Some people like to wave a Canadian flag while watching fireworks on Canada Day. Others prefer to lie in a hammock or sit on a dock, beverage in hand.
Me? I like to reflect on all the reasons that make Canada a great place to invest. Here are my top five.
Would you rather invest your money in a democratic country like Canada, with its free elections and adherence to the rule of law, or a nation – such as China or Russia – where the judiciary, media and other institutions are under the thumb of a thuggish dictator? Canada isn’t perfect, but for investors who do their due diligence it is a safe, well-regulated place to put capital to work. It’s also a relatively peaceful country, with far less of the violence and racial division that affect our southern neighbours. What’s more, we are free of the sorts of armed conflicts that have ravaged so many countries and created millions of refugees around the globe. There is lots of room for improvement – particularly to our straining medical system and growing housing crisis – but this is a good day to remind ourselves that we have it pretty good here, as citizens and investors.
All the reasons we love to complain about Canadian banks – they’re too big, their service fees are too high, they have long lineups at lunch time – are precisely what make them such great investments. The banks have their fingers in everything from mortgages and mutual funds to credit cards, insurance and investment banking, and they rake in billions of dollars in profit from these businesses every quarter. What’s more, they have strong balance sheets and long records of raising their dividends, all of which have contributed to excellent returns for investors. Over the past 20 years – a period that included the financial crisis, a global pandemic and the recent spike in inflation and interest rates – the Big Five posted average annualized total returns of about 10 per cent, led by Royal Bank and Toronto-Dominion Bank, which returned 11.6 per cent and 11.4 per cent, respectively. Will the next 20 years be just as good for the banks? I don’t know, but I wouldn’t bet against them.
The dividend tax credit
One reason I love dividends is that they are taxed at much lower rates than regular income. For example, an investor in Ontario with annual income of $100,000 would face a marginal tax rate of just 12.24 per cent on eligible dividends. That compares with a marginal rate of 33.89 per cent on interest or employment income. Thanks to the dividend tax credit (DTC), in some provinces, it’s even possible to have a negative tax rate on dividends if your income is below a certain level (in Ontario and British Columbia, for example, the threshold is $53,359). The DTC is a non-refundable credit, meaning the government won’t send you a cheque for the negative amount, but you can use it to reduce your other taxes owing. Another plus for Canadian investors is the 50-per-cent inclusion rate on capital gains, which means you’ll pay half as much tax when you sell a stock for a profit as you would making the same amount of income in salary or interest.
Tax-free savings accounts
One of our neighbours recently started looking after the financial affairs of her parents, who are both in their 90s. She was shocked to discover that her folks had never put a penny into their tax-free savings accounts. My message to you is: Don’t be like them. When the federal government introduced the TFSA in 2009, it was one of the greatest financial gifts to Canadians, allowing them to earn interest, dividends and capital gains completely tax-free. Had my neighbour’s parents made the maximum TFSA contribution every year from 2009 through 2023, they would have put away a total of $176,000 ($88,000 each). If they had invested the money each year in an exchange-traded fund tracking the S&P/TSX composite index, and reinvested their dividends, they would be sitting on about $315,000 today. That money could be withdrawn tax free to pay for living expenses or medical care or to throw a huge catered party to celebrate their next wedding anniversary.
How many times have you been waiting outside in the rain to get your money out of the bank, like those panicky customers in It’s a Wonderful Life? Probably never, because Canadian financial institutions are covered by deposit insurance to prevent bank runs and keep customers whole. Canada Deposit Insurance Corp., a federal Crown corporation, insures deposits at member financial institutions for up to $100,000 per insured account category. For example, if you have $75,000 of deposits in a chequing account, $50,000 in a TFSA and $90,000 in a registered retirement savings plan, all at the same financial institution, your money is fully covered. If you have accounts at other CDIC member institutions, they qualify for their own $100,000 coverage, too. Credit unions that aren’t members of CDIC are protected by provincial deposit insurance. What’s more, your brokerage accounts are safe, thanks to the Canadian Investor Protection Fund. If a CIPF member firm becomes insolvent and any of your property goes missing, the fund covers up to $1-million for all cash, margin and tax-free savings accounts combined, $1-million for all registered retirement accounts combined and $1-million for all registered education savings plans combined. So you can sleep easy, Canada.
E-mail your questions to firstname.lastname@example.org. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.