How to start investing as a newcomer to Canada

How do you make your income and savings stretch as far as they can in Canada? Well, you figure out how to make the system work for you. And, in Canada, the system is built to help people, including newcomers to the country, invest their income and savings to generate returns.

In this guide, we’re going to tell you about the various ways you can invest in Canada. Whether you want to put aside savings for a downpayment, save for your kids’ university expenses, or simply build towards retirement, you’ve got options.

As it turns out, immigrants in Canada tend to be supersavers. According to Statistics Canada, immigrant families who have been in Canada for more than two decades tend to be worth more than families who were born in the country. But, how can you join the ranks of these immigrant supersavers?

Saving money and investing may seem a bit complicated, so let us tell you about seven ways to help you get started in Canada as a newcomer.

We’re going to split this article into two sections. Feel free to skip ahead if you already know something.

We’re going to start off by learning about three types of accounts and savings plans in Canada that each have their own superpowers: the RRSP, the RESP, and the TFSA. Then, we’ll tell you about some of the most popular options for investing your money, whether it’s through one of those accounts, or through your regular bank account.

1 – Registered Retirement Savings Plans (RRSPs): Your secret money-making machine

Okay, so, RRSPs might not be a secret among Canadians, but if you’re new to the country, you might be shocked at just how effective an RRSP can be in saving money for retirement and increasing your home-buying power.

A Registered Retirement Savings Plan, or RRSP, is a type of account used to help you save for your retirement. An RRSP can hold a variety of assets, including mutual funds, GICs, stocks, bonds, and cash. But, there are a few superpowers hidden in the land of RRSPs.

Superpower One: RRSP contributions are tax deductible. 

This means that any money that you put into your RRSP, up to your annual contribution limit, reduces your overall taxable income.  Let’s say you make CAD$75,000 per year, but you stick $10,000 into your RRSP and this falls within your RRSP contribution limit, the government may consider your taxable income as only $65,000. Of course, this depends on a few different factors, including the source of your income, your contribution room, and more, so it’s always best to ensure you understand the Canada Revenue Agency’s (CRA) RRSP guidelines when calculating the impact of your RRSP contributions on your overall taxable income. RRSP contributions can be an effective way to generate a financial payout from your annual income taxes (or reduce the amount owed in income tax).

Superpower Two: RRSP savings grow tax free

Contributions made to your RRSP can be invested in a variety of different ways. Be sure to ask about the types of investments available when you’re considering an RRSP and ensure that they align with your financial goals.

Now for the superpower: If you earn on your RRSP investments, you may not have to pay taxes on these earnings as long as they stay in your RRSP. According to the CRA, income earned in your RRSP is usually exempt from tax as long as it stays in the plan. However, always be sure to check the CRA guidelines to ensure your RRSP investment earnings will remain tax-exempt.

Superpower Three: You can borrow up to $35,000 from your RRSP to buy your first home in Canada. 

This plan, known as the Home Buyers’ Plan (HBP), can be incredibly useful, especially when combined with the first superpower. So, you want to buy a home in Canada, but you don’t have enough for a down payment? Tuck away as much income as you can into your RRSP and then invest the return from your income tax refund. Lather. Rinse. Repeat … until you’ve got your down payment ready to go.

A couple of things to keep in mind: first, you’re going to have to put this money back into your RRSP within a predetermined amount of time. As well, the RRSP borrowing-limit for first-time home buyers is $35,000 ($70,000 for a couple), so depending on the home you’re purchasing this may not be enough for your full down payment.

Another RRSP program, the Lifelong Learning Plan (LLP), similarly allows you to withdraw $10,000 in a calendar year (up to a maximum of $20,000) to fund continued education for yourself, your spouse, or your common-law partner.

Superpower Four: Wait to pay taxes on your RRSP account until you’ll be paying lower taxes.

RRSPs are designed for retirement savings; it’s in the name! Once you’re retired, your income will probably be lower, so withdrawing from your RRSP will cause this money to be taxed at a much lower rate than if the money was counted towards your total taxable income during one of your high-earning years.

