What is considered day trading in a TFSA

What is considered day trading in a TFSA

Fareed Ahamed is an investment advisor in Vancouver who opened a tax-free savings account (TFSA) in 2009, when it was first introduced by the federal government. By the end of 2011, his $15,000 of contributions had grown to over $600,000. He was trading speculative penny stocks, mostly in the junior mining sector, with relatively short holding periods. 

Canada Revenue Agency (CRA) took the position that Ahamed’s trading activity constituted a business from 2009 to 2013, and that the profits, despite being inside a TFSA, were in fact taxable. In a recent Tax Court of Canada decision, Justice David E. Spiro validated the CRA’s interpretation, though the taxpayer is appealing the ruling. 

What does the CRA consider day trading in a TFSA?

CRA has previously contended that securities transactions may not always be on account of capital and may be considered income if the taxpayer is deemed to be carrying on a business. 

According to the CRA, “some of the factors to be considered in ascertaining whether the taxpayer’s course of conduct indicates the carrying on of a business are as follows:

It bears mentioning that none of the individual factors alone is typically sufficient to cause a taxpayer’s trading to be treated as a business, but rather, the combination of factors needs to be considered. 

Day-trading income within non-registered accounts

If a taxpayer is deemed to be carrying on a business in their non-registered account, profits will be fully taxable as business income, instead of as a capital gain with only 50% taxable. This at least doubles the resulting tax payable—maybe more if the higher income inclusion pushes the taxpayer into a higher tax bracket. 

This tax treatment can apply to currencies, including cryptocurrencies. It can also apply to short sellers who sell a stock short, as well as to profit when they buy back the stock at a lower price. 

Some of a taxpayer’s trading activities may be considered on account of income (business income treatment) while others on account of capital (capital gains tax treatment). This might apply if they have an account that is actively traded and another that is less active, for example. 

Day-trading income within tax-free savings accounts

The Ahamed decision, though it is being appealed, is a warning for other investors who engage in day trading or other speculative activities in a TFSA. 

Doing so risks having otherwise tax-free income and profits subject to full taxation as business income, along with associated interest and penalties if that income is added to a previous year’s tax return in a subsequent year.

Other registered retirement accounts

Registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), and similar registered retirement accounts are exempt from the business income taxation of trading. 

According to the CRA, “if an RRSP or RRIF were to engage in the business of day trading of various securities, it would not be taxable on the income derived from that business provided that the trading activities were limited to the buying and selling of qualified investments.”

Qualified investments include cash, bonds, guaranteed investment certificates (GICs), stocks, mutual funds, exchange traded funds, warrants and options, foreign exchange, gold and silver, and other listed securities and investment funds. 

This day trading exemption for RRSPs may seem like good news at first. But it may be less so when you consider why the CRA exempts these accounts. 

Because RRSP accounts are eventually subject to the RRIF minimum withdrawal requirements starting no later than age 72 and are fully taxable on death (unless left to an eligible beneficiary like a spouse or financially dependent minor child or grandchild), the CRA will get their tax eventually. Growing your RRSP or RRIF account by day trading, if you are successful, means a larger tax liability is looming in the future since withdrawals are fully taxable. 

It appears to be that the tax-free nature of TFSAs, and the tax-preferred treatment of capital gains (only 50% taxable), causes TFSA and non-registered accounts to be at risk.

Trading within RESPs

Registered education savings plans (RESPs) are registered accounts, which can be at particular risk if an investor is found to be carrying on a business. According to the CRA, “an RESP is revocable pursuant to paragraph 146.1(2.1)(c) [of the Income Tax Act] if it begins carrying on a business.”

This could cause government grants to become repayable and the accumulated income to be taxable in addition to a 20% penalty tax.

Should traders become corporations?

The CRA has confirmed that a “trading business may be considered an ‘active business’ and any gains or losses, as well as any interest or dividend income . . . could be entitled to the small business deduction.” One benefit of incorporation is a day trader may be able to take advantage of the low tax rate on small business income. 

The small business rate ranges from 9% to 12.2% currently depending on the province or territory, which is much less than even the lowest personal tax rate.

Should you trade within your investment accounts?

TFSA contributions and balances are reported by financial institutions to the CRA each year. This makes large TFSA balances and large gains in TFSAs easy to identify. The CRA is auditing taxpayers who may have been day trading in their TFSAs and will continue to do so.

Taxpayers should be aware of the tax implications of day trading and how this may impact different accounts. Investors should consider the risks of day trading, as despite Ahamed’s success, even professional traders have a tough time beating the market.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

Read more from Jason Heath:

Making sense of the markets this week: April 2, 2023

Making sense of the markets this week: April 2, 2023

Kyle Prevost, editor of Million Dollar Journey and founder of the Canadian Financial Summit, shares financial headlines and offers context for Canadian investors.

Freeland fires again at Canadian Banks

There are several big-picture looks at the important aspects of the Canadian federal budget that was unveiled on Tuesday. For this week’s “Making sense of the markets this week” column, we’re focussing on two lesser-reported items buried in the details: A new measure aimed at Canadian banks, and another at corporate shareholders.

The 2023 federal budget and banks

If you’re a Canadian bank shareholder you may already be smarting from the hit you took in the last budget when the Canada Recovery Dividend was announced, and an extra 1.5% corporate tax was placed on banking and life insurance companies.

On Tuesday, Finance Minister Chrystia Freeland announced that the Income Tax Act would be amended, and that dividends received on Canadian shares held by Canadian banks and insurers would be treated as business income. This change is forecast to take $3.15 billion out of shareholders’ pockets over the five years beginning in 2024.

