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How to Invest in Canada: A Complete Guide to Building Long-Term Wealth

How to invest in Canada explained step by step. Learn accounts, asset allocation, taxes, and common mistakes to avoid when building long-term wealth confidently.

INVESTING FOR BEGINNERSFINANCIAL BASICS

1/9/202623 min read

Who This Guide is For?

Are you asking yourself any of these questions?

  • "Should I even be investing right now?"

  • "Am I investing enough for retirement?"

  • "Should I pay off my debt or start investing?"

  • "I have investments but I don't really understand why I picked them"

  • "Is it too late for me to start?"

If any of these sound familiar, you're in the right place. This guide is written for Canadians who want a clear and practical understanding of how investing works. It is intended for beginners who are just getting started, as well as those who have already begun saving but feel unsure about whether they are doing the right things in the right order.

Table of Contents

  1. Introduction

  2. Why Investing Looks Different in Canada

  3. What Is Investing?

  4. Where Investing Fits in Your Financial Plan

  5. Canadian Investment Accounts Explained

  6. How Much Should You Invest?

  7. What Can You Invest In?

  8. Building a Diversified Portfolio

  9. Understanding Risk

  10. Common Investing Mistakes Canadians Make

  11. Tax-Efficient Investing in Canada

  12. Frequently Asked Questions

  13. Conclusion

Introduction

Investing does not need to be complicated, but it does require structure and consistency.

Investing matters because saving alone is no longer enough to reach most long term financial goals. Cash loses purchasing power over time due to inflation, while investment assets have the potential to grow. Without investing, it becomes increasingly difficult to fund retirement, purchase a home, or build long term financial security. This is especially true in Canada, where costs continue to rise and many individuals are responsible for their own retirement outcomes.

This guide is designed to be used as a reference. Each section builds on the previous one and focuses on practical decision making rather than theory. You can read it from start to finish or return to specific sections as your circumstances change. The goal is not perfection, but progress and consistency over time.

Why Investing Looks Different in Canada

Investing in Canada comes with a unique set of challenges and opportunities. The cost of living has increased significantly, particularly when it comes to housing. As a result, Canadians often have less room for error when saving for long term goals. Investment growth has become a necessity rather than an optional supplement to income.

Canadians are also living longer, which means retirement savings must last for several decades. At the same time, defined benefit pension plans have become far less common, especially in the private sector. This has shifted the responsibility of retirement planning from employers to individuals. Without investing, it is difficult to accumulate enough capital to support a long retirement.

Government programs such as the Canada Pension Plan (CPP) and Old Age Security (OAS) provide a baseline level of income in retirement, but they are not designed to fully replace employment earnings. For most people, these programs cover only a portion of retirement expenses. Investing fills the gap between government support and the lifestyle most Canadians want to maintain. This makes understanding how to invest effectively an essential skill rather than a luxury.

What Is Investing?

Common Misconceptions (And Why They're Wrong)

"Isn't investing just gambling?"

No. Long-term investing in diversified assets is fundamentally different from gambling. When you invest in a broad portfolio of Canadian and global companies, you are participating in economic growth over decades. While individual stocks or day trading can be speculative, a properly diversified portfolio has consistently built wealth over time. The difference is time horizon and diversification, not luck.

"Don't I need a lot of money to start?"

Not at all. Many Canadian brokerages now allow you to start with as little as $50 or even less. For Example: A share in ticker XEQT is currently $40.16, and discount brokerages like Wealthsimple will allow you to buy partial shares meaning you could start with as much as $1. What matters more than the starting amount is consistency. Investing $100 every two weeks starting at age 25 will compound into significant wealth by retirement. The barrier is not how much you have today, but whether you start at all.

"Should I wait for the 'right time' to invest?"

The right time is now. Markets have always faced uncertainty. There has never been a perfect moment to invest. Waiting for ideal conditions means missing years of compounding. Even investors who started during market crashes have historically done well if they stayed invested. Time in the market beats timing the market.

Investing vs Saving

Saving is the process of retaining or putting aside a portion of the money you make each week. Investing is the process of taking those saved funds and buying assets that one can be reasonably expected to provide a positive return.

