Savings and investments for newcomers in Canada: What you need to know

Moving to a new country may involve starting afresh personally, professionally and financially. As you strive to settle in and establish a strong financial foothold in Canada for you and your family, it becomes increasingly important to have financial goals. 

Previously, we shared an overview of how goal setting can help you be better prepared for life in Canada. In this article, we’ll dive deeper into financial goals and some of the products available to help you achieve them. 

Financial goals require two very important things — time and money. Having clarity on how you envision yourself and your family living in the next few months or years can help inform the steps you need to take to build a strong financial support system and achieve your goals. 

One of the most commonly asked questions by newcomers is how much of their income they should invest or save. While there’s no fixed number to define this, in general, a good starting point is to direct three to 10 per cent of your paycheque to a savings program, and then revisit this percentage and adjust it as your income increases over time.

Learn more about the different types of bank accounts and familiarize yourself with the banking ecosystem in Canada by downloading our free guide: From Banking to Budgeting in Canada.

Know your options to save and invest your money in Canada

There are many financial products available to save and invest your money in Canada. They can be broadly classified into savings accounts, registered savings plans and investment products. Depending on your goals and your appetite for risk, you can choose one or a combination of several of these. One of the simplest ways to start saving is by putting your money in a high-interest savings account.

High-Interest Savings Account (HISA)

A HISA offers a comparatively higher interest rate on the money you put in. Not all HISAs are the same, and the rates could differ from one financial institution to another, depending on the service provided. 

Savings plans

Savings plans in Canada are generally called ‘registered savings plans’ because they must be registered with the Canada Revenue Agency in order to qualify for tax benefits. Some savings plans avoid taxes and others defer taxes. 

There are four main types of savings plans with tax benefits:

1. Tax-Free Savings Account (TFSA)

A TFSA is a registered savings plan where the investment income and withdrawals are tax-free. It can also hold other investment products such as cash, Guaranteed Investment Certificates (GICs), Mutual funds, Savings deposits, Stocks, Bonds, Exchange-Traded Funds (ETFs) and more. 

• Purpose of a TFSA: Save for short-term or long-term goals — an emergency fund, a car, home renovation, retirement, etc. 
• Who is eligible for a TFSA? Residents, foreign workers, and international students who have reached the age of majority in their province and have a Social Insurance Number (SIN). 
• TFSA contribution limit: $6000 for 2020 (limit changes every year) plus any unused contribution from the previous years. Also, you don’t need to earn an income to contribute. 

TFSAs are a popular tax-free investment option for newcomers in Canada. Learn all the must-know information about TFSAs and be prepared for financial success.

2. Registered Retirement Savings Plan (RRSP)

An RRSP is where investment earnings are tax-deferred until retirement and contributions are tax-deductible, so they reduce your taxable income. When you decide to withdraw the money, withdrawals are added to taxable income the year the money is withdrawn. Similar to the TFSA, an RRSP can also hold other investment products such as Cash, Guaranteed Investment Certificates (GICs), Mutual funds, Savings deposits, Stocks, Bonds, Exchange-Traded Funds (ETFs) and more.

• Purpose of an RRSP: Save for long-term goals such as retirement. 
• Who is eligible for an RRSP? Residents, foreign workers, and international students under the age of 71 who have earned income, filed an income tax return in Canada, and have available contribution room for the year. 
• RRSP contribution limit: 18 per cent of the previous year’s earned income, less any pension adjustment, up to the maximum annual contribution limit.  

3. Registered Education Savings Plan (RESP)

An RESP is where investment earnings are tax-deferred until withdrawal (which may be taxed at a lower rate, or not taxed at all) when paid out to the beneficiary for their education costs. Contributions are not tax-deductible, but some may be eligible for government incentives. Like the TFSA and RRSP, an RESP can also hold other investment products such as Cash, Guaranteed Investment Certificates (GICs), Mutual funds, Savings deposits, Stocks, Bonds, Exchange-Traded Funds (ETFs) and more.

• Purpose of an RESP: Save for a child’s post-secondary education costs.  
• Who is eligible for an RESP? Residents, foreign workers, and international students with a SIN. The beneficiary of an RESP must be a resident and have a SIN. 
• RESP contribution limit: No annual limit, but there is a lifetime contribution limit of $50,000 per beneficiary. Note: There are also government grants and bonds that you may be able to take advantage of to grow your child’s savings faster.

4. Registered Disability Savings Plan (RDSP)

RDSP is a long-term saving plan to help Canadians with disabilities, and their families save for the future. If you have an RDSP, you may also be eligible for government grants and bonds to help with your long-term savings. Withdrawals are tax-free, but you have to pay taxes on any income earned and also return any government grants. 

• Purpose of an RDSP: To provide financial support to a disabled person. 
• Who is eligible for an RDSP? A Canadian Resident under the age of 60 who has a long-term disability. They must also have a SIN and be eligible for Disability Tax Credit. 
• RDSP contribution limit: No annual limit but there’s a lifetime contribution limit of $200,000 for a single person. With written permission from the RDSP holder, anyone may contribute to the RDSP.

Investment Products

You can pick one or more investment products based on your investment goal and risk tolerance. 

Here are some popular investment options:

• Savings Deposits: A simple and safe option with easy access to your money and guaranteeing your original investment (principal) and the interest you earn.
• Guaranteed Investment Certificates (GICs): A secure fixed-income investment that guarantees 100 per cent of your original investment while earning interest at a fixed or variable rate, or based on a specific formula.
• Mutual Funds: An easy way to invest in a pool of stocks, bonds and other investments that are managed on your behalf by a professional money manager.
• Exchange-Traded Funds (ETFs): Similar to a mutual fund, except an ETF trades like a stock on an exchange. Like a mutual fund, you can buy ‘units’ in an ETF to own a proportional interest of a pool of assets (such as stocks or bonds).
• Stocks: Stocks (or equities) let you purchase a small part of an individual company. You can participate in and benefit from the company’s growth, and potentially receive tax-efficient dividend income and capital gains.
• Bonds: Conservative fixed-income investments issued by a company or government. When you buy a bond, the bond issuer pays you interest for a specific time period and repays your initial investment when the bond matures.

With so many options, making an informed decision can be challenging. Speaking with a financial advisor will help you understand which product or plan is right for you. With professional advice and the right resources, you’ll be better prepared to set your financial goals and choose the right products to make them a reality for your financial future in Canada.