Given that the banking sector, as a whole, provides a relatively inelastic good, and the fact that Canada’s banks and insurers operate in an oligopolistic market structure, it’s fair to assume that the vast majority of these tax hits will be passed right along to consumers.

In other words, banks and insurers know Canadians need their banking services and they have (almost) nowhere else to go. These institutions, rather than take the hit to the bottom lines, will just raise the prices of financial products and services.

All this comes at a time when banks are likely to find it more expensive to capitalize themselves due to last week’s worldwide revelation of the risk involved in convertible bonds.

You can read more about Canadian bank stocks on MillionDollarJourney.ca.

The 2023 federal budget and corporate shareholders

The other interesting budget detail: The 2% share buyback tax. For those unfamiliar with the term “buyback,” know that it is when a company uses its profits to “buy back” its shares. This activity pushes share prices higher, allowing shareholders to potentially sell their shares for profit. The whole point is to pass along profits to shareholders in a tax-efficient manner. Investing titan Warren Buffett recently defended the practice.

The Liberal Government suggests this new tax will incentivize companies to reinvest profits instead of rewarding shareholders. Predictably, the Canadian Chamber of Commerce are not fans of the changes in taxation law.

If the Canadian federal government wants retail investors and corporations to put more money in Canada, perhaps it should incentivize investing—and not make it less attractive.

BlackBerry continues to fade while Dollarama thrives

Three Canadian companies from very different sectors of the economy reported earnings this week as BlackBerry, Dollarama and Lululemon opened their books. (All values are in Canadians currency, unless otherwise noted.)

Despite posting a meagre profit in 2021’s fourth quarter, BlackBerry reported a US$495 million loss. CEO John Chen blamed the negative earnings results on delays from several large government cybersecurity contracts. Shareholders are likely to grow increasingly restless as the company continues to try to claw its way back to profitability based on cybersecurity specialization. BlackBerry has roughly three years left of solvency, given its current cash burn rate.

Lululemon shares (which have traded exclusively on the NASDAQ stock exchange since 2013) jumped more than 14% on Wednesday. That came after the news of its earnings and a very strong 2022 holiday shopping season. Lulu’s overstocked inventory issue from the third quarter last year looks to have corrected itself. Overall, the company appears to be on a solid footing as same-store sales were up 27%, year over year.

Meanwhile, Dollarama should be excited to report its profits grew by 27% year-over-year in 2022, andcredited inflation-conscious shoppers for its increased foot traffic. And now, Dollarama shareholders have a 28% higher dividend to look forward to. With 60 to 70 new stores opening next year, Canada’s premier dollar store should continue along its growth trajectory.

Banking run might lead to an inflation crawl

First we had the Silicon Valley Bank (SVB) and cryptobanks debacle from a couple of weeks ago (since stabilized after First Citizens Bank took over operations); then last week, it was Europe’s turn to worry about its banks going under.

Confidence in the structural integrity of the broader financial system appeared to be mostly restored this week.

That said, this scary couple of weeks might end up working very well for the world’s central bankers, thanks to a few unintended consequences. In my explainer on convertible “coco” bonds, I posited that the financial instruments had not been valued correctly from a risk/reward perspective. It appears that many investors from around the world agree.

S&P Global Ratings concurred: 

“An increased focus on downside risk could increase banks’ cost of capital and make new AT1 issuance more difficult and more expensive. Jittery investors will take some time to revise their perceptions of risk for individual banks and instrument structures.”

Basically, for retail banks and lenders, this means is it’s going to cost more money to get Tier 1 capital needed in order to make sure 2008 doesn’t happen again. So, they’ll have to pay investors a higher yield to encourage them to buy convertible bonds. And that means they’re not likely to issue as many of these bonds as they have in the past. That all adds up to less lending over the long run.

It’s also true that, as regulators get more involved in the banking sector and emphasize safety over profits, bank managers will be compelled to hang on to more deposits as they come in.

Less lending means less spending on everything, from houses to skyscrapers. This credit crunch is likely already being felt by both large corporations and retail consumers. It could be especially rough for folks in the American commercial real estate industry, as nearly 70% of U.S. real estate loans are generated by the same regional banks that are now under the regulatory microscope thanks to the failure of Silicon Valley Bank (SVB).

Finally, while it’s hard to quantify, it remains no less true that an economy’s “animal spirits”—how people feel about financial stuff—are major contributors to the direction it heads into for the short- and medium-terms. 

If all North Americans are hearing and reading about is record-low unemployment numbers and inflation headlines, they’re more likely to ask for raises or accept higher prices at their usual store. If that information cycle is suddenly replaced with panic-induced negative sentiment, we’re more likely to spend less and not feel as confident negotiating our salaries and benefits.

All these outcomes are great news, if you’re a central banker looking to slow the economy without breaking anything else. It’s also pretty good news if you’re a stock market investor feeling increasingly stressed by steadily rising interest rates.

Money makes happy people happier

“Money does not buy you happiness, but a lack of money certainly buys you misery.”

—Daniel Kahneman

Back in 2010, Nobel-prize winning researchers Daniel Kahneman and Angus Deaton released a landmark study to show that a household income of USD$75,000 (USD$103,000, adjusted for inflation, which is about $139,000 in Canadian dollars) best predicted happiness.

Their research showed that families earning below $75,000 could benefit from more money. But those with more didn’t show a correlation with increased happiness. The findings meshed well with the belief that “money can’t buy happiness” and that people could think, “Rich people are miserable, so I’m OK not being rich.”

