Banking basics: a guide to bank accounts, RESP, TFSA, RRSP, and FHSA
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The sooner you start to save, the sooner you will be earning interest, and the more your money will grow.
This page offers a brief overview of banking and account types in Canada. For more in-depth information, consult the resources listed on this page or speak to a financial advisor.
Setting up a bank account is one of the most important tasks for newcomers arriving in Canada. A bank account is essential for paying living expenses, rent, and bills, and for receiving benefits. It is also important to have a bank account to receive your salary if you are planning to find a job and work in Canada. There are also special types of accounts for those looking to invest their money, pay for children’s education, save for retirement, or buy a house.
Everyone has the right to open a bank account in Canada, including foreign nationals and non-Canadian citizens, as long as they are able to provide proof of identity. You can consult the bank about what documents they accept as proof of identity. Most of the time, they will require two pieces of ID, including a document issued in Canada (such as a Canadian passport, Canadian driver’s licence, Social Insurance Number, or Permanent Resident card), plus another document (such as a foreign passport, employer photo ID, or signed bank card).
Bank Selection
Banking is one of the most important industries in Canada. The Canadian banking sector in is very secure and safe and provides a variety of services. The industry is dominated by six well-established banks: Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD), Bank of Nova Scotia (Scotiabank), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), and National Bank of Canada (NBC). They offer different advantages to newcomers.
The banks listed above are reliable, as they need to follow more rules and regulations in comparison to other medium and small-sized banks. Apart from the major six banks, there are many other banking options in Canada including cooperative banks, credit unions, and digital banks. Before starting to deal with a new bank make sure to look for good offers, check for credibility, and availability of services in your community. Learn more about how to choose a financial institution in this article.
The banks listed above are reliable, as they need to follow more rules and regulations in comparison to other medium and small-sized banks. Apart from the major six banks, there are many other banking options in Canada including cooperative banks, credit unions, and digital banks. Before starting to deal with a new bank make sure to look for good offers, check for credibility, and availability of services in your community. Learn more about how to choose a financial institution in this article.
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Types of Bank Accounts
There are several types of bank accounts in Canada that serve different purposes.
Chequing Account: This is an essential basic account, where you would be able to keep money that is readily available for daily transactions via cash withdrawals or debit card. A debit card is usually accepted in most shops and businesses, and you can also use it for online purchases and payments. Some banks charge monthly fees to have a chequing account, while others may offer interest rates between 0-2.75% on the money deposited.
Savings Account: Savings account is on the other hand an account which you deposit your money and keep it to earn interest, that usually varies from 0.01 to 5%. Savings accounts are not the best option for daily expenses, as some financial institutions may charge fees every time you make a transaction. Instead, savings accounts may be a good option to set aside money that is readily available to use in case an emergency. If you are interested in depositing a larger amount of money and earn interest, invest, or save for education, retirement or to buy a house check out the other accounts listed in this article.
Registered Education Savings Plans (RESPs)
RESPs are a tax-deferred savings plans commonly used by parents to help save money for their children’s education.
Subscriber: A person who deposits money into the RESP. Usually, this is a parent. If you invest in an RESP, you (or someone acting on your behalf) would be called a subscriber or a contributor.
Beneficiary: A future student who receives contributions from the promoter. A student must attend an eligible educational program to receive payments. While you can open an RESP for a child or relative, you can also name yourself or another adult.
Promoter or provider: An organization responsible for managing contribution payments and the income earned on those contributions for the beneficiaries. Banks, mutual fund companies, scholarship foundations, or trust companies can be promoters.
Educational Assistance Payments (EAPs): When the beneficiary is ready to start their post-secondary education, the money they withdraw from the RESP is called EAPs.
CESG and CLB – Contributions from the Canadian government: The Canadian government makes contributions to an RESP through the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB). In order to receive CESG or CLB as part of an EAP, a beneficiary must be a resident of Canada and have sufficient contributions made into the RESP over the years.