Saving is best for short term (ie. 1-6 months) spending objectives. It should also be used for your emergency and sinking funds. Both scenarios require easy access to your funds in order to pay the intended expense immediately when it arises. Meanwhile, they are too short of a timeframe to expect a reasonable risk adjusted rate of return from an investment. Savings are best held in a high interest savings account so that you can accumulate a small return on your uninvested cash.

Investing is best for medium (car, house, child’s education) and long term (retirement) saving objectives. In each of these scenarios the funds should not need to be accessed immediately as they are intended to pay for future objectives. Also, you have a long time for the investment returns to compound. Investing objectives less than 10 years may require a mix of equites (ie. stocks) and fixed income (ie. bonds) to minimize financial risk. As the investing duration increases the best risk adjusted returns can be found in stocks.

The Role of Time and Compounding

Compounding is the process by which your invested money earns interest, and then that interest earns interest.

For example: If you invest $1,000 today in an investment with a 7% annual rate of return the result of compounding is the following:

Year 1: $1,070 ($1,000 principle investment and $70 interest)

Year 2: $1,144.90 ($1,000 principle investment, $140 interest, $4.90 compound interest)

Year 10: $1,967 ($1,000 principle investment, $700 interest, $267 compound interest)

Year 50: $29,457 ($1,000 principle investment, $3,500 interest, $24,957 compound interest)

Compound interest is the reason why investing only a small amount of money throughout your life can have a significant impact on your ability to reach your financial goals. However, it is important that you start as early as possible in order to provide your self with an opportunity for compounding to do its work. The later your start the less beneficial compounding becomes.

For example: Nick and Nate invest $250 per month into an investment yielding 7% per year. Nick is age 18, and Nate is 30. They both plan to retire at 65 years old. How much will each have in retirement?

  • Nick: $993,684

  • Nate: $417,379

In this scenario, Nick would have $576,304 more money than Nate in retirement simply because he started 12 years prior. His total investment over those 12 years was only $36,000 more, but because he started earlier compound interest did the rest of the work for him.

It is also important that you determine an investment amount each month that you can remain consistent to, regardless of life circumstances. Infrequent investing will have a similar impact to starting late hindering your long term returns.

Where Investing Fits in Your Financial Plan

The Canadian Financial Order of Operations

The following is an adaptation of the financial order of operations created by the money guy show. It is a checklist that you should follow when deciding how to allocate your savings in order to create financial security. It is important that you address each step prior to the proceeding to the next.

Short-Term vs Long-Term Goals

The timeframe of your financial goal determines where to keep your money and how to invest it.

Short-Term Goals (0-5 Years)

Emergency funds, car purchases, weddings, near-term home down payments.

Where to keep it: High-interest savings accounts, GICs, or money market funds.

Why: You cannot afford market losses right before you need the money. Maintaining your capital matters more than growth.

Medium-Term Goals (5-10 Years)

Flexible home purchases, education savings.

Where to keep it: Balanced mix of equities and fixed income that becomes more conservative as your target date approaches.

Why: You have some time to recover from market downturns, but not enough to be fully aggressive.

Long-Term Goals (10+ Years)

Retirement savings, wealth building.

Where to keep it: TFSA and RRSP with majority in equities, especially in early years.

Why: Time allows you to ride out volatility and benefit from compounding. This is where real wealth is built.

The Bottom Line

Investing short-term money in stocks risks selling at a loss when you need it. Keeping long-term money in savings accounts guarantees you lose to inflation and miss decades of compounding growth. Match your strategy to your timeline.

Canadian Investment Accounts Explained

Tax-Free Savings Account (TFSA)

What It Is

The Tax-Free Savings Account (TFSA) is a registered account intended to help Canadians to save for short, medium, and long term expenses. Its most powerful use case though is as a retirement investment account. Unfortunately, it suffers from poor name selection which often results in Canadians not taking full advantage of the account.

The Key Benefit

The benefit of the TFSA is that all income earned within the account is tax-free. Comparatively, in a taxable account all dividends, capital gains, and interest would have to be claimed as income in the year they are earned. This is not the case in the TFSA which provides tremendous long term investment return benefits.

Real Numbers: TFSA vs Taxable Account

Example: You are age 20 and live in Ontario making $80,000 per year. You want to invest $7,000 for the next 45 years earning 7% per year. The following is the invest:

  • TFSA: $2,140,262

  • Taxable Account: $1,491,160

Important Details

  • TFSA contributions are not tax deductible.

