Types of investing accounts
In Canada, there are two types of investment accounts: registered and non-registered. Registered accounts are filed with the Canada Revenue Agency (CRA), the governmental body responsible for overseeing the country’s tax regulations. Investments made within registered accounts benefit from several tax incentives, including tax-free or tax-deferred growth of investments, depending on the type of account. Additionally, certain contributions to registered accounts qualify for tax deductions. More on that below.
Because of these tax benefits, you have limits on the amount of money you can contribute to each type of registered account. In contrast, non-registered accounts are basic investment accounts without any tax benefits. However, there are no contribution limits or withdrawal rules for non-registered accounts.
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Types of registered accounts in Canada
| Tax-free savings account (TFSA) | Registered retirement savings plan (RRSP) | Registered education savings plan (RESP) | First home savings account (FHSA) | Registered disability savings plan (RDSP) | |
|---|---|---|---|---|---|
| Purpose | Saving | Retirement savings | Saving for a child’s post-secondary education | Saving for a first home | Save for long-term financial security of a person with disabilities |
| Tax advantages | Tax-free growth and withdrawals, but contributions are not tax-deductible | Contributions are tax-deductible and grow tax-deferred. Withdrawals are added to income and taxed. | Tax-deferred growth. When withdrawn, gains are taxed in the hands of the student. | Contributions are tax-deductible. Growth is tax-free. Withdrawals for a first-home purchase are tax-free. | Contributions are not tax-deductible. Gains are taxed in the hands of the beneficiary. |
| Contribution limit | Changes annually; in 2024, the limit is $7,000 | 18% of earned income, up to a maximum of $31,780 in 2024. The maximum changes annually. Unused contribution room can be carried forward. | No annual maximum. Lifetime maximum of $50,000 per beneficiary (child). | Annual limit is $8,000, and lifetime limit is $40,000. Contribution room can be carried forward one year. | No annual limit. Lifetime limit of $200,000 per beneficiary. |
| Other key details | Newcomers get TFSA contribution room starting the year they arrive in Canada, if they are at least 18 and have a social insurance number (SIN) | RRSP contribution limits are based on earned income (based on your tax return from the previous year), not on age. So, minors can open an account too. | Federal government grant: up to $500 per year (20% on the first $2,500 contributed), to a lifetime maximum of $7,200. Some provinces offer additional incentives. | You qualify for a FHSA if you’re 18 or older, and 71 or younger as of Dec. 31 of the year you open the account. You also cannot have lived in a “qualifying home” owned by you or your spouse or common-law partner in this calendar year or the previous four calendar years. | Government grants up to $2,000 per year, depending on contributions and the family’s net income. Government bond: up to $1,000 per year based on net family income—and does not require contributions. |
Types of non-registered accounts
- Cash account: This is the most common form of non-registered investing account. In it, you can purchase various securities, including stocks, exchange-traded funds (ETFs) and mutual funds. (Note: A cash account is not the same as a bank account.)
- Margin account: In this type of account, you can trade on leverage—which means your broker extends you credit to trade securities, allowing you to invest more money than you have in your account. Trading with borrowed money carries significant risk, as it can magnify your losses. Margin accounts are best suited to experienced investors.
Types of investments in Canada
Whether you invest in a registered or non-registered account, you can hold various types of investments across the risk spectrum:
- Stocks: A stock—or a share—represents ownership in a company. If you own even just one stock of a company, you own a small part of that company. Investors can buy the stocks of publicly listed companies that trade on Canadian or U.S. stock exchanges through a brokerage. As a stock owner, you could gain in two ways: dividends and capital gains. A dividend is the portion of a company’s profits that it distributes to its shareholders, typically every quarter. Capital gain refers to what you can earn from selling a stock at a higher price than what you bought it for.
- Mutual funds: Not everybody has the time or expertise to manage a stock portfolio. This is where mutual funds enter the picture. Mutual funds are pooled investment vehicles in which a professional asset manager manages a diversified portfolio of stocks or other securities for a fee. Investors buy units in these funds, giving them indirect exposure to the stocks in the fund’s portfolio.
- Exchange-traded funds (ETFs): Like mutual funds, ETFs are a professionally managed portfolio of securities such as stocks or bonds. However, unlike mutual funds, ETFs are bought and sold on the stock market like stocks.
- Bonds: When you purchase a bond issued by a government or a corporate entity—you’ll receive a fixed interest rate for a specified period (for example, 4% for five years). The principal amount will be repaid to you when the bond matures (meaning its term has ended). Investors can also benefit from the capital gain in a bond—if they sell their bond to someone else on the secondary market.
- Guaranteed investment certificates (GICs): A GIC is a lower-risk instrument in which the investor’s initial amount invested is guaranteed, and typically an annual rate of return is also guaranteed. The exception is a market-linked GIC, which does not provide a fixed, guaranteed rate of return—its returns depend partly on market performance—but even these GICs guarantee the safety of the initial amount invested.
How to start investing
Let’s look at a few commonly asked questions from newcomers interested in investing:
“Do I need to be a permanent resident before I can invest?”
Newcomers to Canada don’t need to be permanent residents (PR) to start investing. Students and temporary workers can invest as well.
“What do I need before I can open an investment account?”
To open an investment account, you will need a social insurance number (SIN), a valid government-issued form of photo identification such as a driver’s license, and a bank account.
“Can I invest in U.S. stocks and ETFs if I’m in Canada?”
Yes. Once you have a brokerage account, you’ll be able to invest in Canadian stocks and ETFs, as well as stocks and ETFs listed on the major U.S. exchanges.
“Where can I open an investing account?”
Below, we list the different ways to start investing. Most financial institutions offer the ability to hold your TFSA, RRSP or FHSA within a brokerage account. This means you can have a registered account that functions as a brokerage account, allowing you to manage your investments directly or with an advisor.
Aditya Nain
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