Then in 2021, Matthew Killingsworth, senior fellow at Penn’s Wharton School, came along and ruined that feel-good story about more money meaning more problems. He found that happiness increased quite strongly after that $75,000 level, and “There was no evidence for an experienced well-being plateau above $75,000.”

In order to settle their dispute, Kahneman threw down the gauntlet and challenged Killingsworth to a cage fight—for researchers, that means to collaborate on a new paper.

Killingsworth’s name comes first in the citations, so maybe this means his hand was raised at the end of the fight.

What the authors discovered, when they put their respective theories to the test, was an interesting bit of nuance. It turns out that earning more than $75,000 will probably make you happier, but only if you were in the happiest 80% to begin with.

Kahneman and Killingsworth together concluded:

“There is a plateau, but only among the unhappiest 20% of people, and only then when they start earning over $100,000.”

If you had a baseline level of happiness, then the diminishing returns of a high income only start to kick in after $500,000. 

That intuitively feels more right. 

It would be great to have a follow-up research paper looking at the overall net worth or savings of people as it relates to happiness. I’d pay to read that, especially if they packaged it with a rematch for the “Econ Academic-weight Championship Belt.”

Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances over at MillionDollarJourney.com and the Canadian Financial Summit.

What happens to my RRIF when I die?

Can you name a beneficiary on a RRIF?

Thanks for your question, Bob. A registered retirement income fund (RRIF) is one of several registered accounts available in Canada, along with the registered retirement savings plan (RRSP), tax-free savings account

What happens to my RRIF when I die?

Can you name a beneficiary on a RRIF?

Thanks for your question, Bob. A registered retirement income fund (RRIF) is one of several registered accounts available in Canada, along with the registered retirement savings plan (RRSP), tax-free savings account (TFSA) and others. These accounts can be valuable financial tools, as they offer various tax incentives and handy estate planning options, such as naming a beneficiary (or multiple beneficiaries) who will receive the assets in the account upon our death.

In all provinces except Quebec, you can name your beneficiary directly within a registered account. In Quebec, the beneficiary can only be named in a will.

Let’s review who can be a beneficiary of your RRIF account and the tax implications depending on their relationship to you.

Who can be the beneficiary of a RRIF?

You have a few options for who can benefit from your RRIF account, Bob, which provides options for your estate planning by utilizing beneficiary designations in registered accounts.

Each of these options has different tax implications for your estate and the person or people receiving the RRIF. Let’s look at those next.

Tax implications for the RRIF

What happens to your RRIF when you die, and how your estate will be affected, depends on whom you name as the beneficiary. Let’s compare the tax implications for the situations mentioned above.

And if you want to divide up your RRIF between multiple types of beneficiaries, it’s best to seek advice from a financial professional, as the tax breakdown could be very complex.

Get RRIF advice from a financial planner

As you can see, Bob, you have various options for naming beneficiaries within your RRIF account, depending on your situation. Seeing as you have named your three adult children, and assuming that they are not financially dependent on you, this means that they will receive the assets on a tax-free basis; however, your estate will pay the taxes on your final return.

As with all aspects of an estate planning process, Bob, it is wise to consult a professional who can review your overall financial situation and inform you of all the tax impacts of your beneficiary designations and choices. A Certified Financial Planner is an excellent resource for information on registered accounts. They can walk you through the best options for your situation.

Thanks for your question.

Debbie Stanley is the CEO and Senior Estate Administrator at ETP Canada, a boutique firm specializing in estate administration and professional executor services. ETP Canada most recently launched an online course designed for Canadian executors called Executor Ready.

Read more on estate planning:

Best FHSAs in Canada: What to know about the new first home savings account

Best FHSAs in Canada: What to know about the new first home savings account

Canadians will soon be able to boost their savings for a down payment on a home with a new type of registered account. The first home savings account (FHSA) creates up to $40,000 in tax-free savings room for first-time home buyers who face barriers to entry into the real estate market. In this article, we’ll explain why the FHSA was created, how it works, and how you can maximize its potential—whether or not you’re saving for a home. (More on using it outside of home ownership later on.)

The best FHSA in Canada

Banks and other financial institutions can begin rolling out their FHSAs as early as April 1, 2023. As they do, the MoneySense editorial team will update this page so you can easily find the best FHSAs available in Canada. 

Here are some things to consider when comparing FHSAs as they become available: 

What is an FHSA?

Short for first home savings account, the FHSA is a type of registered account designed to help Canadians save to buy their first home, namely the down payment, which can be up to 20% of the total cost of the property. You can contribute up to $8,000 per year into an FHSA, up to a lifetime limit of $40,000. 

The FHSA shares similarities with the registered retirement savings plan (RRSP) and the TFSA, which are also available to Canadians. FHSA contributions are tax-deductible, like with an RRSP, and the money can be withdrawn tax-free, like with a TFSA—as long as the withdrawal is used for a down payment on a home. Funds put into an FHSA grow tax-free and are not subject to capital gains tax. 

What is an FHSA? Read our MoneySense Glossary definition.

FHSA start date

FHSAs are scheduled to become available as early as April 1, 2023. They are offered by banks, credit unions and other financial institutions that offer RRSPs and TFSAs. 

Though the federal government set a target date of April 1, some financial institutions are not yet ready to launch their FHSAs. Keep checking this page for updates. We will rank the best FHSA rates offered in Canada as they become available.

Read more about the announcement of the FHSA as part of the 2022 federal budget.

