Thankfully, it’s not all doom and gloom. Canada has broad, deep, well-regulated financial markets for investors to explore. Newcomers are often pleasantly surprised to learn they also have easy access to U.S. markets when investing here in Canada. With sufficient investment knowledge and diligent planning, it’s possible to beat inflation and create long-term wealth. But doing this involves knowing how to:
- Maximize returns.
- Optimize investment taxes.
- Reduce your investment fees.
Here’s how newcomers can achieve these aims.
New Canadians: Invest in registered accounts first
Generally speaking, Canada has two types of investment accounts available to residents: registered and non-registered. Registered accounts are registered with Canada Revenue Agency (CRA), which administers tax laws for the federal government.
Investing inside a registered account provides tax breaks of various kinds—including tax-free and tax-sheltered investment gains. This means gains in registered accounts are either never taxed (tax-free) or only taxed upon withdrawal (tax-sheltered). Some investments in registered accounts even provide a tax deduction. On the other hand, non-registered accounts are simply investment accounts that do not provide any tax advantages. However, unlike registered accounts, they have no contribution limits.
Types of registered accounts in Canada
Here are three types of registered accounts available in Canada that you may want to consider:
- Tax-free savings account (TFSA): Any Canadian resident who is 18 or older and has a social insurance number (SIN) can open a TFSA. The contribution limit changes each year—in 2022, it’s $6,000, and in 2023, it’s expected to be $6,500 (the limit is indexed to inflation). Interest and dividends earned in a TFSA are tax-free. Amazingly, you will never be taxed on capital gains, even when you eventually withdraw the money. And here’s the kicker: Newcomers get TFSA contribution room immediately in the year that they arrive in Canada. So, if you arrived in December 2021, you could invest $12,000 in your TFSA: $6,000 for 2021 and $6,000 for 2022. Read about the best TFSAs in Canada and try MoneySense’s TFSA contribution room calculator, which accounts for when you arrived in Canada.
- Registered retirement savings plan (RRSP): As you might guess, this account was created to encourage Canadians to save money for retirement. Contributions are limited to 18% of your previous year’s earned income—up to a maximum of $29,210 for 2022. You will not be taxed on any income earned within an RRSP until withdrawal. When you begin making withdrawals—which can be deferred to as late as age 72—your marginal tax rate will likely be lower than when you were working and contributing. That’s not all: You get a tax deduction on the amount contributed, which lowers your taxable income and could get you a tax refund or reduce your tax payable. These tax breaks can boost your investment returns considerably over the long term. You can indefinitely carry forward any unused RRSP contribution room—it is added to your new room each year. Read more about RRSPs and the best RRSP accounts.
- Registered education savings plan (RESP): RESPs exist to encourage parents or other family members to save for a child’s post-secondary education. And if you love free money, you’ll love the RESP! The Canadian government contributes $0.20 for every $1 you contribute to an RESP. This free 20% bump—up to $500 per year and $7,200 overall—is known as the Canada Education Savings Grant (CESG). The investments you accumulate in an RESP are for your child’s college or university education. Like an RRSP, this account provides tax-sheltered growth; unlike an RRSP, it does not offer a tax deduction for contributions. When the child goes to school, principal contributions are withdrawn tax-free, and the taxable portions of withdrawals are taxable to the child, who will likely pay little or no tax. Get more details and valuable RESP resources.
Starting in 2023, newcomers could also benefit from the proposed tax-free First Home Savings Account (FHSA)—a new type of registered account to which Canadians can contribute a total of $40,000 towards buying their first home. Investors will get a tax deduction (like the RRSP) and the growth is tax-free (like the TFSA), as long as the money is withdrawn for the purchase of your first home.
New to Canada? What to invest in
OK, so you know about registered accounts, but what should you hold within those accounts? The beauty of the TFSA, RRSP and RESP is that you can choose. Qualified investments include cash, stocks, mutual funds, exchange-traded funds (ETFs), bonds, guaranteed investment certificates (GICs) or a combination of these.
For example, newcomers who are growth-oriented investors with a long investment time horizon and an aggressive risk profile may consider equity ETFs—pooled, low-cost investment products that typically track a broad stock market, such as the S&P 500 in the U.S. or the S&P/TSX 60 in Canada. On the other hand, conservative investors saving money for a more imminent purchase such as a home down payment may prefer GICs—instruments that pay a guaranteed, fixed interest rate. And, if you’ve exhausted all the contribution room in your various registered accounts, you can invest the rest of your money in non-registered (taxable) accounts, which have no contribution limits.