    • They can not be used to offset taxes in the year you contribute. However, they will not be taxed whenever you decide to withdraw the funds.

  • The maximum contribution limit for 2025 is $7,000. All Canadian citizens start accumulating room when they reach age 18, and all unused room gets carried forward.

    • You can calculate your personal contribution room using our calculator here.

Registered Retirement Savings Plan (RRSP)

What It Is

The Registered Retirement Savings Plan (RRSP) is a registered account that is intended for the sole purpose of investing for retirement. There are some programs such as the Home Buyers Plan (HBP) and Lifelong Learning Plan (LLP) that allow the funds to be used for alternative purposes. However, they must be re-contributed.

How It Works

The RRSP is like the TFSA in that all investment earnings will not be taxed within the account. The other benefit is that it provides you with a tax deferral opportunity.

The premise goes like this: When you are working you will likely earn a higher income compared to when you are retired. Hence you should have a higher marginal tax rate during your working years. The RRSP provides you with opportunity to save some money today, invest it within the account, and then pull it out when you are taxed at a lower rate.

It does this through the following:

  • Providing you with a tax deduction in the year you contribute

  • Taxing you at your marginal tax in the year you withdraw

Additional Perks

Another perk of this account is that you don't have to claim the deduction in the year you contribute, it can be withheld until a higher income earning year. However, there is a maximum deduction limit each year. The maximum 2025 deduction limit for the RRSP is the lesser of 18% of previous years earned income or $32,490. You can calculate your RRSP tax refund here.

First Home Savings Account (FHSA)

What It Is

The First Home Savings Account (FHSA) is a new addition to the list of Registered Accounts in Canada. The sole purpose of this account is to help young Canadians save a down payment for their first home. This account can also be utilized by those who were previous home owners but haven't owned a home for the last five years.

The Triple Tax Benefit

The FHSA combines the benefits of the TFSA and RRSP, but only if the funds are used for your first home purchase. This includes:

  • Tax deduction in the year you contribute (or withheld to future year)

  • Tax free growth

  • No taxation upon withdrawal

Contribution Rules

Unlike the TFSA where contribution room starts accumulating at your 18th birthday, you must open the FHSA to start the process. You can contribute $8,000 annually up to a lifetime total of $40,000. The carry forward limit is $8,000 per year. The funds must be used within 15 years of opening the account.

Non-Registered Investment Accounts

What They Are

Non-Registered Investment Accounts are another option that Canadians can use to grow their wealth. They do not provide any of the tax benefits offered by the other account options. These accounts work best for high net worth individuals who have already maximized their Registered Account options. Also, they should be used for individuals that wish to engage in frequent trading activity.

How They're Taxed

In Non-Registered Accounts, all investment income is taxed in the year that it is earned, and added to your taxable income. How it is taxed depends on the type of income earned. We go into more detail in our article here, however, the following is a brief summary:

How Much Should You Invest?

Savings Rate Guidelines

The exact amount that you should save depends on a variety of factors including:

  • Your income

  • Your age

  • Your current situation (in school, living at home, living on your own)

  • Your financial goals (ex. Plan to own a home, or plan to live off investments in retirement)

  • When you plan to retire

  • Investment risk tolerance

However, the following is a rule of thumb that we generally recommend depending on when you start:

  • Under Age 30: Aim to save an invest 10% of your next income each month.

  • Age 30: Save, and invest at least 15% of your net income each month.

  • Age 40: May need to save 30% or more of your next income each month in order to achieve the same financial goals.

This shows you why starting early is so critical to long term investing success as it allow time for your savings to compound.

Starting Late or Early

When you decide to start investing will have a significant impact on how much you ultimately will need to save. The most important variable in investing is time.

Early career investors (20s) have time as their greatest advantage. Even modest monthly contributions can compound into meaningful wealth if given enough years to grow. At this stage, income is often lower but expenses are usually more flexible. Because retirement is decades away, short term market volatility has little practical impact. This allows early investors to prioritize growth assets such as equities.

The most important objective at this stage is consistency rather than optimization. Building the habit of investing regularly matters more than selecting the perfect investment.

Mid career investors (30s-40s) face a different challenge. Time becomes more limited, which means your savings rate plays a much larger role in achieving financial goals. While income is often higher, lifestyle inflation can quickly reduce the ability to save if it is not controlled intentionally. Market volatility can also feel more stressful as retirement approaches, increasing the likelihood of emotional decision making.