FHSA rules 

To open an FHSA, you must be a Canadian resident aged 18 or older. The FHSA can remain open for 15 years, or until the end of the year you turn 71, or until the end of the year following the year in which you make a qualifying home purchase—whichever comes first. 

You can contribute up to $8,000 per year toward your FHSA, up to a lifetime limit of $40,000. Unused contribution room is carried forward to the next year. Unlike a TFSA, however, FHSA contribution room only begins to accumulate once you’ve opened the account—it does not automatically begin when you turn 18. 

What investments can you hold in an FHSA? 

In Canada, there are limitations on the types of investments you can hold in registered accounts. The federal government has stated that the qualified investments for an FHSA will be the same as those for a TFSA. This means you will be able to hold: 

You can’t hold the following investments in your FHSA:

Read: “What can I hold in an FHSA?”

What happens to the money in an FHSA if you don’t buy a home? 

If you decide not to use money in an FHSA for a home purchase—you may decide that renting is better for you, you live with someone who already owns their place, or you inherit real estate—you can transfer the funds to an RRSP or a registered retirement income fund (RRIF) without being penalized or affecting your RRSP contribution room. In essence, the FHSA creates additional RRSP contribution room, up to $40,000, for all Canadians. 

However, keep in mind that an FHSA withdrawal used for a home purchase is not taxed, whereas funds withdrawn from an RRSP or RRIF are taxed.  

Using an FHSA with other accounts and home-buying programs

When buying your first home, you can use the FHSA with the Home Buyers’ Plan (HBP), which allows you to borrow up to $35,000 from your RRSP. And when buying a home jointly with another person, you can combine your FHSA and HBP withdrawals for a sum of at least $80,000 from your FHSAs and $70,000 through the HBP, for a total of $150,000. That’s equal to a 20% down payment on a home priced at $750,000. This is why the FHSA was created—to make buying a home more accessible for those wanting to get on the real estate ladder (more info below). 

However, these calculations do not account for potential tax-free investment growth in the FHSA, nor any money you may have saved in a TFSA, both of which would boost the total amounts available for a down payment. Note that HBP withdrawals are taxed if not repaid within 15 years.

To get a sense of how your investments might grow in an FHSA, use a compound interest calculator. 

FHSAs: How they compare to RRSPs and TFSAs

Here’s a chart that shows the key differences and similarities between these three accounts.

Are FHSA deposits insured? 

Yes. Effective April 1, 2023, the Canada Deposit Insurance Corporation (CDIC) will begin to offer separate coverage of $100,000 for eligible deposits held in an FHSA. Canadians’ deposits are now covered under nine different insured deposit categories at CDIC member institutions. Note, however, that while the CDIC covers GICs, it does not cover other types of investments.

Why was the FHSA introduced?

Many Canadians dream of home ownership. However, many factors have long made it a difficult goal to achieve, and that continues to be the case in 2023. These factors include high real estate prices, which require saving a substantial down payment and having a high income to qualify for a mortgage, as well as high rents, which make saving more difficult. (See how much income you need to afford a home in the Greater Toronto and Vancouver areas.)

As such, with the goal of helping more people buy their first home, the federal government announced in 2022 its plans to launch the FHSA in 2023. It also doubled the first-time home buyers’ tax credit from $5,000 to $10,000 and extended the First-Time Home Buyer Incentive to March 31, 2025, among other measures aimed at supporting home buyers. 

Frequently asked questions

Read more about FHSAs: 

When should you sell a used car?

Even before that unmistakable new-car smell disappears, a new car has become a depreciating asset—it’s no longer worth what you paid for it, and it will keep losing value over time. Huge downer, right? While you can’t avoid car depreciation, you can reduce how

When should you sell a used car?

Even before that unmistakable new-car smell disappears, a new car has become a depreciating asset—it’s no longer worth what you paid for it, and it will keep losing value over time. Huge downer, right? While you can’t avoid car depreciation, you can reduce how much value your new ride loses. You can even start thinking about depreciation before you buy a car. We’ll explain how, as well as the best time to sell a used car and how to get the best price for it.

What is car depreciation?

Car depreciation is the difference between a vehicle’s purchase price and its resale value. Unless the car is a collector’s item—say, a classic car—its resale value will decline over time. (A car’s value can go up, but this is very, very rare. Remember the pandemic-related car shortage of 2021?!)

Understanding how fast a vehicle depreciates and why can help you pick one that’s more likely to retain value over time.

How quickly does a car lose value?

Brand-new vehicles lose more value in their first year of ownership than in any other year after, starting as soon as you drive it out of the dealership. Why? People are willing to pay a premium for a new car. Once it’s been “used” at all, it becomes less valuable and attractive to a potential buyer. Unless the value drops significantly, there would be no benefit to buying a slightly used vehicle rather than spending a bit more to get a brand new one. Plus, newer models keep coming out, so the desirability of your car—and its value—will decline.

The table below shows how quickly a new $35,000 vehicle, such as a Subaru Outback, is likely to depreciate over the first five years. The rate of depreciation will vary by model. To find yours, search online for the make and model plus the word “depreciation,” or get an estimate of your car’s resale value on Canadian Black Book. More on this below, under “How to calculate depreciation and set a price.”

Cars depreciate by 50% somewhere between turning three and four years old. That’s why three years marks a significant point in car ownership. Depreciation is the largest single expense of owning a new vehicle—more so than other average lifetime ownership expenditures such as insurance, regular maintenance and gas. 

What causes a car to depreciate?