As well, once you reach the age of 71, you are obligated to take one of these actions: withdraw your RRSP funds in a lump sum, convert your RRSP to a Registered Retirement Income Fund (RRIF), or use your RRSP funds to purchase an annuity. A RRIF enables you to maintain the same investments as with your RRSP, while requiring that you withdraw a minimum amount each year.

For detailed information on the various plans and programs associated with RRSPs, be sure to consult the appropriate CRA webpage:

• Registered Retirement Savings Plan (RRSP)
• Home Buyers’ Plan (HBP)
• Lifelong Learning Plan (LLP)
• Registered Retirement Income Fund (RRIF)

#2 – Registered Education Savings Plans (RESPs): Maximize savings for your child’s education.

The Registered Education Savings Plan, or RESP, isn’t as much about your financial success, as it is about that of the youngsters in your life. RESPs are savings plans for children opened by adults in their lives, whether they be parents, grandparents, other relatives, or friends.

An RESP is a special type of savings plan that’s been designed by the Canadian government. With an RESP you can save for a child’s post-secondary education with your own investments being supplemented by financial boosts from the federal government and, in some cases, by provincial governments as well.

It’s like going out to a restaurant for dinner, but having the government help you pay the bill! (“I’ll have the steak AND the lobster, please!”)

One important distinction between an RESP and an RRSP, is that the RESP does not allow you to deduct contributions from your income on your annual income tax. But, RESPs have their own distinct set of superpowers:

Superpower One: Have 20 percent of your annual contributions matched by the federal government (up to $500).

If you open an RESP for a child, you’ll be the subscriber (or account holder), and, as such, you’ll be eligible for a range of government benefits, including the Canada Education Savings Grant (CESG). Through the CESG, the Canadian government will match 20 percent of the contributions you make to the child’s RESP each year, up to a maximum of $500 per child per year (with a lifetime total of $7,200 per child).

If you open an RESP for a child from a modest- or low-income family, the RESP may also be eligible for contributions from the Canada Learning Bond (CLB). The CLB adds government money to RESPs for children from lower-income households, with a maximum government contribution of $2,000 over a child’s lifetime.

Certain provincial governments may also have a provincial incentive for opening an RESP. Check it out if you’re living in Quebec or British Columbia.

Superpower Two: Don’t pay tax on the growth of any RESP investments until they’re withdrawn.

As the subscriber, your RESP contributions can be invested through a, and any growth in these investments will not be taxed until the RESP is withdrawn by the beneficiary at a later date. If an RESP is withdrawn by a child for the purpose of education, the taxes paid may be much lower than if you withdrew them yourself. That’s due to our third superpower.

Superpower Three: Allow the beneficiary to withdraw the RESP investments and be taxed at their own income tax bracket (often lower than yours!). 

When it comes time for the beneficiary of your RESP to head off to college or university, typically they won’t have high annual income (this, of course, varies from person to person). But, assuming the child isn’t reporting much income during their post-secondary studies, they can withdraw from their RESP and be taxed based on their low-income bracket.

For more information about RESPs, be sure to consult the CRA guidelines:

• Registered Education Savings Plan (RESP)
• Canada Education Savings Grant (CESG)
• Canada Learning Bond (CLB)

#3 – Tax-Free Savings Accounts (TFSAs): Don’t pay tax on your savings.

Canada’s Tax-Free Savings Accounts (TFSAs) are a great opportunity to save and invest money, tax-free! Each year after the age of 18, you have  annual contribution room for your TFSA. Any amount you deposit in your TFSA in a given year (up to your contribution room) is not deductible for income tax purposes. If you exceed your contribution room, however, you will be penalized through a tax — so it’s best to squirrel away funds that exceed your TFSA contribution room in another type of account.

Beyond the obvious benefits of the tax-free nature of TFSAs, these accounts have a few other superpowers!

Superpower #1 — Don’t pay tax on investment income earned by your TFSA

The amount you contribute to your TFSA isn’t the only thing that’s tax-free. Any investment earnings from your TFSA are also tax-free. Plus, investment income earned by your TFSA doesn’t impact your annual contribution room.

