Introduction to Canada’s investment accounts
So, you’re planning to move to Canada – or have already made the move. First, let us be one of the first to welcome you to your new home. We think you’ll love it here.
While you’re probably overwhelmed with all the things you need to do to get settled in your new home – such as find a place to live, find a job, maybe find a school and activities for kids – we’ll help take the stress out of one thing you’ll need to know about your new country: How investments work in Canada.
Read on for your cheat sheet on all things investing in Canada for newcomers. Make sure to bookmark this page and come back to it often as a reference whenever you’ve got a question about how investments in Canada work.
Types of investment accounts in Canada
Canada is home to many investment accounts and investment types. Luckily, you can get everything you need at one of Canada’s banks, including Scotiabank, Royal Bank of Canada (RBC), TD Bank, Bank of Montreal (BMO), and the Canadian Imperial Bank of Commerce (CIBC).
Below, you’ll find a list of the most popular investment accounts in Canada, including who they’re suited for and what they’re typically used for. While this list will help you get started, if you want to really get to know how investment accounts work in Canada, you can schedule an appointment with a financial advisor at your bank.
Registered retirement savings plan (RRSP]
Think of an RRSP as your personal piggy bank for retirement, but with a tax twist. It’s a special account approved by the Canadian government that lets you stash money away for your golden years while enjoying some tax benefits before you get there.
Any investment you put into your RRSP – whether it’s cash, stocks, or bonds – grows tax-free until you’re ready to dip into it during retirement. An added bonus is that you get a nice tax deduction each year for the contributions you make. So, it has some great benefits now and in the future.
Who it’s for: Canadian residents over the age of 18
What it’s used for: Saving for retirement
Contribution limit for 2024: 18% of your earned income, up to $31,560. You can contribute to an RRSP once you’ve lived in Canada long enough to file a tax return.
Tax free savings account (TFSA)
Imagine a Tax-Free Savings Account (TFSA) as another great tool with tax benefits. It’s an account where you can stash away cash, stocks, or whatever else you fancy, and watch it grow without having to pay a cent in taxes on the interest you earn.
The best part? You won’t get taxed when you withdraw your money. TFSAs are perfect for both short-term goals and long-term savings dreams, giving you flexibility and tax-free growth. It’s also a little more relaxed than an RRSP. While you might have to pay penalties for withdrawing early from an RRSP, you can withdraw from your TFSA whenever you’d like.
Who it’s for: Canadian residents over the age of 18
What it’s used for: Short- and long-term savings
Contribution limit for 2024: $7,000. Contribution room starts accruing the year you become a resident.
First home savings account (FHSA)
The FHSA is one of Canada’s newest investment accounts. Think of an FHSA as a mix of both an RRSP and TFSA, but with one goal: Helping you purchase your first home. With an FHSA you get the tax deduction perks of an RRSP plus the tax-free growth of a TFSA.
With an FHSA, you can save up to $40,000 ($8,000 per year) toward the purchase of your first home.
Who it’s for: Canadian residents over the age of 18
What it’s used for: Saving for your first home
Contribution limit for 2024: $8,000. Contribution room starts accruing the year you become a resident.
Registered education savings plan (RESP)
Now, let’s dig into the RESP, or the registered education savings plan – a smart choice for Canadian parents planning their kids’ future. Here’s how it works: You stash your cash into this special account and the government gives you a nice little boost with grants and tax-deferred growth.
When it’s time for your kid (or kids) to go to college or university, they can dip into the RESP to cover tuition, books, housing, and more. And since the money grows tax-free until withdrawal, it’s a win-win for both parents and their studious kids.
Who it’s for: Parents
What it’s used for: Saving for your children’s education
Contribution limit: $50,000 lifetime. Anyone with a social insurance number can open a RESP.
Investment types in Canada
Now that you’ve been given a crash course in the types of investment accounts available to newcomers, let’s learn a little more about the types of investments you might want. After all, you’ll need to put something in your new investment accounts.
Below is a breakdown of the most common investment types in Canada. Of course, there are others, but this should help get you started. Similar to helping you with investment accounts, an advisor at your bank can help answer any questions you might have.
Stocks
Otherwise known as equities, these are one of the most common investments in Canada – and around the world. You can purchase individual shares of Canadian and international companies using an investing account.
Although you’re probably already familiar with stocks, here’s a brief refresher.
Stocks represent ownership in a company, often traded on stock exchanges like the New York Stock Exchange, Toronto Stock Exchange, or NASDAQ. When you buy stocks, you’re purchasing a share of that company’s ownership. Investors buy stocks with the hopes of the company’s growth and profit, planning to sell them at a higher price in the future.
Stocks offer potential for capital appreciation and may pay dividends, a portion of the company’s profits. However, they also carry risks, as stock prices can go up or down based on market conditions, company performance, and economic factors. Before diving into the world of purchasing stocks, you’ll want to research not only how buying and selling them works, but also the companies you plan to purchase shares for.
Bonds
Think of bonds as the safer, less bold cousin of stocks. They’re essentially loans investors make to governments or corporations. When you buy a bond, you’re lending money to the issuer for a set period, typically receiving regular interest payments until the bond matures, at which point you get back the initial investment.
Bonds are considered safer than stocks, offering predictable income and a fixed return. However, they still carry risks, such as interest rate changes. Bonds come in various types, including government bonds, corporate bonds, and municipal bonds, each with their own risk and return profiles targeted to different types of investors.
Mutual funds
Mutual funds are a longtime staple in many Canadians’ investment accounts. They’re a pool of money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets.
Mutual funds are managed by professional fund managers, and they offer investors access to a diversified investment portfolio with the convenience of easy buy-in and liquidity, typically for a fee. They’re more of a “set it and forget it” approach to investing, since they’re managed for you.
Exchange traded funds (ETFs)
Similar to a mutual fund, an exchange traded fund is a pooled investment that’s traded on stock exchanges. They hold a mix of assets like stocks, bonds, or commodities. ETFs offer diversification and flexibility like mutual funds but trade on exchanges like individual stocks. They’re a low cost, low maintenance investment type.
Guaranteed investment certificates (GICs)
Finally, GICs are one of the lowest-risk investments you can buy in Canada. With a GIC, investors deposit funds for a specific term – you can choose from just a few days to a few years.
During that term, your bank guarantees the principal and pays a fixed or variable interest rate. GICs offer security and predictable returns but typically have lower yields compared to riskier investments. The tradeoff of lower yields, though, is the safety of your investment.
A word of advice
We know we just threw a lot of information at you. Luckily, if you’re ever overwhelmed about investments or anything money-related, you can schedule an appointment at your local bank to speak with an advisor.
You can even book appointments online, from the comfort of your couch. Just visit your bank’s website to book a call.
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.