Start investing as a newcomer to Canada
How do you make your income and savings stretch as far as they can in Canada? Well, you figure out how to make the system work for you. And, in Canada, the system is built to help people, including newcomers to the country, invest their income and savings to generate returns.
In this guide, we’re going to tell you about the various ways you can invest in Canada. Whether you want to put aside savings for a downpayment, save for your kids’ university expenses, or simply build towards retirement, you’ve got options.
Saving money and investing may seem a bit complicated, so let us tell you about seven ways to help you get started in Canada as a newcomer!
#1 – Registered Retirement Savings Plans (RRSPs): Your secret money-making machine.
A Registered Retirement Savings Plan, or RRSP, is a type of account used to help you save for your retirement. An RRSP can hold a variety of assets, including mutual funds, GICs, stocks, bonds, and cash. But, there are a few superpowers hidden in the land of RRSPs.
RRSP contributions are tax deductible.
RRSP savings grow tax free
You can borrow up to $35,000 from your RRSP to buy your first home in Canada.
Wait to pay taxes on your RRSP account until you’ll be paying lower taxes.
1: This means that any money that you put into your RRSP, up to your annual contribution limit, reduces your overall taxable income. Let’s say you make CAD$75,000 per year, but you stick $10,000 into your RRSP and this falls within your RRSP contribution limit, the government may consider your taxable income as only $65,000. Of course, this depends on a few different factors, including the source of your income, your contribution room, and more.
⭕️Be sure to ask about the types of investments available when you’re considering an RRSP and ensure that they align with your financial goals.
This plan, known as the Home Buyers’ Plan (HBP) too, can be incredibly useful, especially when combined with the first superpower. So, you want to buy a home in Canada, but you don’t have enough for a down payment? Tuck away as much income as you can into your RRSP and then invest the return from your income tax refund. Lather. Rinse. Repeat … until you’ve got your down payment ready to go.
Another RRSP program, the Lifelong Learning Plan (LLP),
similarly allows you to withdraw $10,000 in a calendar year (up to a maximum of $20,000) to fund continued education for yourself, your spouse, or your common-law partner.
RRSPs are designed for retirement savings; it’s in the name! Once you’re retired, your income will probably be lower, so withdrawing from your RRSP will cause this money to be taxed at a much lower rate than if the money was counted towards your total taxable income during one of your high-earning years.
As well, once you reach the age of 71, you are obligated to take one of these actions: withdraw your RRSP funds in a lump sum, convert your RRSP to a Registered Retirement Income Fund (RRIF), or use your RRSP funds to purchase an annuity.
#2 – Registered Education Savings Plans (RESPs):Maximize savings for your child’s education.
The Registered Education Savings Plan, or RESP, it is about that of the youngsters in your life. RESPs are savings plans for children opened by adults in their lives, whether they be parents, grandparents, other relatives, or friends.
An RESP is a special type of savings plan that’s been designed by the Canadian government. With an RESP you can save for a child’s post-secondary education with your own investments being supplemented by financial boosts from the federal government and, in some cases, by provincial governments as well.
Have 20 percent of your annual contributions matched by the federal government (up to $500).
Don’t pay tax on the growth of any RESP investments until they’re withdrawn.
Allow the beneficiary to withdraw the RESP investments and be taxed at their own income tax bracket (often lower than yours!).
One important distinction between an RESP and an RRSP, is that the RESP does not allow you to deduct contributions from your income on your annual income tax.
1: If you open an RESP for a child, you’ll be the subscriber (or account holder), and, as such, you’ll be eligible for a range of government benefits, including the Canada Education Savings Grant (CESG). Through the CESG, the Canadian government will match 20 percent of the contributions you make to the child’s RESP each year, up to a maximum of $500 per child per year (with a lifetime total of $7,200 per child).
If you open an RESP for a child from a modest- or low-income family, the RESP may also be eligible for contributions from the Canada Learning Bond (CLB). The CLB adds government money to RESPs for children from lower-income households, with a maximum government contribution of $2,000 over a child’s lifetime.
2: As the subscriber, your RESP contributions can be invested through a variety of opportunities, and any growth in these investments will not be taxed until the RESP is withdrawn by the beneficiary at a later date. If an RESP is withdrawn by a child for the purpose of education, the taxes paid may be much lower than if you withdrew them yourself. That’s due to our third superpower.
3: When it comes time for the beneficiary of your RESP to head off to college or university, typically they won’t have high annual income. they can withdraw from their RESP and be taxed based on their low-income bracket.
#3 – Tax-Free Savings Accounts (TFSAs): Don’t pay tax on your savings.
Canada’s Tax-Free Savings Accounts (TFSAs) are a great opportunity to save and invest money, tax-free! Each year after the age of 18, you have annual contribution room for your TFSA. Any amount you deposit in your TFSA in a given year (up to your contribution room) is not deductible for income tax purposes.
Don’t pay tax on investment income earned by your TFSA
Your contribution room accumulates from year to year
1: The amount you contribute to your TFSA isn’t the only thing that’s tax-free. Any investment earnings from your TFSA are also tax-free. Plus, investment income earned by your TFSA doesn’t impact your annual contribution room.
2: Your TFSA isn’t just for squirreling away savings. It can also be used for investing!
Most Canadian banks will give you an array of options for managing your TFSA contributions. For example, with HSBC Canada, you can choose between a range of TFSA options, from a simple high rate savings account, to a more active stock market investing option.
In the next section we’re going to review some of the popular options for using your account to invest in Canada.
Whether it’s your TFSA, your RESP, or your RRSP, understanding how to invest the funds in your accounts is crucial to your success as an investor.
Types of investment options in Canada
In this section, we’re going to break down three popular investment options which you can participate in using one of the accounts from above. You can also leverage these investment options through your regular bank account, or another type of account, just remember the investment superpowers associated with the accounts laid out above.
It’s important to note that not all accounts with all institutions are eligible for all of these investment options. Before signing up for an RRSP, RESP, TFSA, or any other account, it’s worthwhile to check with the institution to understand what types of investing options they offer for the account you’re hoping to open.
A Guaranteed Investment Certificate4, or GIC, is a type of Canadian investment that offers a guaranteed rate of return. As such, it’s a reliable way to make money on your investments. But, this does come with a downside.
In making a guarantee on investment returns, GICs have little risk associated with them. But, this means that the return on these investments is usually lower than what you might experience with stocks, bonds, or mutual funds.
Low-risk, low return. It’s good for some investors, but doesn’t satisfy everyone. If you’re looking for something with the possibility of higher returns and long-term growth, there are other options.
#1 – Guaranteed Investment Certificates (GICs): Low-risk, low return.
#2 – Mutual funds: let someone else make the big investment decisions
A mutual fund is a type of investment where multiple investors contribute to a larger pool of money which is then invested and managed by professionals. Mutual funds consist of securities (financial assets) including stocks, bonds, money market instruments, and more.
Most major banks in Canada offer mutual fund investment opportunities.
Investing in mutual funds can be a great option if you’re looking for advice and greater potential to grow your investment long-term, But, mutual funds are also sensitive to movement in the markets, so there’s always a risk of losing the original amount you invested.
So, GICs and mutual funds sound nice, but you want to see a bigger return on your investment? You’re willing to do the work to understand how the stock market works? And what’s a smart investment? And when’s the risk worth the potential payout? Well then, maybe you want to try out being a direct investor in the stock market.
Managing all of your own investments in the stock market makes sense if you are confident in your understanding of the market. But, if you’re unfamiliar with the stock market and you don’t want to learn how it works, or you don’t have the time, then you might prefer investing through one of the earlier options outlined.