Multiple factors contribute to depreciation in both new and used cars. These factors may be brand- or model-specific, and others apply to all vehicles. For example, luxury models often lose some value due to reduced popularity over time, whereas the resale values of all makes and models are affected by issues related to their age and condition. On the other hand, a cheap commuter car could lose its value much faster, depending on the mileage and what types of roads it’s driven on.

If you’re planning to sell your car as used at the two- to three-year mark, knowing what causes a drop in value over time can help you set a competitive asking price. 

Causes of depreciation for new and used cars

1. The kilometres on the dial 

In Canada, car drivers average about 16,000 clicks per year. When you put your car up for sale, buyers will note the age of the vehicle and the number on its odometer. If your average annual mileage is significantly higher than 16,000 kilometres, that will suggest to buyers that your vehicle will need imminent maintenance, affecting the sale price. (Something to note if you’re in the market to buy a used car, too.)

2. Reputation and reliability

Some vehicle brands are known for their quality, reliability and durability, while others may be known for having frequent maintenance issues. (This info is easy to find—Google the year, make and model of the vehicle and see what reviews, ratings and buying guides say about it.) If your car’s make or model has a poor reputation, buyers may haggle on the price to help absorb any short-term maintenance costs. Similarly, if the model has ever been recalled by the manufacturer, used-car buying guides and car reviewers will mention this, and it could affect the resale value.

3. Number of previous owners 

Used cars with multiple previous owners typically depreciate more. Buyers may have concerns or suspicions about why so many people would want to part with this vehicle. They may also be dubious because multiple ownership suggests the used car has been driven and maintained to different standards over its lifetime, meaning that maintenance issues could soon follow.

4. Overall condition

Cosmetic issues such as poorly maintained bodywork and worn-looking interiors drive down the resale value of your used car. Mechanical issues will also have a significant impact on value. Even though the car may be used, people will want it to at least feel new to them. A detailing, for about $100, could make all the difference.

How to calculate depreciation and set a price

How do you set a realistic price for your used car? Canadian Black Book gives estimates for a car’s trade-in value. You plug in the vehicle’s year, make, model, mileage and any additional options (power sunroof, leather seats, etc.), plus your postal code, and the tool provides a resale value. To view it, though, you will need to provide your contact information.

Ways to reduce your car’s rate of depreciation

Reducing your car’s rate of depreciation can be broken down into two categories. First, we will consider how you can plan for a reduced rate of depreciation at the buying stage. Second, we’ll cover how you can lower the rate of depreciation once you own the vehicle.  

At the buying stage:

Once you own the vehicle:

Finally, you could remove the issue of depreciation almost entirely by planning to own the car for at least five years. At this age, your vehicle will not be expected to recoup significant value. 

The best time to sell your car

Considering all of the above, the best time to sell a new vehicle as used might seem to be “as soon as possible.” But that would mean changing cars frequently, which isn’t practical or cost-effective. Selling a car around the three- to four-year mark might get you a better price than if you waited longer, but it only makes sense to sell if you’re not using it much. Instead, you could hang on to it longer, keep the kilometres as low as you can and maintain the car inside and out. This should result in a fair resale price when you do choose to sell. 

Read more about autos:

How to buy mutual funds in Canada

Did you know that mutual funds have been around in Canada since the Great Depression? Though exchange-traded funds (ETFs) have gained popularity as an alternative, mutual funds are still the go-to option for many Canadians. According to the Investment

How to buy mutual funds in Canada

Did you know that mutual funds have been around in Canada since the Great Depression? Though exchange-traded funds (ETFs) have gained popularity as an alternative, mutual funds are still the go-to option for many Canadians. According to the Investment Funds Institute of Canada (IFIC), at the end of 2022, there were 3,409 mutual funds and 1,056 ETFs in Canada. The total invested in mutual funds was about $1.8 trillion, compared to $314 billion in ETFs.

What are mutual funds?

We all want to benefit from the stock market, but not everybody feels comfortable buying stocks directly. This is where mutual funds come in handy. They’re a way to invest in the stock market without picking the assets yourself.

A mutual fund is a “pooled investment,” pooling together money from many investors—possibly thousands—to buy a portfolio of securities. Investors buy “units” that represent their ownership in the fund and give them indirect exposure to the securities held by the fund.

The value of each unit you own increases or decreases daily based on the underlying portfolio’s performance. For example, if you own 10 units worth $50 each, then the total value of your investment is $500—$50 multiplied by 10. If the fund’s portfolio gains 1% (net of fees), then the total value of your investment would increase by 1% to $505.

You can hold mutual funds in registered and non-registered investment accounts. Examples of registered accounts include registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), and they allow you to hold your investments on a tax-deferred or tax-free basis, as applicable.

What’s the difference between mutual funds and ETFs?

Mutual funds and ETFs have much in common, plus some crucial differences. They’re both types of pooled investment funds that offer investors diversification, convenience and professional management for a fee. The fee charged is the fund’s management expense ratio (MER), and is a percentage of the assets invested.

Mutual funds and ETFs are bought and sold differently.

Mutual fund MERs are typically higher than comparable ETFs, because investors receive advice from a financial advisor. While the decision to work with an advisor or not depends on your personal circumstances and preferences, research has shown that working with an advisor could potentially create up to 2.3 times more wealth over time.

Here are other factors to consider when choosing your investments:

What to consider when choosing mutual funds?