Contribution room: The subscriber has a limit on how much they can deposit into an RESP account. After 2007, subscribers can contribute up to $50,000 into the RESP of each beneficiary. If the contribution goes over the limit, the subscriber must pay tax on the excess contribution.
RESPs (Registered Education Savings Plans) let your savings grow tax-free while the money stays in the account. Taxes are only applied to the earnings and government grants when they are withdrawn to pay for education.
When the student starts an eligible post-secondary education program, they can withdraw funds as Educational Assistance Payments (EAPs) to pay for tuition costs or living expenses.
In the event that a child decides not to attend a post-secondary institution, or does not use the RESP fund entirely, it is possible to add another child to an RESP plan to support their education. Certain rules apply, so be sure to check with your financial advisor. As a subscriber, you can withdraw money from your RESP for non-education purposes. However, the grant component is returned to the government, and the remaining money will be taxed at your regular income tax rate, plus an additional 20 per cent.
Tax-Free Savings Accounts (TFSAs)
A TFSA is an account where individuals can set money aside tax-free over the course of their lifetime. Contributions to a TFSA are not deductible for income tax purposes.
TFSA issuer: An eligible provider of a TFSA account, usually banks, insurance companies, credit unions and trust companies.
Types of TFSA: There are three types of TFSA accounts available:
- Deposit TFSA – an account that allows you to deposit your money and earn interest through products such as a savings account or GIC.
- Annuity contract – an account that offers fixed payments over time when you deposit a lump sum amount.
- Trust arrangement – when a financial institution manages your money on your behalf through investment accounts such as mutual funds or trading accounts.
Contribution room: You have a limit on how much you can contribute to your TFSA. Your available contribution room includes the current year’s TFSA limit, any unused contribution room from previous years, and amounts withdrawn in previous years. Your contribution room is indicated on your CRA account, but you can also calculate your contribution room for a more accurate estimate.
Opening a Tax-Free Savings Account (TFSA) is a good option for newcomers who wish to save or invest shortly after arriving in Canada. Any Canadian resident who is 18 years of age or older and has a valid Social Insurance Number (SIN) is generally eligible to open a TFSA. You do not need to earn income to open an account.
Contributions to a TFSA are not tax-deductible; however, any income earned within the account, such as interest, dividends, or capital gains, is generally tax-free. In addition, withdrawals from a TFSA are usually tax-free.
You can withdraw money from your TFSA whenever you need it, and financial institutions typically do not charge a penalty for withdrawals, although some may charge administrative fees. Amounts withdrawn in a given year are added back to your contribution room at the beginning of the following year.
Talk to a financial advisor at your bank or financial institution to learn more about TFSAs. They can help you understand the available savings and investment options and choose those that best fit your financial needs and goals.
Retirement and Registered Retirement Savings Plans (RRSPs)
An RRSP is a savings plan registered with the Canadian federal government that you can contribute to for retirement purposes.
RRSP Issuer: an eligible bank, insurance company, trust, or credit union that can issue an RRSP account.
Types of RRSPs:
It is generally recommended to open one RRSP account per individual. Some companies offer group RRSPs plans, if that is not available to you, you can open an individual plan for yourself or for a spouse or common-law partner.
- Individual RRSP – A regular RRSP account where you are solely responsible for making contributions and choosing the investments. You can choose an investment type that will earn you interest, including stocks, mutual funds, ETFs, and GICs.
- Spouse or common-law partner RRSP – If you earn more than your spouse or common-law partner, you may open an RRSP on their behalf. This allows you to have a greater tax deduction while supporting your partner during retirement.
- Group RRSP – Some employers offer group RRSP to their employees where RRSP contributions can be deducted from your pay. Employers may match the contributions you make to help with retirement. Group plans allow the employer to negotiate lower fees with the RRSP provider. If you leave the company, the balance in a group plan can be transferred to an individual plan.
Contribution room: You can only contribute to an RRSP if you have earned income in Canada. The amount you can contribute each year depends on how much income you earned in the previous year and the annual limit set by the government. If you do not use all your contribution room in a given year, you do not lose it. Instead, the unused amount carries forward and can be used in future years. You can check your available contribution room through your CRA account or on your Notice of Assessment. Your unused contribution room carries forward until you turn 71.
