5 Investment Accounts for New Canadians

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This resource contains information about investment accounts in Canada for newcomers. The non-registered investment account, Tax-Free Savings Account (TFSA) Registered Retirement Savings Plan (RRSP), Registered Education Savings Plan (RRSP), Registered Disability Savings Plan (RDSP) and the First Home Savings Plan (FHSA) are covered.

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Non-Registered Investment Account

With this account, you pay taxes on your investments while funds are invested in the account. For example, you will pay taxes on interest, capital gains when you sell an investment like a stock for more than you paid for it, and on dividends you receive. 

There is no limit on the amount that you can contribute to this account and you don’t need to be working to open one.

More Information About the Non-Registered Account>

Tax Free Savings Account (TFSA)

This is a great account that allows you to save up for a car, a vacation, a house, or even a horse if that’s your thing. The main benefit of this account is that there are generally no taxes on your investments. This allows you to maximize your investment gains and have access to tax-free withdrawals.

Every Canadian from the age of 18 can contribute up to $6,000 per year into this account.  Newcomers can open this account and start getting contribution room in the year they arrive in Canada.

If you don’t contribute the full amount in one year, it will carry forward to future years.

For example, if you open a TFSA when you arrived in Canada in 2020, and contributed $2000 in 2020 and another $2000 in 2021, you would be able to contribute up to $14,000 in 2022.

Just be sure not to contribute more than you are allowed. The government will charge a fee on excess contributions.

More Information about the Tax-Free Savings Account>

Registered Retirement Savings Plan (RRSP)

This one is awesome for people working in Canada who want to reduce their income taxes. When you contribute to an RRSP, you get a tax deduction that lowers the amount of tax you owe in the year you contribute.

In addition, you will not pay any investment taxes while the money is held in the account. But, when you withdraw the money, you will probably have to pay income taxes. You are allowed to contribute up to 18% of your prior year’s income (up to $29,210), and contribution room carries forward just like with a TFSA.

Let’s see how this works. Let’s say you work in Toronto and make $80,000 a year (not too shabby). You might owe about $16,199 in income taxes, based on this take home pay calculator. If you make an RRSP contribution of 18%, or $14,400, you could reduce your income taxes to $11,780 for a tax savings of $4419. 

 

When you withdraw money from an RRSP, then you must pay income taxes. The benefit is that when you are retired, your income will probably be lower than when you are working and there are some benefits for seniors like pension splitting and tax credits.

There are 2 special programs that allow you to avoid taxes on RRSP withdrawals. These are the Home Buyers’ Plan for people buying their first home in Canada which allows them to withdraw up to $35,000 tax-free and there’s the Lifelong Learning Plan which allows people to withdraw up to $20,000 tax free to pay for an education program. These are great uses for an RRSP, but you have to repay or re-contribute the money you withdraw for these programs over a period of time.

Importantly, you must be working in Canada and your contribution room is based on your Notice of Assessment from the previous year. Because of this, most newcomers will have to wait until after completing their first income tax return to benefit from an RRSP.

Many companies provide their employees with RRSP benefits and will contribute to their accounts.

More Information About the Registered Retirement Savings Plan >

Registered Education Savings Plans (RESP)

This is an amazing program that helps parents and others pay for their children’s post-secondary education like university, college or trade school. And before you ask, no the school doesn’t need to be in Canada, as long as it’s on the list of designated institutions on the Government of Canada website. Anyone can open an account for a beneficiary (the person who will use the money for their education).

There are several key benefits of this account. First, the investments can grow tax-free while they are held in the account, similar to a TFSA or RRSP. Secondly, the government of Canada will pay a Canada Education Savings Grant to match contributions as long as the beneficiary is 17 or younger. The basic amount for everyone is 20% of contributions up to $500 per year per child (20% of $2500 is $500. Depending on the beneficiary’s family income, the government may pay an additional amount of up to $100 per year. So that’s up to $600 per year of free money.

But that’s not all. If the beneficiary’s family is “low-income”, the government will pay the Canada Learning Bond which is $500 in the first year of opening the account plus $100 per year after that, as long as the family qualifies.

 

There are a few rules to mention. There is a lifetime contribution limit of $50,000 per child. Generally, you can carry forward contribution room from previous years. For an older child to benefit, accounts must be opened by the time the child is 15. You can also open an individual or family plan. The CESG is limited to $7,200 per child.

Let’s quickly see how this might work. Let’s say you have a kid. When she is born, you open an RESP for her. You contribute $2,000 to her account every year. You will be entitled a CESG of $400 (20% of $2,000) per year. Also, you may also be eligible for the additional CESG and the Canada Learning Bond. This amount can grow tax free, and with future contributions and government grants, your child will have a good amount saved for her education.

Finally, regarding taxes, the contributions made to the account can be withdrawn tax free, but the government grants and investment income will be taxable on withdrawal. The good news is that the beneficiary must pay the taxes, and since they will be a student at the time, they will probably pay little to no taxes. Be careful, if you make withdrawals for other purposes besides schooling. You can get your contributions back, but the government will take back all the money they contributed and you’ll face a tax bill on any investment gains.

More Information About the Registered Education Savings Plan >

Registered Disability Savings Plans (RDSP)

The last account we’ll cover is the Registered Disability Savings Plan or RDSP. This account helps parents and others save for the long term financial security of a person with a disability up to the age of 59. To be eligible, the beneficiary of this account must be eligible for the Disability Tax Credit. Similar to an RESP, the government will provide a Canada Disability Savings Grant. Depending on the family income of the beneficiary, this could be up to 300% of contributions, up to $3,500 per year and $70,000 over a lifetime. In addition, the government provides a Canada Disability Savings Bond of up to $1,000 per year or $20,000 lifetime to low-income families.

As for taxes, contributions can be withdrawn tax free, but government grants and investment gains are taxable to the beneficiary as income.

More Information >

First Home Savings Account (FHSA)

Now this account doesn’t exist quite yet, but the government is planning to create it soon. This special account is called the Tax-Free First Home Savings Account (FHSA) which would allow people to save up to $8,000 per year to a maximum of $40,000. You would receive a tax deduction for contributions (like with an RRSP), and withdrawals would be tax free (like in a TFSA).

More Information >

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