Owning a house in Canada has become unaffordable due to the rapid growth in house prices during the pandemic. The Justin Trudeau government introduced the First Home Savings Account (FHSA) to make the Canadian housing dream come true.
You can start saving for the down payment on your first home and also save on tax with the FHSA. You can contribute as much as $8,000 in 2023 and deduct this amount from your 2023 taxable income. The FHSA is only accessible for 15 years from the date of opening, or till your contribution reaches $40,000 or your 72nd birthday.
How to make the most of your FHSA?
The Canada Revenue Agency (CRA) allows you to carry forward your $8,000 FHSA contribution to the next year. You can deduct the entire contribution made during the year from your taxable income. To use this feature to your advantage, calculate your estimated taxable income after all deductions and determine how much you want to contribute to the FHSA. By preserving the contribution room for the year when your taxable income is high, you can maximize your tax savings.
For instance, Mary’s taxable income comes to $80,000 in 2023. She is due for a promotion and gets it in 2024, increasing her taxable income to $120,000. She can invest a small amount in an FHSA this year and a higher amount next year.
You can also maximize your FHSA withdrawals by investing in growth stocks that can double your money. FHSA withdrawals are tax-free if you use them to pay for your first home. You can complement the FHSA with the Registered Retirement Savings Plan (RRSP) Home Buyer’s Plan (HBP). The HBP allows you to withdraw up to $35,000 tax-free to buy a home. Unlike the FHSA, you need to repay the withdrawn amount into an RRSP in 15 years.
Going back to our previous example, Mary invests her $40,000 FHSA contribution in such a way that it grows to $80,000 in five years. She can compliment it with the HBP and pay a higher upfront amount for her home.
Popular Canadian stocks for your FHSA
You can start investing in your FHSA with some popular Canadian stocks with significant growth and dividend potential.
Bombardier stock
Business jet maker Bombardier (TSX: BBD.B) is in the midst of a turnaround from a loss-making to a profit-making company with a healthy balance sheet. While the company’s fundamentals are growing, the stock price reacts to overall market momentum and macroeconomic conditions. Bombardier stock fell 13% in the last two days as fears of recession resurfaced with the sale of First Republic Bank to J.P. Morgan.
Bombardier stock fell 18% in the March bank crisis but recovered 28%. The fears of economic weakness could slow Bombardier’s recovery, but it is unlikely to stop it. Most of Bombardier’s clients are the world’s wealthy individuals unaffected by interest rates or inflation.
Bombardier aims to reach revenue of $9 billion ($6.9 billion in 2022) and free cash flow of $500 million to $900 million by 2025 ($735 million in 2022). The stock has the potential to double your money in the next three to five years as it stays on track to achieve its 2025 target.
BCE stock
The telecom giant BCE (TSX: BCE) gives returns through high dividends while its stock price grows at a slower pace. The BCE stock price and dividends have surged at a compounded annual growth rate (CAGR) of 3.4% and 5%, respectively, in the last 10 years. This growth came in the 4G era, which made video calling and live streaming possible. BCE has the potential to sustain this growth and even grow faster in the 5G era, which could make autonomous cars and smart cities a reality.
You can maximize your returns from BCE by enrolling in the dividend reinvestment plan (DRIP). The company makes quarterly dividend payments, and the DRIP uses these payments to buy more shares of BCE without commission or tax. DRIP increases your share count and the 5% dividend growth increases your dividend income. More shares and higher dividend income helps you buy more BCE shares.
