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Murat Yukselir/The Globe and Mail

The COVID-19 pandemic ushered in a new era of investing as Canadians spent long periods living with lockdowns that limited their expenses. Many people turned to investing as a way to use unspent money

That’s all well and good, but investing comes with its own tax rules as well. Experts offer some tips for newbies to the markets.

Ensure you’re using the right investment account

Clay Gillespie, managing director of RGF Integrated Wealth Management, said a common mistake is for people to not use the best tax-sheltered investment product for them. The best options can be debated, but his general advice is that a low-income individual would benefit most from a tax-free savings account. Higher income people may be better off investing in a registered retirement savings plan, because they have more to gain from the tax deduction on their contribution.

Your TFSA and RRSP contribution limits carry over

People who’ve been investing for years are well aware of this, but it can come as a surprise to someone just starting out. Your TFSA contribution room has been accumulating since 2009, or the date you turned 18, whichever is later. Your contribution room for an RRSP starts building from the date you start earning income. This means you can make massive contributions to either type of account if you only started investing later into adulthood.

It doesn’t always make sense to make a lump sum contribution to your RRSP

Let’s say a family member passes away and leaves you a large sum of money. Mr. Gillespie said he’s seen many Canadians consider dumping all of the money into an RRSP in an attempt to pay zero tax in a given year. However, that can be a bad idea, because you could benefit more down the road when you’re in a higher tax bracket or need to reduce tax you may owe in future years.

Cryptocurrencies can’t be sheltered from tax, but crypto ETFs can

Mr. Gillespie said two massive hot-button issues in the crypto community are how you purchase coins and whether you actually have possession of them. His firm recommends investing in crypto exchange-traded funds because that’s simpler for the average investor, it diversifies your crypto portfolio and allows you to put an ETF into a TFSA or RRSP that will shelter it from capital gains tax.

Keep detailed records, especially for cryptocurrencies

IG Wealth Management head of financial planning Christine Van Cauwenberghe says it’s important to keep documentation for all your investment activity for seven years, as that’s the time frame in which the Canada Revenue Agency can conduct an audit. Anyone investing with a trading app or through a crypto exchange should take particular care to periodically download their statements in case the provider goes under.

If you take out a loan to invest, the interest is tax deductible

Generally speaking, Mr. Gillespie said investors who take out a loan to invest can deduct any interest they pay from their taxes. This was more common when interest rates were low and during the last crypto boom, but it could become relevant again in the future.

You’ll be taxed more heavily if you day trade

Unsheltered investments are usually subject to capital gains tax, which means only 50 per cent of the profits are taxed as income. However, if you’re aggressively buying and selling stocks in a short time frame, you could be considered a day trader. At that point, the CRA would consider your operations as a business, meaning 100 per cent of your profits are taxed as income. Furthermore, if you’re found to be day trading within a TFSA, the CRA could make you pay taxes on those gains too.

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.

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