Canadian-US investing differences
Template:Financial Planning Sidebar Much of the investment literature available in Canada is produced in the United States for US investors. Canadian investors should be aware of some of the differences between Canadian and US investing, which include the following:
- The Canadian stock market is far less diversified than the US market, and is highly dependent on just three sectors:[1] financials; energy (oil and gas); and materials (gold and mining). Therefore, an investor who purchases only Canadian securities may have insufficient sector diversification (see Portfolio Design and Construction - Sector Diversification).
- It is also possible for a single stock to dominate the Toronto stock exchange. Nortel was 36.5% of the TSX on July 26, 2000, before eventually becoming bankrupt in 2009.[2]
- Canadian tax laws do not distinguish between short-term and long-term capital gains. Unlike the US tax system, one cannot designate which lot(s) of shares is to be sold when placing a sell order, and cannot choose between FIFO, LIFO, average cost or specific lots. Thus, in Canada, the adjusted cost base per share is used to determine the gain or loss.
- Canada does not have a mortgage-interest exemption. Instead, the capital gains from a principal residence sale are not taxed.
- Canada does not have "401 (k)" or "Roth IRA" plans. The closest similar plans are the RRSP and TFSA, respectively. However, the TFSA is not a "retirement account" per se because it allows withdrawals at any age.
- Canada does not allow tax-free treatment of municipal bonds.
- Canadian stock market returns have generally been lower than the US, but bond returns have been higher. Consequently, depending upon the measurement interval, stock and bond returns may exhibit less difference than corresponding US data (see the discussion in Risk and return).
- There are slight differences in the superficial loss rules.
- At death, Canada deems that all property, including listed securities, were deemed to be disposed, thus resulting in a capital gain or loss. USA allows a step-up in the adjusted cost base at death (no gain or loss for the deceased), but assesses an estate tax which can be onerous; Canada has no estate tax per se (probate is often referred to as a tax, but its level is an order of magnitude lower than the US estate tax).
- There are also some terminology differences. For example, a US "Certificate of Deposit" is similar to a Canadian Guaranteed Investment Certificate and US "TIPS" are similar to Real Return Bonds.
Canadian purchasers of US securities should also be aware of the tax consequences. Also, the Canada Revenue Agency's $100K reporting limit may require filing of a Form T1135.[3]
See Also
- Adjusted Cost Base discussion, tutorial, calculator, and spreadsheet (xls).
External links
- Financial Webring Forum, Differences between Canada and USA.
- Bogleheads Forum, Investing as a Canadian - Differences.
- ^ iShares Canada, XIC Overview: Sector Breakdown, viewed May 22, 2012. Sector breakdowns as of that date were: Financials, 31.59%; Energy, 25.76%; and Materials, 18.52%.
- ^ CBC News, Nortel's Icarus-like stock, January 15, 2009.
- ^ Financial Webring Forum, T1135 - Just the beginning?