There are several types of mutual funds available on the market. Consider these factors before investing:

How to buy mutual funds in Canada

Investors have two main options for purchasing mutual funds:

If you want a convenient and straightforward way to invest in a diversified portfolio without doing the heavy lifting yourself, mutual funds may be the right option for you. But before you jump in, consider various options to find the funds best suited to your time horizon, investment goals, risk tolerance and investment objective.

For more information about Fidelity Investments mutual funds, click here.

Read more about investing:

How to have the most tax-efficient retirement income plan

How to have the most tax-efficient retirement income plan

The most tax-efficient retirement income plan

Francine, there’s no such thing as “the most tax-efficient method of drawing down investments over a lifetime.” I’ll show you why by modelling four different withdrawal strategies that allow you to successfully retire at age 60. Then I’ll make a small change to your circumstances, and you will see that what was once the most tax-efficient plan might no longer work.

Not only will you see why “the most tax-efficient plan” doesn’t exist, but you’ll also realize that, if you are working with a planner, it is vitally important to look at alternative solutions within a computer model and participate in the planning process. 

The four different strategies help you to identify ways to reduce taxes. The first two have you starting Canada Pension Plan (CPP) and Old Age Security (OAS) at age 65, and the third and fourth ones start CPP at age 70 and OAS at age 65. Here they are:

Now, which solution do you think would be the most tax-efficient? Rank them from 1 to 4, based on what you think would be the “most tax-efficient.” Are you comfortable with any or all of these solutions?

Ways to save on taxes on your investments during retirement

Let’s look at the numbers based on the four solutions above.

It’s interesting that the solution creating the most wealth is also the solution that has the highest lifetime tax liability.

I arrived at the above numbers with the following assumptions:

The main reasons the RRSP top-up solution did so well include:

Spending an extra $10,000 in retirement

This table shows what happens when you spend an extra $10,000 a year or live to age 83, which is the life expectancy for women in Canada, according to Statistics Canada data.

Again, this looks interesting. If you live until age 83, the best solution from the previous chart becomes the lowest-ranked solution. Francine, of all these solutions, allow you to retire at age 60. So, which one would you choose?

Life changes, and so should your goals and financial plan

The challenge with financial planning is that things change. It’s good to simulate a plan over your lifetime to get a general sense of what’s possible. But once you have that, you’ll want to consider tax planning annually and/or over a five-year projection, particularly before you reach age 65 and receive your CPP and OAS.

Francine, if you really want a proper answer to this question, you need a financial planner to simulate it within a computer model, providing your input, to make it your plan. Planners can run the simulations, but only you know how you want to live and what strategies are a fit for you.

Allan Norman provides fee-only certified financial planning services through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc. (ACPI). ACPI is regulated by the Investment Industry Regulatory Organization of Canada (IIROC.ca). Allan can be reached at [email protected].

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Video: Buying your first home? Learn about the First-Time Home Buyer Incentive

If you’re saving up to buy your first home, you may benefit from the federal government’s First-Time Home Buyer Incentive program. This shared-equity program helps improve affordability for qualified first-time home buyers. Watch for more details about how the program works.

Video: The First-Time Home Buyer Incentive function request_ad(e,t){t(e)}!function(e,t,n,o,i,u){e._Rumble=o,e[o]||(e[o]=function(){(e[o]._=e[o]._||[]).push(arguments),1==e[o]._.length&&(i=t.createElement(n),u=t.getElementsByTagName(n)[0],i.async=1,i.src="https://rumble.com/embedJS/ulkdw1"+(arguments[1].video?"."+arguments[1].video:"")+"/?url="+encodeURIComponent(location.href)+"&args="+encodeURIComponent(JSON.stringify([].slice.apply(arguments))),u.parentNode.insertBefore(i,u))})}(window,document,"script","Rumble"),function(){var

Video: Buying your first home? Learn about the First-Time Home Buyer Incentive

If you’re saving up to buy your first home, you may benefit from the federal government’s First-Time Home Buyer Incentive program. This shared-equity program helps improve affordability for qualified first-time home buyers. Watch for more details about how the program works.

Video: The First-Time Home Buyer Incentive function request_ad(e,t){t(e)}!function(e,t,n,o,i,u){e._Rumble=o,e[o]||(e[o]=function(){(e[o]._=e[o]._||[]).push(arguments),1==e[o]._.length&&(i=t.createElement(n),u=t.getElementsByTagName(n)[0],i.async=1,i.src="https://rumble.com/embedJS/ulkdw1"+(arguments[1].video?"."+arguments[1].video:"")+"/?url="+encodeURIComponent(location.href)+"&args="+encodeURIComponent(JSON.stringify([].slice.apply(arguments))),u.parentNode.insertBefore(i,u))})}(window,document,"script","Rumble"),function(){var e,t,n="v2boy94",o="videoplayer-v2boy94",u=(document.getElementById(o),[]),c={},l=function(){c={},u=[],e.clearAds(),a(0,["https://pubads.g.doubleclick.net/gampad/ads?iu=/57452754/Rumble_Video&description_url=http%3A%2F%2Fmoneysense.ca&tfcd=0&npa=0&sz=400x300%7C640x480&gdfp_req=1&output=vast&unviewed_position_start=1&env=vp&impl=s&correlator="]),s()},a=function(t,n){u.push(n),e.insertAd(t,n)},r=function(e){var n,o=e.url;return t&&t==o&&(t=!1,setTimeout((function(){s()}),5e3)),"string"==typeof c[o]?c[o]:(c[o]=function(t){n&&(clearTimeout(n),n=0),e.callback(t),c[o]=!0},n=setTimeout((function(){c[o]=!0,e.callback(!1)}),1500),!0)},s=function(){if(0!=u.length){var e=u.shift();for(t=e[0],i=0;i less

Compound interest calculator: How to use one and how interest grows

How to use this compound interest calculator

Input the following information into the compound interest calculator:

Compound interest calculator: How to use one and how interest grows

How to use this compound interest calculator

Input the following information into the compound interest calculator:

Why compound interest matters

Compound interest is kind of like getting paid twice on your investment. It can also work against you if you owe money. Using a compound interest calculator can help you figure out the future value of your savings, or how much you’ll owe on a debt. Here’s what you need to know.