Investors who start later often need to balance continued growth with a gradual reduction in risk. Mistakes during this stage are more costly because there is less time for recovery.

Late career investors (45+) require catch up strategies. This typically requires saving a significantly higher percentage of income and fully maximizing all available registered accounts. It may also involve reducing expenses that do not meaningfully improve quality of life.

Attempting to compensate for lost time by taking excessive investment risk often leads to poor outcomes. Speculation is not a substitute for time. A disciplined and consistent approach is far more reliable.

What Can You Invest In?

There are a broad range of different investment types that a Canadian could have in their portfolio. How much of each will depend on your risk tolerance, financial goals, and where you are in life (ex. Retirement vs in your 20’s). This section will dive into each of these investment types so you understand what they are, and when to hold them.

Stocks (Equities)

What They Are

A stock is simply a partial ownership share in a company which entitles you to a claim on a portion of company earnings. A company will generally return capital to their shareholders through one or both of the following: dividends or capital appreciation. Not all companies pay dividends but those who do will generally pay them quarterly. If the company does not pay a regular dividend then returns are dependent solely on an increase in the stock price.

What You Can Buy in Canada

In Canada, you have a wide variety of individual stocks that can be purchased through your brokerage/bank of choice. These include:

  • Canadian companies listed on the Toronto Stock Exchange (TSX)

  • US companies listed on the New York Stock Exchange (NYSE) or NASDAQ

  • Asian, European, or other countries that are listed as an American Depository Receipt (ADR) or Canadian Depository Receipt (CDR)

The Upside: Massive Growth Potential

The primary benefit of owning stocks is there is a large potential upside in terms of growth if the company does well. A prime example of this would be Amazon (AMZN) which has grown by ~25.6% per year over the last 20 years. A $10,000 investment in late 2005, would be worth $1,183,328 today. This is life changing returns from one investment choice.

The Downsides

However, there are two obvious downsides to holding individual stocks.

Downside #1: Most stocks underperform. The first is that not all stocks produce returns like Amazon. In fact, a vast majority produce underwhelming returns. Previous studies have shown the number to be in the range of 60-75% of stocks underperform the Standard and Poor's 500 (S&P 500) Index. Add to this that the mega outperformers like Apple, Amazon, NVIDIA, etc only make up ~2% of stocks in the index.

Downside #2: High volatility. The second potential downside of stocks is that they require the ability to tolerate large price fluctuations. Stocks have a high amount of volatility compared to fixed income assets like bonds, GIC's, money market funds, etc. Referring back to the example of Amazon, during this long period of phenomenal returns, there was a rollercoaster ride. In 2022, the stock fell ~50% from the previous high that year. If you can't stomach decreases like this without losing confidence in the company then maybe individual stocks aren't for you… and thats ok.

Bonds and Fixed Income

Types of Fixed Income

There are several types of "fixed income" which include:

  • Bonds

  • Guaranteed Interest Certificates

  • Money Market Funds

  • High Interest Savings Accounts

The most complex of these options to understand is a bond, but once you get it the rest are easy.

How Bonds Work

A bond is simply a loan contract whereby the roles are reversed compared to what you are used to. This time you are lender not the borrower. You buy a company or governments bond in exchange for a predetermined interest rate return.

Example: You buy a $1,000 of 5-year treasury bonds yielding 4% interest. The government will pay you $40/year for 5 years. On the last year, the bonds expire and you receive your principle amount of $1,000 back.

The Risk: Credit Quality Matters

Based on the above example you would assume bonds have no risk, but that isn't the case. The price of the bond can fluctuate over time, albeit generally to a much less degree than stocks. The degree to which the bond price fluctuates is often dependent on the credit risk of the borrower. This is just a fancy way of saying the likelihood that the borrower will pay you back your money.

On one end of the spectrum you have the US government. They have a pristine record of paying back their bond holders this is why Treasury Bonds are often viewed as the most safe. The opposite extreme would be low credit rating corporate bonds, often termed junk bonds. The later tends to see more fluctuations in price, and more defaults which makes them more risky.

The Trade-Off

Provided you buy "safer" bonds, or other fixed income assets as noted above there is a relatively low risk to your initial investment. Compared to stocks the returns of bonds are much more stable over time. Also, they provide a steady income source that is preferred for retirees who live off their investments.

