What newcomers need to know about investing in Canada

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:

1. Maximize returns.
2. Optimize investment taxes.
3. 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:

1. 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.
2. 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.
3. 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.

Video: GICs for all life stages

Robo-advisors and financial advisors

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:

1. Robo-advisor: A low-fee, hands-off approach to investing where an investment management firm manages your money. An algorithm does the heavy lifting by buying and selling investments using parameters based on your goals and risk tolerance. Robo-advisors, which first made a splash in Canada in 2014, are a convenient and easy option for investors who don’t want to spend a lot of time managing their portfolios. But don’t expect to receive in-depth financial advice—for that, you’ll need to consult a human advisor. Check out MoneySense’s guide to the best robo-advisors in Canada.
2. Financial advisor: If you want personalized investment advice from a human, which may include help with financial planning, you could consult a financial professional. How do you choose one? Many people who provide investment or insurance services refer to themselves as “financial advisors,” but there are major differences between their credentials, the products and services they offer, and how they get paid. These are important considerations that could affect which advisor is the best fit for you. Finding the right advisor could take time, but it’s worth the effort—this person will be helping you make major financial decisions. Learn more about finding an advisor, and check out MoneySense’s Find a Qualified Advisor tool.

Maximize capital gains and minimize interest as a new-to-Canada investor

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.

1. Capital gains: If you buy a stock for $100 and sell it for $120, that’s a realized capital gain of $20. Capital gains are only 50% “taxable.” So, in this case, $10 is added to your income and taxed at your marginal tax rate. Learn about capital gains tax.
2. Dividends: Dividends are the profit that companies distribute to shareholders as a quarterly distribution. Foreign dividends don’t get this special tax credit, so investors earning Canadian dividends keep more of their income after tax than foreign stock investors. Foreign dividends are taxed at the same rate as interest.
3. Interest: If you buy a one-year GIC that pays you $100 in interest at the end of its term, that amount is added to your income and taxed at your marginal tax rate. Interest is the least favourable for taxes, taxed at the same rate as a salary, without any special treatment.

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.

Beware scams and con artists

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:

1. Verify any links using a link-expansion tool or service when banking or investing online.
2. Don’t act on unsolicited calls if you haven’t verified the caller’s identity. You could ask the caller to send you an email from their official work email or call them back on the 1-800 number (no phone charges to you), and verify the number online.
3. Always use official support channels when contacting your broker, bank or financial institution. Official phone and email details are available on their websites and mobile apps.
4. Do your own research to verify whether information is accurate. And if a call or email seems “scammy,” a quick Google search often helps confirm the same.
5. To avoid phone scams, consider turning on caller identification (“caller ID”) to be forewarned of spam numbers.
6. Never disclose confidential financial or personal information unless you’re sure it’s being sent to a legitimate source through a secure means of communication.
7. If you have the misfortune of being blackmailed, it’s best not to respond. Instead, report it to the Canadian Anti-Fraud Centre.
8. If something doesn’t feel right, it might not be. So, give yourself the time to make good financial decisions and fact-check any solicitations.

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.

Read more about investing:

• Earning, saving and spending money in Canada: A guide for new immigrants
• TFSA vs RRSP: How to decide between the two
• The best RRSP investments
• The best TFSAs in Canada

About Aditya Nain

Aditya Nain is an author, speaker and educator who writes about Canadian investments, personal finance and crypto. He has co-authored two books and taught at universities for 12 years.

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