What is compound interest?

Compound interest is earned on money that has already earned interest. Sounds tricky, but it’s one of the best ways Canadians can build wealth because it’s more lucrative than traditional simple interest, says Sheldon Craig, a financial planner with Alaphia Financial Wellness in Osoyoos, B.C. 

“For example, if you have a $10,000 investment and you earn 5% on that, the first year you will have $10,500. The next year, you’ll earn interest on that $10,500, plus another 5%,” explains Craig. 

If you purchase an investment featuring compounded interest, your balance will grow over time as your interest earns interest on itself. Your original investment can be compounded yearly, monthly, weekly or daily—it’ll grow faster when it’s compounded more frequently over the term of your investment.

It works the same way with credit and debt. Say, for example, you don’t pay your line of credit interest or a credit card bill on time. You could be paying interest on top of interest. 

What’s the difference between nominal interest rates and effective interest rates?

The big difference between nominal and effective interest is what’s earning the interest. A nominal interest rate is simple interest, with earnings calculated on the principal investment. Effective interest includes the compounding period, enabling you to grow your money, explains Craig. 

“Compounding is beneficial when you’re saving money because you’re earning money on the yield that was originally earned,” he says.

What types of products use compound interest?

Financial products offering compound interest include: savings accounts, guaranteed investment certificates (GICs), stocks, bonds and exchange-traded funds (ETFs). Credit cards, loans and mortgages also use compound interest—but these don’t work in your favour the way investment products do, because what you owe is compounded. 

How do you calculate compound interest on savings and investments?

To calculate compound interest and the future value of your assets or investments over time, it’s helpful to use a free online financial calculator (also known as a time value of money—a.k.a. TVM—calculator). Simply plug in your initial investment, your additional contributions or loans, how long you’re allowing your money to grow or how long you’re borrowing it, and the estimated annual interest rate. 

Compound interest calculators detail the exponential growth of your money, so you can project how long it will take to achieve your savings goals—whether it’s saving for a house or for retirement. The calculator also shows the exponential growth of a debt, so you can see how much it will grow if you don’t pay it down.

You can also figure out how much compounding interest you’ll earn over time by using this formula: 

The total value of your investment = (Your initial investment x (1 + R ^ T)) + (Your additional contributions [(1 + R)^T -1] ÷ R)

R represents the interest rate divided by the compound frequency. T stands for the compound frequency multiplied by the amount of time the money will be invested. 

Let’s say you invest $1,000 for one year, with interest compounding monthly. By the end of that year, you’ll have earned $1,051. If you invest $5,000 for 10 years with interest compounding annually, you’ll get $8,144.

Compound interest: Monthly for one year

Let’s look at the monthly compounded interest, starting with $1,000.

Compound interest: Annually for 10 years

Now, let’s look at the annual compounded interest, starting with $5,000.

When does compound interest work against you?

Compound interest is a lot less exciting when calculated on loans or credit card debt, explains Craig.

“Many Canadians pay the minimum payment on their credit card and wonder why they never seem to [be able to] pay it off,” he notes. 

If, in year one, you have a $10,000 credit card debt with an interest rate of 22% and you only make the 5% minimum payment—$500 a year—your balance will be $11,500 at the end of that year. 

“Here’s when the compounding factor comes in: Your interest will be calculated on that new balance of $11,500 for year two, and if you make that same minimum payment—say $575, or 5%—your new balance after year two goes to $13,225. Your credit card debt will double by year six if you [keep] only paying the minimum, so you’d owe about $20,000. That’s where Canadians [can] get into trouble,” adds Craig.

How to make compound interest work for you 

To benefit the most from the magic of compound interest, start saving early and contributing to your investment accounts, says Craig. 

“If you’ve allocated an investment stream in your 20s, that will compound dramatically for the next 30 to 40 years,” he says. “That’s going to be the difference between retiring on a nice income that pays all your expenses versus delaying your retirement or perhaps not retiring at all.”

Pay yourself first instead of putting away money after your expenses are met, suggests Craig, and set up automatic withdrawals so you can make frequent tax-free savings account (TFSA) or registered retirement savings plan (RRSP) contributions. 

“With pre-authorized contributions, you’re earning interest on top of your payments as well,” he explains. “And it gets even better: If there’s a dip in the market, you’re taking advantage of dollar cost averaging—buying at low unit cost.” By investing small amounts regularly over time, rather than larger lump sums less often, you reduce the risk of making an ill-timed investment decision. 

Reap the benefits of compound interest by investing early and often and choosing a product that offers compound interest that’s calculated frequently. Then, watch your money grow and enjoy the higher return.

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Janet Gray advice-only Financial Planner

Janet Gray advice-only Financial Planner

Meet Janet Gray

Janet Gray is an advice-only Certified Financial Planner, speaker and educator with over 20 years of experience. She’s been featured in countless Canadian news publications as a financial expert, and she even won “Financial Services Person of the Year” twice. Janet specializes in business and retirement, and has additional certifications to prove it—she’s a Certified Professional Consultant on Aging (CPCA), an Elder Planning Counsellor (EPC) and is a member of the Orleans Chamber of Commerce (Ottawa Board of Trade) since 2001. Read more about Janet and her unique approach to financial planning below.

