Canada’s new First Home Savings Plan
Brand new for Canadians this year is the First Home Savings Account (FHSA). If you or perhaps your adult child will be a first time home buyer in the foreseeable future, then this new plan should be of interest to you.
For first-time home buyers it allows a maximum contribution of $8000 this year and that contribution is tax deductible.
The FHSA allows for a maximum contribution of $40,000 over 5 to 15 years. If the money (including the growth of the money) is ultimately used to purchase a first home then the withdrawal is not taxed.
I wanted to draw your attention to this new account at this time because the end of the year is approaching. It turns out that if a future first-time home buyer does not contribute anything or the does not contribute the maximum $8000 by December 31, they CAN carry forward the unused contribution to 2024. But they would lose the chance to make a maximum income tax deduction in 2023. Correction: You can only carry forward the unused room from 2023 if you actually open a FHSA by December 31. (And note that if they again do not contribute in 2024 the maximum carry forward to 2025 would be $8,000 and not $16,000). Edit: For potential first-time home buyers there is NOTHING to lose by opening a First Home Savings Account by December 31 and you can contribute just a few dollars or up to $8000. If you can only contribute a few dollars you will at least create unused contribution room to carry forward.
My message is that potential first-time home buyers should probably take action and open a FHSA account before the end of this year and consider contributing up to $8,000. This is especially relevant and important for those with high enough incomes to benefit from the the income tax deduction.
In Ontario, the income tax savings will range from 20.05% of the FHSA contribution to as high as 53.35% of the contribution for those with taxable incomes over $236,000. For those with taxable incomes between $53,000 and $87,000 the tax savings will be 29.65% or $2,372 for an $8,000 contribution. This if basically “free money” and those to which it is applicable should take advantage of it.
Why the Stock Markets are down
The Toronto Stock Exchange is down 3.3% year to date and it’s down 16% from the high for this year reached at the beginning of February. And the S&P 500 is down 11% from its peak level reached this past summer.
Higher interest rates have pushed stocks lower in four ways.
First, even if companies continue to earn and to grow at the same level as previously, those earnings and the associated dividends are simply less valuable as interest rates increase. For example a dollar that is guaranteed to be received in 10 years has a theoretical value of 82 cents when interest rates are 2% but only 56 cents when interest rates are 6%. Stated another way, stocks have to offer a higher expected return as interest rates rise. And if the expected future earnings and cash flows have not changed then the only way a stock can offer a higher expected return is to decrease in price.
Second, compounding the above is the fact that many companies can expect to have lower future earnings as interest rates rise because of the higher interest they must pay on debt. This impact varies greatly by company depending on their debt level and how much, if any, of their debt is locked in with fixed interest rates for several or more years.
Third, in the most extreme cases the higher interest payments can threaten the financial viability of a company and in that case its share price can drop precipitously.
Fourth, higher interest rates tend to slow the overall economy. In fact Central Banks increased interest rates with a goal of slowing the economy and therefore inflation. A slower economy tends to lower the expected earnings of most companies even those with no debt.
How to Get Started Investing Now.
This month, I updated my article on how to get started investing in a prudent balanced and diversified way. Both stock and bond prices have declined on average in recent months. While this could continue, the fact is that the lower prices are presenting an opportunity for new investors. And anyone getting started investing now is not likely doing a “once-and-done” form of investing. Younger investors in particular can invest funds each month or year. A scenario of lower stock and bond prices, if that does continue, will be an advantage. Investing will almost certainly provide a better future as compared to never getting started investing.
Preferred Shares
My updated article on preferred shares explains why they have fallen in value and why they are now offering attractive returns.
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InvestorsFriend Inc.
Shawn Allen
October 29, 2023