The Canadian financial system is one of the most accessible and reliable in the world.
According to the World Economic Forum, Canada consistently ranks as one of the most stable financial systems, thanks to effective regulation and Government oversight. For people living in Canada, that means you can trust the system.
It’s important to familiarize yourself with the Canadian financial system to understand how it works and what options are available to you. You need to know how to bank, borrow, protect your money and property, and pay taxes.
If you’re a newcomer to the Canadian financial system and want to learn more, you’ve come to the right place. Read on.
Federal financial authorities
Five government organizations oversee the Canadian financial system. It’s worth understanding what they do to protect it.
The Bank of Canada
This is Canada’s central bank. Some of its roles include influencing the amount of money in circulation by setting policies to keep inflation low and stable, printing and distributing bank notes, managing the Government’s debt, and setting interest rates. The Bank of Canada’s official mandate is “to promote the economic and financial welfare of Canada.”
Office of the Superintendent of Financial Institutions (OSFI)
The Office of the Superintendent of Financial Institutions (OSFI) is the federal agency that regulates and supervises Canada’s banks, insurers, and private pension plans. OSFI ensures these financial institutions are operating in good financial condition.
Canada Deposit Insurance Corporation (CDIC)
The Canada Deposit Insurance Corporation (CDIC) protects Canadians’ savings by insuring the money held in savings at banks, some credit unions, and loans and trust companies. Essentially, the CDIC insures the banks so that if a bank were to go bankrupt, Canadians with accounts at that bank would still get their money back. Each account you hold in a CDIC-protected bank is insured for up to $100,000.
Financial Consumer Agency of Canada
The Financial Consumer Agency of Canada protects financial consumers by ensuring banks and other financial institutions comply with their codes of conduct and legal obligations to their clients. It also develops resources and tools to educate Canadians on financial decision-making.
Minister of Finance and the Department of Finance
The finance minister oversees the governing legislation supported by the Department of Finance.
Banks
Banks in Canada operate like banks in many other countries. Your bank is where most Canadians open chequing and savings accounts and do most of their day-to-day banking. Most banks also offer mortgages, loans, lines of credit, credit cards, and investment services.
The Canadian banking landscape is dominated by the so-called Big Five banks — Scotiabank, RBC, BMO, TD, and CIBC. Outside the Big Five, the sixth largest bank is National Bank, which predominantly services Quebec and New Brunswick, and there are another two dozen or so domestic banks with smaller presences.
Online banking alternatives
An increasing number of alternative banking options are popping up all the time. Online-only banks, neo-banks, and fintech (financial technology) companies offer many banking services, like accounts, bank cards, and investment services, but they operate online with no physical branches to visit.
Credit Unions / Caisses Populaires
Credit unions (or caisses populaires in French-speaking areas) are similar to banks but have one key difference. Credit unions are owned by their members (customers) and operate as not-for-profits. To join a credit union, you need to become a member. Because the purpose of a credit union is not to make a profit, their fees, rates, and services are typically priced better than traditional banks. Some credit unions are federally insured by the DCIC, while others are provincially insured. Either way, your money is just as safe in a credit union as it is in a bank.
Credit cards, mortgages, and loans
Like in other countries, a big part of the Canadian financial system is related to borrowing and debt.
Most Canadian adults (about 80 percent) own a credit card — in fact, there are close to 100 million cards in circulation. Credit cards are offered by most banks and credit unions, as well as other financial institutions. Credit cards — often Visa, Mastercard, or American Express — allow you to borrow money from your financial institution as credit, which you must repay. Credit cards allow you the financial freedom to buy things you might not otherwise be able to afford right now, charge that purchase on your card, and repay it over time. Credit cards have associated fees, and you will be charged interest on your purchases if you don’t pay them back quickly.
Banks and other financial institutions also offer loans, mortgages, and lines of credit in various forms. Again, with any of these, you borrow money from your bank and then repay it over time. Loans and lines of credit can be used for all kinds of purchases and are often used for larger purchases like vehicles and vacations. The benefit of these is access to money to achieve your goals. Of course, you will be charged interest when you borrow money from a bank and must be careful to repay your debts. Mortgages are principally used to buy property, like a home. These are large loans and are typically structured with interest and minimum payments over 20-30 years.
Insurance
Insurance also forms part of the Canadian financial system. It protects you financially in case something happens to you, your loved ones, or your property.
Health insurance in Canada is (mostly) covered by taxes. That means you don’t have to pay for doctor and hospital visits. However, additional health insurance is required to pay for prescription medication, eye exams and glasses, and dental care. Many employers will provide “benefits”, which may include coverage for these services. You may still need to buy extra health insurance if you don’t have benefits or they are insufficient.
All other insurance — auto insurance, property insurance, life insurance, travel insurance, and more — is bought by the consumer when they’re needed. If you own a vehicle, auto insurance is compulsory in Canada.
The federal government regulates Canadian insurance companies to ensure they are financially sound and operating within the law. Provincial and territorial insurance regulators also regulate them. Provincial and territorial regulators ensure insurers obey consumer protection laws, protect consumers in case an insurance company goes bankrupt, and help consumers resolve complaints against insurance companies.
Importance of credit scores in Canada
In Canada, you need to have a good credit score to apply for loans, credit cards, mortgages, car leases, and even property rentals.
A credit score proves to lenders that you can be trusted to borrow and repay money. You need to build your credit to qualify for more credit. There are a few different ways you can build your credit score. One of the easiest is with a credit card. Even if you don’t have an established credit history, many banks offer “starter” credit cards with low limits. Once you start spending with a credit card and regularly paying it back, you will quickly build up your credit score by proving you are reliable. You can also build credit by paying bills, for example.
Paying taxes
Finally, you must understand taxes and your obligations to the Canadian Revenue Agency (CRA). The CRA looks after taxes in Canada, as well as social benefits and incentive programs.
When you earn money in Canada, you must pay income tax to the federal and provincial governments after a certain limit. The higher your income, the more you’re taxed. Like many other countries, when you receive your weekly or monthly paycheques from your employer, some of your income will already have been deducted and sent to the CRA as taxes. These taxes are used to pay for things that benefit you and other Canadians, like health care, roads, schools, and public safety.
The tax year runs from January 1 – December 31. You must gather your relevant tax documents each year and submit your tax return by April 30 for the previous tax year. Depending on your circumstances during the tax year and the amount of tax you paid, the CRA will determine if you are entitled to a tax refund (where you get some money back) or whether you have a balance remaining (where you still owe more taxes and need to pay extra to the CRA).
For more information on taxes and your obligations, visit the CRA website.
This article is provided for information purposes only. Any information, data, opinions, views, advice, recommendations or other content included in this article are solely those of the author and not of Scotiabank or its affiliates. It is not to be relied upon as financial, tax or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article is subject to change without notice. All third party sources are believed to be accurate and reliable as of the date of publication.