However, the primary downside is that the increased stability of bonds generally results in less potential upside. Over the past 100 years the S&P 500 has produced an average return of ~10%/year. Meanwhile, treasury bonds have been in the ~4-6% per year range on average. For a more detailed comparison we created a blog for you here.

Investment Products

Exchange-Traded Funds (ETFs)

What They Are: Exchange Traded Funds (ETFs) are investment products that allow you to purchase shares in many (even thousands) of companies with one low cost purchase. For example: Ticker XEQT which is a globally diversified ETF currently trades at $39.89 and allows you to purchase shares in ~8,400 different companies around the world. ETFs trade like a stock, and can be purchased during market hours.

Think of It as a Money Pool The best way to think about an ETF is as a money pool. You or I, likely couldn't buy shares in 8,400 different companies. The cost would be unapproachable. However, an ETF allows us all to pool our money together. The sum total of our money is enough to be able to buy into all of those different companies. Thus, we can contribute to an ETF, and get a partial ownership stake in all of the underlying holdings with one purchase.

The Cost Advantage ETFs are operated by investment management companies such as Blackrock or Vanguard for a fee. The management expense ratio combines the cost to operate the fund, and the managers fee. It is expressed as a percentage which is deducted from your returns each year. Due to the size of some ETFs the manager is able to charge a very low fee. The ticker XEQT, noted above, has an MER of 0.17%. The low cost of ETFs is what makes them the preferred option over mutual funds.

Real Numbers: ETF vs Mutual Fund John who is 25 years old received an inheritance of $200,000 from his wealthy Grandma Judy. He invests $100,000 in a mutual fund through his bank, which charges an MER of 2%. The other $100,000 he invests in XEQT through a discount brokerage firm. Both yield a long term average return of ~7%. He doesn't contribute another penny to either account until he is 65 years old. The net result is he will end up with half the amount of money, because of management fees. This is the power of compounding.

  • Bank Mutual Fund: $703,998

  • Discount Brokerage Firm investments in XEQT: $1,405,170

The Diversification Benefit The one major benefit of investing in ETFs that individual stocks, or bonds doesn't provide is broad market exposure. An ETF allows you to get instant access to a diversified portfolio with one purchase. Depending on the ETF of choice this could be across multiple companies, industries, countries, and even asset types.

Mutual Funds

What They Are: Mutual funds are professionally managed investment products that are most commonly offered through banks and financial advisors. In most cases, they are actively managed, meaning the goal is to outperform a benchmark by selecting specific securities.

The Primary Drawback: Cost The primary drawback of mutual funds is cost. Management expense ratios are typically much higher than those of exchange traded funds, and these fees are charged regardless of performance. Over long periods of time, even small differences in fees can result in significantly different outcomes due to compounding. Higher fees reduce the investor's share of market returns year after year.

When to Consider Them Mutual funds may have limited use cases, particularly in specialized strategies. However, for most long term investors focused on broad market exposure and wealth accumulation, they are generally an inefficient option. In non registered accounts, they are also often less tax efficient due to frequent trading and internal distributions.

Index Funds vs Active Funds

The Key Distinction One of the most important distinctions investors must understand is the difference between index based investing and active management.

Why Index Funds Usually Win Over long periods of time, the majority of actively managed funds fail to outperform their benchmark after fees. While some managers outperform in certain years, identifying them in advance is extremely difficult. Sustained outperformance is rare. Higher fees further compound this problem by creating a constant drag on returns.

How Index Funds Work Index funds are designed to track a market index (ex. S&P500) rather than attempt to outperform it. They do not rely on predictions or stock selection decisions. Instead, they capture market returns at a very low cost. This simplicity, combined with lower fees, results in a higher probability of long term success for most investors.

The Bottom Line Active funds may still have a place in specific situations. However, for core long term holdings, index based approaches tend to be more reliable, more predictable, and easier to stick with through different market cycles.

Building a Diversified Portfolio

Asset Allocation

Asset allocation refers to how your investments are divided across different asset types, most commonly stocks and bonds. This decision has a larger impact on long term outcomes than individual stock or fund selection.