Meet Janet Gray

Why she became a Financial Planner

In many ways I have given advice all my life. I am the oldest sibling and it seems to come naturally to me because I love to help people.

Her investment philosophy

First clarify the desired goal/outcome, then the ‘job’ of the investment will be revealed. If the job is short term, then choose a short or medium term investment (cash or fixed income). If it’s long term, then choose a long term investment like equities. Be prudent, diversify and obtain professional help at a reasonable and understood fee.

Her proudest achievement as a Financial Planner

After working with clients for a few decades, I have had many of them tell me that I have helped to decrease their stress levels and made them feel more confident about their future—which is awesome to hear. Sometimes it’s the little things that help people.  

A client success story

It’s great when I work with clients close to retirement and I can suggest that they can retire at an earlier date. Or dream bigger than they first thought.

What if money were no object?

I can see myself still doing this in some form. Maybe more on a volunteer level. Financial literacy is an essential life skill and it’s sadly not taught as much as it should be.

The best money advice she ever received

Live within your means.

The worst money advice she ever received

I think the worst advice is any generalized advice given without knowing all you can about a client. Any advice should be given with consideration for the client’s goals, starting point and motivation in mind.

Contact Janet Gray

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Sander Meijers shares the most relatable money regret ever and talks about being a selective investor

Sander Meijers shares the most relatable money regret ever and talks about being a selective investor

Check your phone. Chances are Sander Meijers has been on it. While you likely haven’t texted with him—or even used it the ol’ fashioned way by calling him—your apps, like Spotify, Netflix and Blendle, know him well. As a tech vet, with over 14 years experience leading growth partnerships with those brands, he’s well-versed in the sector. Now, though, since August 2022, he’s the Canadian manager for Adyen (he’s been there since 2017), a Dutch company that processes payments for online purchases and in-person points of sales (retail speak for “at the cash register”). Speaking of cash, here’s Meijers’ thoughts on money, finances, investing and more. 

Who are your money heroes?

Obviously, there’s Warren Buffet, who has so much wisdom and experience in the industry. I also admire my aggregated pools of friends and family. There is so much to learn from their various experiences. I highly value their opinions. 

How do you like to spend your free time? 

I like to spend my time outdoors, preferably on or around water. Being active outdoors just makes the world a playground. When I’m outdoors, all I can think about is what I’m doing at that moment and how it makes me feel. It’s so liberating. Spending time outside with my daughters and seeing them enjoying that feeling, too, is a bonus.

If money were no object, what would you be doing right now?

Skiing or kitesurfing around the world. And ending each day with a beer with family and friends.

What was your earliest memory about money? 

My earliest memory about money is when I bought candy at my local candy shop with my weekly allowance. At an early age, I learned the value of money, and that to make the most of it you need to be selective with what you invest in. At the time, it was which candy I should buy. Ultimately, it came down to which candy tasted the best to me, but it still taught me to spend my money wisely.  

What was your first job?

My first job was working as a waiter at my local sports club. I initially got the job because I scratched my family car; I knew that it was my responsibility to pay my parents back for the damage. That’s where my first paycheck went. However, I kept working at the sports club. 

What was the biggest money lesson you learned as an adult?

Money should not drive any of your life decisions. If I had done that, I wouldn’t be in the position I am today. I am so grateful I work at Adyen, which has such a great culture. I truly enjoy coming to work everyday. I also completely trust and believe in the company mission to fuel the future of payments, especially in Canada.

What’s the best money advice you’ve ever received?

“Buy a house now.” That was such a huge milestone in my life.

What’s the worst money advice you’ve ever received?

“Get into crypto. Everybody’s doing it.”

Would you rather receive a large sum of money all at once or smaller regular amounts for life? 

Whether you decide to invest a large sum of money or smaller amounts consistently depends on what the economic climate is. It also totally depends on your own personal finance goals and needs. For example, at this moment, I don’t have any plans or needs for a big investment so I’d [take regular amounts and] do small, consistent investments so I can save and spend wisely.

What do you think is the most underrated financial advice, tip or strategy?

Don’t invest in something you don’t really understand in depth.

What is the biggest misconception people have about growing money?

Investing is always a good idea.

Can you share a money regret?

Forgetting to cancel my gym subscription.

What does the word “value” mean to you?

Experiences can be very valuable and build memories that last. I find value in spending money on things you don’t own—that is, experiences that result in lifelong memories.

What’s the first major purchase you made as an adult?

A house.

What’s your take on debt?

Not a fan and try to stay away from it.

What was your most recent splurge?

The Dyson vacuum cleaner.

What is the last money-related book you read?

I haven’t read any books recently; however, I did see the Netflix documentary Skandal! Bringing Down Wirecard, which blew my mind. Money can be deceiving.

What is something you always have in your wallet?

I rarely use a physical wallet. I use the digital wallet on my phone. The payments landscape is evolving, and digital wallets are becoming the go-to payment options for Canadians. It’s always a thrill when I pay with my digital wallet at a store. 

What is your favourite possession? 

My electric bike. It’s the reason I smile on my way to work every day.

What’s your next money goal?

Being able to buy a lovely home for my family.

My MoneySense quick questions

Rent or own?

Own.

Buy or lease?

Buy.

Save or invest?

Save.

Budget or not? 

Budget.

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