Superpower #2 — Your contribution room accumulates from year to year

Each year, you have an annual contribution room, but if you don’t meet your limit for one year, the unfilled space rolls into the next. If you’re not ready to open a TFSA when you arrive in Canada, that’s okay! You can wait a year or two, and your contribution room will grow, regardless of whether or not you’ve ever opened a TFSA.

Your TFSA isn’t just for squirreling away savings. It can also be used for investing! Most Canadian banks will give you an array of options for managing your TFSA contributions.

In the next section we’re going to review some of the popular options for using your account to invest in Canada. Whether it’s your TFSA, your RESP, or your RRSP, understanding how to invest the funds in your accounts is crucial to your success as an investor.

Learn more about the rules and regulations for your TFSA from the Canada Revenue Agency:

• Tax Free Savings Account (TFSA)
• TFSA Contribution Room

Types of investment options in Canada

There are many different ways to invest your money, from buying real estate, to investing in your cousin’s idea for a cheeseless pizza restaurant (don’t do it!). In this section, we’re going to break down three popular investment options which you can participate in using one of the accounts from above. You can also leverage these investment options through your regular bank account, or another type of account — the world is your oyster — just remember the investment superpowers associated with the accounts laid out above.

It’s important to note that not all accounts with all institutions are eligible for all of these investment options. Before signing up for an RRSP, RESP, TFSA, or any other account, it’s worthwhile to check with the institution to understand what types of investing options they offer for the account you’re hoping to open.

#1 – Guaranteed Investment Certificates (GICs): Low-risk, low return.

Not a gambler, eh? Then the GIC might be the investment opportunity you’ve been looking for.

A Guaranteed Investment Certificate, or GIC, is a type of Canadian investment that offers a guaranteed rate of return. As such, it’s a reliable way to make money on your investments. But, this does come with a downside.

In making a guarantee on investment returns, GICs have little risk associated with them. But, this means that the return on these investments is usually lower than what you might experience with stocks, bonds, or mutual funds.

Low-risk, low return. It’s good for some investors, but doesn’t satisfy everyone. If you’re looking for something with the possibility of higher returns and long-term growth, there are other options.

#2 – Mutual funds: let someone else make the big investment decisions

A mutual fund is a type of investment where multiple investors contribute to a larger pool of money which is then invested and managed by professionals. Mutual funds consist of securities (financial assets) including stocks, bonds, money market instruments, and more.

Investing in mutual funds can be a great option if you’re looking for advice and greater potential to grow your investment long-term, but you don’t want to do the research and make your own investment decisions. A well-diversified mutual fund portfolio can also help to minimize investment risk. But, mutual funds are also sensitive to movement in the markets, so there’s always a risk of losing the original amount you invested.

#3 – Stock market investing: Risks may mean big losses or big rewards.

So, GICs and mutual funds sound nice, but you want to see a bigger return on your investment? You’re willing to do the work to understand how the stock market works? And what’s a smart investment? And when’s the risk worth the potential payout? Well then, maybe you want to try out being a direct investor in the stock market.

In recent years, it has become easier to manage your own investments in the stock market. With online investing platforms you can buy, sell, and trade quickly and easily. But, just because you can do it, it doesn’t necessarily mean you should do it.

Managing all of your own investments in the stock market makes sense if you are confident in your understanding of the market. But, if you’re unfamiliar with the stock market and you don’t want to learn how it works, or you don’t have the time, then you might prefer investing through one of the earlier options outlined.

If you’re unfamiliar with the stock market, but you want to start building your knowledge, we recommend taking the time to learn ahead of time. Investopedia is a solid place to start learning about the stock market, with a range of educational materials and frequent updates relating to changing market conditions. As well, you may want to consider opening a practice account, or beginning with only a small number of investments, in order to experience the market before putting in larger portions of your hard-earned money.

^{This article is for information purposes only and is not intended to provide specific financial, legal, tax, investment, or other advice, and should not be relied upon in that regard. You should not act or rely on the information without seeking the advice of a professional. Please consult your tax advisor to find out which strategies best suit your tax situation.}