Stocks are the primary driver of portfolio growth. They come with higher volatility, but historically provide the strongest long term returns. Bonds and other fixed income investments provide stability, reduce overall portfolio volatility, and offer predictable income. The appropriate mix between the two depends on your time horizon, financial goals, and ability to tolerate market fluctuations.

A higher stock allocation generally increases expected returns but also increases short term volatility. A lower stock allocation reduces volatility but limits long term growth potential. Asset allocation should be viewed as a risk management decision rather than a return maximizing one.

Diversification by Geography

Geographic diversification refers to spreading investments across different countries and regions rather than concentrating them in one market.

Canadian investments offer several advantages, including exposure to financial institutions, natural resources, and favourable tax treatment for dividends. However, Canada represents a relatively small portion of the global equity market. Limiting investments to Canada alone increases concentration risk.

U.S. markets provide access to many of the world’s largest and most innovative companies. International markets further reduce reliance on any single economy and help smooth long term returns. A globally diversified portfolio reduces the impact of country specific risks and improves overall stability.

Understanding Risk

Risk Tolerance vs Risk Capacity

Risk tolerance refers to how comfortable you are emotionally with market volatility. Risk capacity refers to your financial ability to withstand losses without jeopardizing your long term goals.

These two concepts are often confused, but they are not the same. You may have the financial capacity to take risk but lack the emotional tolerance to handle large market swings. Alternatively, you may feel comfortable with volatility but lack the financial ability to absorb losses.

Your portfolio should be designed based on the lower of the two. When risk tolerance is exceeded, investors are more likely to panic and make poor decisions during market downturns. A portfolio that you can stick with is more effective than one that looks optimal on paper.

Common Risk Profiles

A conservative risk profile prioritizes capital preservation and income. These portfolios typically have a higher allocation to fixed income and lower expected volatility.

A balanced risk profile aims to achieve growth while limiting volatility. These portfolios generally hold a mix of stocks and bonds and are common among investors with medium time horizons.

A growth risk profile prioritizes long term appreciation and accepts higher short term volatility. These portfolios are typically stock heavy and are more suitable for investors with long time horizons and strong risk tolerance.

Common Investing Mistakes Canadians Make

Trying to Time the Market

Market timing involves attempting to buy and sell investments based on short term market movements. For value investors it can also mean trying to get the “right” price, instead of a good price. This strategy relies on predicting events that are inherently unpredictable.

For Example: If you were looking at a stock such as Carvana Co (CVNA) they were on the brink of bankruptcy around 2023 which forced the stock down to ~4USD/share from a previous high of ~360USD/share. Even if you bought half way down at 180USD/share in January 2022, the stock now trades at ~400USD/share in January 2026. That is still at 122% increase in 4 years, or 22% per year.

Missing even a small number of strong market days can significantly reduce long term returns. Since market gains are often concentrated in short periods, staying invested is typically more effective than trying to move in and out of the market.

Chasing Performance

Performance chasing occurs when investors buy investments that have recently performed well, assuming that strong returns will continue.

This behaviour often results in buying after prices have already increased and selling after declines. Over time, this pattern leads to poor outcomes. Long term investing success depends on discipline rather than reacting to recent performance.

Ignoring Fees

Fees reduce investment returns every single year, regardless of market performance. Because fees compound negatively, their impact becomes more significant over long periods of time.

Small differences in fees can result in large differences in portfolio value over decades. Reducing costs is one of the most reliable ways to improve long term investment outcomes.

This is why index ETF investing is the most commonly recommended strategy as it allows you to get market level returns at a very small cost. Meanwhile, you should also seek to invest using a low cost brokerage firm such as Wealthsimple Trade or Questrade.

Poor Tax Efficiency

Poor tax efficiency occurs when investments are held in accounts that are not well suited for their tax treatment. In Canada, there are a few common errors that create unnecessary tax drag on your portfolio.

Common Tax Efficiency Mistakes

  • Not maximizing tax-advantaged accounts first. You should fully maximize your TFSA, RRSP, and FHSA before investing in a Non-Registered Account. Tax-free and tax-deferred growth is too valuable to leave unused.

  • Holding interest paying assets in Non-Registered Accounts. Interest income is taxed at your full marginal tax rate, making it the least tax-efficient type of investment income. GIC’s, bonds, and high interest savings should be held in a registered account whenever possible.

