Tax-Free Down Payment: Understanding the First-Home Savings Account

The First Home Savings Account (FHSA) could be invested in dividend stocks like Slate Grocery REIT (TSX:SGR.U).

| More on:
edit Back view of hugging couple standing with real estate agent in front of house for sale

Image source: Getty Images

The Federal government is stepping in to make home ownership a little more attainable for first-time buyers. The upcoming First-Home Savings Account (FHSA) is a tax shelter that can be used to accumulate a down payment. If you’re saving up to buy your first property, here’s what you need to know. 

FHSA basics

The new FHSA program is expected to launch in 2023. Any Canadian taxpayer over the age of 18 is eligible to open this account. To be eligible, you must also prove that you do not own a home currently and have not bought a property within the past four calendar years. 

Once the account is set up, you can contribute up to $8,000 to the account every year. This amount is deducted from your annual taxable income. The total cap for the program is $40,000. Unused contribution room cannot be carried forward. Also, the account must be shut within 15 years. 

If you use the funds to place a down payment for a home, the withdrawal is tax free. You can also defer taxes by transferring funds from the FHSA to the Registered Retirement Savings Plans (RRSP). However, if you withdraw the funds directly from the FHSA for any purpose other than buying a home, it will be taxed. 

Will this help?

When it comes to savings and investment, every little helps. The FHSA can be thought of as a supercharged Tax-Free Savings Account (TFSA) that is focused on first-time homebuyers. The annual contribution limit of $8,000 is certainly higher than the TFSA, and the program shares the same tax deduction benefits of the RRSP. 

However, the account may not be enough to buy a home. The average home price in Canada is $746,146 right now. You would need $150,000 to place a 20% down payment on a typical home. Even if you combine funds with a partner, the maximum you can accumulate in these accounts is $80,000 within five years. 

To close the gap, you need to invest your FHSA funds in growth stocks. 

Where to invest

While you wait to buy your first home, you can get some exposure to the real estate sector via real estate investment trusts. High-yield, low-risk REITs can boost your FHSA savings by a significant amount. 

Slate Grocery REIT (TSX:SGR.U) is an excellent example. The company owns and operates a network of grocery store properties across the United States. Most of these units are anchored by robust retailers like Wal-Mart and Krogers. These tenants are likely to pay rent regardless of economic conditions, which means the company’s earnings are secure. 

Over the past five years, Slate’s average annual dividend yield has been 9%. Right now, it’s closer to 6%. At that rate, you could boost your FHSA to $45,000 within five years. Robust dividend stocks like Slate could get your closer to your goal of homeownership. 

Bottom line

Canada’s upcoming FHSA program helps first-time homebuyers, but it may not be enough. Savers might need a high-growth or high-yield dividend stock to close the gap. Alternatively, they should hope for home prices to drop off a cliff!  

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool recommends Walmart Inc. 

More on Investing

woman data analyze
Dividend Stocks

These U.S. Stocks Are No-Brainer Additions to Your Portfolio

Buy these two no-brainer U.S. stocks if you want to gain exposure to international stocks in your self-directed portfolio.

Read more »

Value for money
Dividend Stocks

1 Value Stock Every Canadian Investor Should Own

This value stock not only has a solid present, but a stable future at incredibly cheap and even oversold prices!

Read more »

consider the options
Tech Stocks

Top 2 Beaten-Down Stocks I’ve Not Given Up on

The massive correction in the prices of these TSX stocks presents a solid buying opportunity at current levels.

Read more »

sale discount best price
Dividend Stocks

Passive-Income Alert: 2 Great Canadian Dividend Stocks Trading at Cheap Prices

TFSA investors can now buy top TSX dividend stocks at discounted prices for a portfolio focused on passive income.

Read more »

Growing plant shoots on coins
Dividend Stocks

Long-Term Investing: 2 Top Dividend-Growth Stocks to Power Your Portfolio

While many growth stocks remain under pressure in this environment, here are two top dividend-growth stocks to buy now and…

Read more »

edit Safety First illustration
Dividend Stocks

2 of the Safest Dividend Stocks on Earth Right Now

Royal Bank of Canada (TSX:RY)(NYSE:RY) is one of the safest stocks on earth, historically speaking.

Read more »

retirees and finances
Bank Stocks

Why You Can’t Rely on the Common Sources of Retirement Income  

Future Canadian retirees can’t rely solely on the common sources of retirement income. However, there are ways to convert savings…

Read more »

TFSA and coins
Dividend Stocks

TFSA 101: How Retirees Can Earn $407.50 Per Month Tax Free for Decades

Retirees can buy top TSX dividend stocks at cheap prices right now for a TFSA focused on passive income.

Read more »