their disposal when the tax-free First Home Savings Account (FHSA) launches on April 1, 2023 (according to the federal government’s latest update). Here's what we know about the new tax-free First Home Savings Account and how physicians can tap into its benefits.

What is the FHSA?

The proposed FHSA is a savings account that combines the best features of a registered retirement savings plan (RRSP) with the best features of a tax-free savings account (TFSA). Canadians who are at least 18 years old and who qualify as first-time homebuyers will be able to open an FHSA and contribute up to $8,000 in the first year.

After that, they'll get another $8,000 in contribution room each year, for a total of five years — giving them a lifetime maximum of $40,000 in FHSA contribution room. Unused contribution room is automatically carried forward and can be used later.

How the FHSA works

The FHSA will work a bit like an RRSP, and a bit like a TFSA. FHSA contributions will be tax-deductible, just like RRSP contributions. And, like a TFSA, you'll be able to withdraw funds tax-free — though, unlike a TFSA, only provided that the funds are used to purchase your first home.
Contributions will be invested in much the same way as they are in an RRSP or TFSA. That means you'll be able to park your FHSA contributions in cash, GICs, stocks, bonds, mutual funds, and exchange-traded funds (ETFs). You will then be able to keep the FHSA open for up to 15 years or until the end of the year that you turn 71, whichever is earlier. Funds held in your FHSA that aren't used to buy a first home will be transferrable tax-free into an RRSP or registered retirement income fund (RRIF), or you'll be able to withdraw them as taxable income.

Can the FHSA and Home Buyers’ Plan be combined?

Yes, individuals are allowed to use both the FHSA and the HBP (which allows first-time homebuyers to withdraw funds from their RRSP to put toward a down payment) simultaneously. Note that the HBP requires you to return the money you withdraw to your RRSP or have it treated as taxable income — whereas the funds withdrawn from an FHSA to buy a home doesn't have to be repaid. 

How physicians can use the FHSA

Physicians, on average, attend school for longer and graduate with more debt than the average Canadian. That often means renting for longer, especially in the more expensive real estate markets in Canada.

The FHSA will offer an ideal way for physicians to begin saving for a first home, while receiving a valuable tax deduction for their FHSA contributions. They can then invest those funds in a risk-appropriate portfolio and withdraw the funds tax-free when they're ready to purchase a home.

What about physicians who are further along in their careers and already own a home? Another benefit of the FHSA will be offering you a way to help your young adult children save for their first home.

We'll now look at two brief case studies to show you how physicans can get the most out of the new FHSA when it launches.

Case study 1: A young physician getting started in Vancouver

Susan Haney is a new family physician practising in Vancouver. Her husband, Geoff, is an account manager at a local marketing firm. Together they rent a two-bedroom apartment in Mount Pleasant, near Susan's clinic, for $2,500 per month.

Susan wants to buy a first home but understands how challenging it is to find something affordable in Vancouver. She's feeling anxious about her financial situation, as the other doctors in her social circle seem much further ahead than she is.

Their MD Advisor* mentions the new First Home Savings Account as a tool designed for first-home buyers to save a down payment. Together, they come up with a five-year plan to maximize their FHSA contributions, buy a home and stay in the area they love.

Both Susan and Geoff will open FHSAs as soon as the account launches in April. They'll each contribute $8,000 before the end of 2023 and receive tax deductions for those amounts. They'll invest the funds in a mix of GICs and short-term bonds, where they hope to achieve annual return of around 4%.

Each year from 2024 to 2027 they'll contribute the $8,000 maximum — reaching the maximum of $40,000 in 2027. Assuming a 4% annual growth rate, they'll each have $43,331 — $86,662 in total — available tax-free to use toward a first home purchase.

They find a two-bedroom, two-bathroom townhouse for sale at $950,000. Susan and Geoff withdraw their FHSA funds, plus another $23,338 in cash savings, to put down $110,000 on the property and take out a mortgage of approximately $866,040 after Canada Mortgage and Housing Corporation insurance fees.

At an interest rate of 4.4%, their monthly mortgage payments are $4,744 — nearly 90% more than their previous rent payment. But with Susan now five years along in her practice as a family physician and her student debt nearly behind her, as well as Geoff moving up to a senior account manager position, the couple feels more at ease that their mortgage payments won't impact their ability to live a good life and save for retirement.

Case study 2: Established physicians want to help son buy a first home

Vikram and Vinaya Singh are practising physicians in Etobicoke, Ont. Their son, Arjun, is 20 years old and lives at home with his parents while attending the University of Toronto.

One of Vikram and Vinaya's priorities is to help set Arjun up for success. That's why they committed early on to fully fund Arjun's post-secondary education and support him as he starts his career, hopefully as an engineer.

They reach out to their MD Advisor to ask about ways to support Arjun's financial journey. They wonder if they should help fund Arjun's TFSA while he's in school and not earning an income. They're also concerned about house prices in the Greater Toronto Area and want to know the best way to help Arjun buy a home when he's ready.

Their MD Advisor suggests they wait for the FHSA to launch. When it does, they can ask Arjun to open an FHSA and then gift him $8,000 to make a contribution. They'll continue to provide $8,000 in financial support for the next four years for Arjun to max out his lifetime FHSA limit.
Their MD Advisor explained that while Arjun may not be ready to buy his first home at 24 or 25 the funds invested inside the FHSA can continue to grow tax-free for up to 15 years after opening the account.

So if Arjun waits until he's 30 to buy his first home, his FHSA portfolio will have had an additional five years to grow and compound tax-free. If we assume his $40,000 contribution grows to $43,331 by the end of five years (the end of the contribution period) and then grows by another 4% annually for five more years, Arjun will have a total of $52,719 to withdraw and use toward his first home purchase.

Arjun, rather than his parents, gets the tax deductions for his FHSA contributions, and can wait to use those deductions at a later date when he is in a higher tax bracket (just like with an RRSP).

Final word

Once it’s available, the new FHSA will be an excellent savings tool for physicians to use toward a first home or to help adult children or grandchildren save for their first home.

The FHSA acts as an RRSP–TFSA hybrid, providing a tax deduction on contributions and tax-free withdrawals when used for a first home. Unused funds can be transferred tax-free into an RRSP or RRIF without needing additional RRSP contribution room or withdrawn as taxable income.

Watch for this new account to be available at MD sometime in June, and contact your MD Advisor to add it to your savings toolkit.

*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.