  • Not Holding US dividend paying equities in your RRSP. US withholding tax on dividends is waived in RRSP due to a tax treaty with the US. The same benefits do not apply for TFSA’s or Non-Registered Accounts.

  • Misplacing Canadian dividend paying stocks. Canadian dividend paying stocks receive preferential tax treatment in Non-Registered Accounts through the dividend tax credit. This makes them relatively tax-efficient there if you have already maxed out your taxable advantaged accounts.

The Cost

These mistakes reduce the amount of money available to compound over time. Even small inefficiencies can cost tens of thousands of dollars over a multi-decade investment timeline.

Tax-Efficient Investing in Canada

Asset Location Strategies

Asset location refers to placing investments in the most appropriate account type to minimize taxes incurred. The goal is to hold tax-inefficient investments in tax-sheltered accounts and tax-efficient investments in taxable accounts.

It is important to note again that until you have maximized your tax-advantaged accounts you should avoid using a Non-Registered Account.

TFSA (Tax-Free Savings Account)

The TFSA is best for growth-oriented investments where you expect large capital appreciation either through capital gains, dividends, or both.

Since all growth is tax-free, you want to maximize the benefit of this account by holding your highest-growth assets here. Canadian and US equities, particularly growth stocks, are well-suited for the TFSA.

RRSP (Registered Retirement Savings Plan)

The RRSP is best for US dividend-paying stocks, as the RRSP is exempt from US withholding tax. If you hold interest paying assets such as bonds, and GIC’s they would be well placed inside your RRSP.

Non-Registered Accounts

Best for Canadian dividend-paying stocks, which benefit from the dividend tax credit. Also, tax-efficient ETFs or stocks that generate primarily capital gains rather than distributions are also reasonable choices for non-registered accounts. The reason being that capital gains are taxed at a lower rate than interest, and foreign dividends.

Frequently Asked Questions

TFSA vs RRSP: which should I prioritize?

The decision depends largely on your current marginal tax rate compared to your expected tax rate in retirement:

  • Higher current tax rates generally favour RRSP contributions because you are likely to have a lower income in retirement.

  • Meanwhile, lower current tax rates often favour TFSAs because your income will either be similar or higher in retirement.

We developed a calculator here that you can use to determine which is the right choice for you.

Should I invest while paying off debt?

This depends on the interest rate of the debt and your overall cash flow. High interest debt (>8-10%) should be prioritized above investing. The reason being that we are unlikely to produce consistent returns above the cost of our debt, at least without unnecessary risk. However, low interest debt can be paid off gradually while you simultaneously invest.

If you want a more targeted answer we created a one page excel file that tells you exactly which strategy you should use: invest or pay down debt. You can provide your email here, and we will send that to you.

How do I invest if I'm self-employed?

Self-employed individuals should prioritize RRSP contributions to reduce their tax burden. This is particularly important because self-employment creates unique tax challenges.

The first is that your taxable income is often high relative to your actual take-home pay. Even with business deductions, gross income does not always reflect the cash you have available to spend. RRSP contributions provide tax deductions that help align your taxable income with your true financial situation.

Also, Self-employed individuals also lack employer pensions, which makes building retirement savings entirely your responsibility. Consistent RRSP contributions serve dual purposes: they reduce current tax liability while building the retirement income that no employer will provide.

If you are incorporated, additional options become available. Speak with an accountant about strategies like paying yourself dividends, using an Individual Pension Plan (IPP), or making contributions to a corporate investment account. The optimal approach depends on your specific business structure and income level.

How do I balance retirement and children’s education savings?

Retirement savings should generally take priority, as education can be funded through multiple sources. In other words, the funds from your TFSA can pay for your retirement and your child’s education. Meanwhile, the funds from an RESP can only be used for their education.

RESPs should be used strategically once retirement contributions are on track. Luckily, the maximum grant for the RESP is reached with an annual contribution of $2,500 which is only $208.33/month.

Conclusion

Successful investing is not about prediction or complexity. It is about consistent behaviour over long periods of time.

By focusing on savings rate, diversification, costs, and tax efficiency, you put the odds in your favour. Start as early as you can. If you are starting later, focus on what you can control. Over time, disciplined investing and compounding do the heavy lifting.

Disclaimer: The information discussed in this blog is not financial advice, and is meant for educational purposes only. Please consult a personal financial expert before making any financial decisions.

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