What newcomers need to know about investing in Canada – MoneySense

What newcomers need to know about investing in Canada – MoneySense

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Investing
By  Aditya Nain  on November 15, 2022
By  Aditya Nain  on November 15, 2022
New to the country? Here’s your quick-start guide to the investing landscape in Canada, including tax-sheltered accounts, inflation and more.
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Photo by Rodnae Productions from Pexels
Canada is a beautiful, diverse country—maybe that’s why you immigrated here. But as a newcomer, you also need to know about the rising cost of living and the high income tax rate (up to a 54% marginal tax rate for high income earners). Today’s inflationary environment—with steep increases in housing and energy prices—isn’t helping. For example, Swiss investment bank UBS recently ranked Toronto as the world’s biggest real estate bubble. Vancouver is also among the top 10.
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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:
Here’s how newcomers can achieve these aims.
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.
Here are three types of registered accounts available in Canada that you may want to consider:
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.
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.
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Having plenty of options is great, but what’s right for you and your family as newcomers? If you understand Canadian investments well and are confident in managing your money, you could consider self-directed or DIY (do-it-yourself) investing. You will need to open a brokerage account at your bank or an online brokerage (also called a discount brokerage).
These are the two main options for investors in Canada who want some help and don’t want to manage their own investments:
Good tax planning can save you thousands of dollars. There are three types of income you could earn from your taxable, non-registered investments, and they’re taxed differently.
How much tax you pay will depend on details such as your income and province or territory of residence.
As a rough estimate, here’s how $100 of investment income is taxed as interest, dividends or capital gains, based on a $75,000 income in Ontario.
At higher levels of income, capital gains are taxed at a lower rate than Canadian dividends. Foreign dividends are taxed at the same rate as interest.
Canada offers newcomers many investment avenues. No matter your stage of life or risk appetite, there are suitable products, providers and accounts for you. But being new to the country and unfamiliar with the investing landscape here can also make you susceptible to scams and fraud. It is prudent to exercise caution and be skeptical of any offers that seem too good to be true. There’s no such thing as a free lunch!
Here are some pointers to keep you safe as an investor in Canada:
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Aditya Nain is an internationally published author, educator and business owner. His business specializes in investment research, writing and content. Connect with him on LinkedIn for daily posts on investing, business and life.
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