Canadian residents who hold a valid Social Insurance Number, have received employment income, and file their taxes are eligible to open an RRPS account. You can open and make deposits into your account until the 31st of December of the year you turn 71.
Making regular contributions allows you to grow your money and save on taxes in the short term. The sum of your RRSP contributions during the year are deducted from your overall taxable income in the following year. That means when you deposit money into your RRSP account, your money will grow and you will receive a tax refund or reduction in tax owed. When you start tapping into your RRSP account at retirement age, the money is subjected to tax.
You can withdraw funds from your RRSP account at any time, as long as your plan allows you to do so. However, spending money from your RRPS will require you to pay withholding tax on the withdraw of up to 30%, and it its considerable taxable income, which will increase any tax owed. In some cases, you may use RRSP funds to buy a house and invest in education and not pay the withholding tax, as long as you deposit back the amount you spend in a set time.
Once you are ready to retire, you have a few options to use your funds. You have until the 31st of December of the year you turn 71 to convert your RRPS into retirement income, after this date you can no longer contribute. The first option for tapping into your funds is to make a lump-sum withdrawal, which has withholding tax of up to 30%. A second option is to convert your RRSP account into a RRIF, the money you withdraw from an RRIF during retirement is considered taxable income. Finally, you may convert your RRPS into an annuity that pays guaranteed amounts for life or for a period of time.
Making investments in RRSPs or other types of retirement investments are crucial in Canada as public pensions alone will likely not allow you to maintain a similar standard of living to your working years. Starting early and making regular contributions can help you make the best of your later years.
However, you should speak to a financial advisor before deciding if RRSPs are the best option for you. This decision may depend on your income, personal debts, or if you are already covered by another pension plan.
First Home Savings Accounts (FHSAs)
A FHSA is a registered plan that allows first-time home buyers to save for buying or building a house.
FHSA issuer: a bank, credit union, or a trust or insurance company allowed to open a FHSA.
Types of FHSA:
- Depositary FHSA – an account where you deposit cash, GICs, or term deposits.
- Trusted FHSA – a trust that contains investments such as money, term deposits, GICs, bonds, mutual funds, and stock exchange securities.
- Insured FHSA – a contract for an annuity.
- Self-directed FHSA – an account in which you can decide when to buy or sell your own investments.
Contribution room: You can deposit up to $8,000 per year into an FHSA account and a maximum of $40,000 in total. If you did not contribute to the yearly limit, you will be able to contribute $8,000 plus leftover amounts in the following year. Any excess contributions receive a 1% monthly penalty until the excess is cleared.
If you are between 18 and 71, a resident of Canada, and a first-home buyer, you can open an FHSA. To be considered a first-home buyer, you may not have lived in a home you own in the current year or the past four years. Those who have sole or joint ownership of a house are considered owners.
Contributions to an FHSA are tax-deductible, and allowable withdrawals are not taxed. The money you deposit into an FHSA reduces your taxable income, similar to an RRSP. If you use FHSA funds to buy a house or withdraw excess contributions, the money is not taxed. In addition, any investment gains earned within the account are tax-free. If you withdraw funds for other purposes, the amount withdrawn must be reported as income and is subject to income tax.
Once you are ready to use the money you have saved for a house, you can withdraw the money tax-free. You will need a written agreement to buy or build a house, close the housing purchase within a year, and intend to live in the newly bought home. That means you cannot buy a home using money from your FHSA for investment purposes.
In total, you have 15 years, or until the year you turn 71, to buy a home. If you do not buy a home within this time frame, you have options:
- Transfer your FHSA funds into an RRSP account – Direct transfers are tax-free and does not impact contribution limits if the funds are within the allowable contribution limits.
- The second option is to cash in your funds, which will cause you to pay income tax.
If you are unsure whether an FHSA is the right investment for you, speak to your bank or a financial advisor.
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