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Investment for Expats in Canada

Submitted: September 2013

As in any country, expats should be concerned with beating inflation and taxes to preserve the value of their savings.

Inflation is actually a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned with Canadian inflation. If you plan to return to your home country, you might prefer beating the inflation rate of that country.

Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside Canada but you invest in any CAD-denominated assets, you are effectively making a currency bet.

Inflation in Canada

The Bank of Canada is committed to its current inflation target of 2% per year. Today’s central bank inflation-targeting isn’t necessarily bound to last for decades, however. Remember that inflation-targeting has been in place since 1991. Prior to 1991, Canadian inflation was frequently allowed to exceed 5%.

For more information on monetary policy, see Foreign Exchange for Expats in Canada.

Risk-free yields

Risk-free investments generally include savings accounts and Government debt. Canadian deposits are guaranteed by the Canada Deposit Insurance Corporation (CDIC) up to $100,000.

Easy-access online savings accounts generally have a low yield (around 1.5%), even if this matches inflation. Savings accounts offered by high street banks may get you an even lower return. Term deposits may attract a higher yield, but not by much.

As far as Canadian Government debt is concerned, such an investment may or may not preserve the real value of your savings.

Excluding taxes and capital gains, Canadian government debt investments need to have a maturity of at least 2 years in order to match inflation (October 2013 figures). As inflation is currently at low levels (1.1-1.3%), one could reasonably expect it to return to the BoC’s 2% target over the foreseeable future. A Government bond cannot have a yield exceeding 2% unless you invest for a maturity of at least 10 years.

Government bonds are subject to market variations. Bond prices rise when the market demands a lower yield, and they shrink when the market demands a higher yield. Consequently, there is some capital gains potential if you expect interest rates to be lower in the future. If rates rise, you would likely lose money, be it directly through a capital loss, or indirectly through failure to benefit from the higher future interest rates.

Market interest rates are strongly dependent on global macroeconomic factors. Typically, they should move downwards when the global pool of money grows much bigger, whereas they rise when global liquidity dries up.

Tax-free accounts

Tax-Free Savings Accounts (TFSAs) are another way to save for retirement. Investment income within a TFSA is tax-free. So are withdrawals, at least in Canada. However, contributions must be made out of your after-tax income, and they must not exceed a specified amount.

Any individual resident in Canada has a TFSA allowance of $5,500 per year. If you fail to fully avail yourself of your TFSA allowance in a given year, the unused part may carried forward. Likewise, withdrawals can be put back in in future years, but not in the year in which the withdrawal was made.

A TFSA can include a wide range of investments, such as bank deposits, mutual funds or bonds.

In addition to TFSAs, Canadian residents may save towards educational expenses (yours or somebody else’s) through a Registered Education Savings Plan (RESP). RESPs are like private pension plans (RRSPs), but contributions are not tax-deductible.

Canadian securities (costs)

Do consider carefully the applicable transaction costs if you wish to trade Canadian securities. Here are the main costs you should be aware of:

  • Broker’s commission fees (they are often on a flat rate or on a per-share-basis)
  • Minimum commission fees (this can go as high as $30 per transaction)
  • Any other applicable fees that may be charged by your broker.

Canadian stockbrokers are often referred to as “registered representatives”. Online stockbrokers may charge cheaper fees than high street banks. For an overview of the Canadian online stockbroker market, click here.

Canadian shares (overview)

Canada’s main index is the S&P/TSX. Canadian share prices have tremendously risen since the early 1980s, although they are a far cry below their 2008 record highs in real terms. This long-term rise is largely due to the combined effect of inflation and lower interest rates. In other words, the dividend yields currently offered by the market are historically low, but they reflect today’s market interest rates. As it is largely possible to find shares with a dividend yield in excess of 4%, Canadian shares aren’t really overpriced.

Be wary of volatility when you invest in securities. Volatility is heavily dependent on the underlying risk. However, higher risk normally means higher reward, and some securities may be low-risk. Additionally, stock market variations are very dependent on interest rates. If they are going up, stock prices should go down. At the moment, Canadian interest rates are still at low levels, but they might rise further if the BoC tightens monetary policy. See Foreign Exchange for Expats in Canada.

You are responsible for deciding how much risk you want to take on. There is no set answer to this question, as this largely depends on your personal circumstances. A qualified wealth manager may assist you regarding this matter.

On the stock market, your emotions are your enemy. You must control them rather than let them control you. Do not, under any circumstances, let (natural) psychological factors make you take irrational decisions.

Financial returns

From a financial point of view, the real return on investment consists of:

  • Net dividend or coupon yields
  • + Net capital gains (or losses)
  • -  Taxes
  • -  Inflation

When a company reinvests its business profits, the net dividend yield is lower but this may be offset by higher potential for capital gains over the long run.

Technically speaking, an investment can be highly profitable despite low coupon/dividend yields if the interest rate demanded by the market edges further down.

FX risks for expatriates

As an expatriate, you don’t necessarily want to be a speculator. If you park your money in a currency which you eventually intend to spend, you have little FX exposure. Otherwise, you are effectively making a currency bet. A lot of money can be made on currency bets, but a lot can be lost as well.

Example

Patrick is an Irish citizen who has been posted to Newfoundland for one year. He will return to Ireland later on.

His net salary is $70,000 per year, but he intends to spend only $30,000 per year. He thinks it would be appropriate to save an additional $10,000 for a rainy day whilst he is in Canada.

Charles is effectively making a currency bet if he fails to convert 70,000 – 30,000 – 10,000 = $30,000 into euros.

Overseas investments generally

If you wish to invest in overseas assets, there are a few points you need to check:

  • Financial transactions taxes
  • Inheritance tax considerations
  • Asset liquidity
  • Broker’s fees (pricing structures may vary greatly from one jurisdiction to another)
  • Foreign withholding or income taxes
  • Yields available on foreign investments
  • Foreign currency exposure.

Retaining overseas assets might be helpful if you plan to return to your home country. That should spare you the money transfer hassle.

For more information on offshore investments, see our section on alternative investments.

Taxation

The first thing to check is your residence status for tax purposes. See TAXATION – Overview of Tax Issues for Expats in Canada.

Your worldwide investment income is taxable in Canada if you are resident in Canada for tax purposes. If you have non-resident status, you are liable to tax on your Canadian-source income only.

For more information on investment taxation, see TAXATION – Investment Taxation for Expats in Canada.

 

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