Canadian-US investing differences
There are significant differences between Canadian and US investing. 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 significant differences, because they will impact financial planning, tax planning and can impact tax-efficient investing choices.
Savings accounts for retirement and education
- Canada does not have "401 (k)" or "Roth IRA" plans. The closest similar plans are the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA), respectively. However, the TFSA is not a "retirement account" per se because it allows penalty free withdrawals at any age.
- Registered Education Savings Plan and the Canada Education Savings Grant are much more generous than most state 529 Plans, which do not offer government grants.
Stock markets
- The Canadian stock market, as denoted by the Toronto Stock Exchange (TSX), is approximately 1/10 the size of the US stock market, as can be seen in the following table:[1][2][3]
| S&P/TSX Composite (Canada) |
S&P Total Market Index (US) |
S&P 500 (US) | |
|---|---|---|---|
| Number of Constituents | 225 | 4121 | 503 |
| Adjusted Market Cap. ($ Billion) | CAD 3,111 | USD 49,519 | USD 33,781 |
| Largest Market Cap | 187,917 | 2,994,371 | 2,9994,371 |
| Smallest Market Cap | 791 | 0.15 | 4,921 |
| Mean Market Cap | 14,415 | 12,019 | 83,594 |
| Median Market Cap | 3,939 | 796 | 33,545 |
| Top 10 Holdings (% Market Cap Share) | 37.0 | 26.5 | 30.9 |
| Weight of largest constituent % | 6.3 | 6.0 | 7.0 |
- Because market capitalization in the TSX drops off sharply, the market is more concentrated in a relatively small number of stocks, as can be seen in differences in the Top 10 Holdings Market Share.
- The Canadian stock market is far less diversified than the US stock market, and is highly dependent on just three sectors:[4] Financials; Energy; and Materials (gold and mining).[1] Therefore, an investor who purchases only Canadian securities may have insufficient sector diversification (see Sector diversification and index concentration). The following table gives a comparison across all of the Global Industry Classification Standard (GICS®) sectors.
| GICS® Sector | S&P/TSX Composite (Canada) |
S&P Total Market Index (US) |
S&P 500 (US) |
|---|---|---|---|
| Communication Services | 3.7 | 8.0 | 8.6 |
| Consumer Discretionary | 3.6 | 10.9 | 10.9 |
| Consumer Staples | 4.2 | 5.7 | 6.2 |
| Energy | 17.1 | 4.0 | 3.9 |
| Financials | 31.3 | 13.6 | 13.0 |
| Health Care | 0.3 | 12.5 | 12.6 |
| Industrials | 13.7 | 10.0 | 8.8 |
| Information Technology | 8.7 | 27.5 | 28.9 |
| Materials | 11.0 | 2.7 | 2.4 |
| Real Estate | 2.4 | 3.0 | 2.5 |
| Utilities | 4.0 | 2.3 | 2.3 |
- Canadian stock market returns have generally been lower than the US, but bond returns have been higher.[8] 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).
- (Note that the past may not repeat itself, i.e. we can't know in advance if US stocks will outperform Canadian stocks or vice-versa; see global diversification and periodic table of annual returns.)
- 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, average cost or specific lots. Thus, in Canada, the adjusted cost base per share (that is, average cost) is used to determine the gain or loss.
- There are slight differences in the superficial loss (wash sale) rules.
- The dividend tax credit in Canada makes dividend investing in a taxable account more attractive than it is in the US. This likely explains in part the relative popularity of preferred shares and dividend strategies in Canada.
Fixed income
- Canada levies income tax on all bond interest, including municipal bonds.
- US investors can easily buy Treasury bonds at auction using the Treasury Direct on the internet whereas Canadians have to buy them on the secondary market which means that Canadian investors are paying bid ask spread to the broker.
- There are also some terminology differences. For example, a US Certificate of Deposit is similar to a Canadian Guaranteed Investment Certificate and US Treasury Inflation Protected Securities (TIPS) are similar to Real Return Bonds (RRBs).
- Canadian RRBs, unlike US TIPS, do not have a $100 face value minimum, so, in the event of extended deflation, could be worth less than the issue price.
- Deposit insurance limits are different. In the US, FDIC protection is for $250,000 per account[9] whereas for Canadians, CDIC protection limit is $100,000 per account.[10]
- Accrued interest calculations on bonds generally follow an "actual/365" day count.[11] This differs from American practice, which is usually "actual/actual" (or "actual/365") for Treasuries longer than one year and "30/360" for corporate and municipal issues.[12]
Tax considerations
Canadian purchasers of US securities should be aware of the tax consequences. Also, the Canada Revenue Agency's $100K reporting limit may require filing of a T1135 Foreign Income Verification Statement.[13] Completing the IRS W-8 BEN form can reduce the tax withholding rate on US income from 30% to 15%
Homes and taxes
Canada does not have a mortgage-interest deduction (however, see Smith Manoeuvre), nor are property taxes deductible from taxable income. Instead, the capital gains from a principal residence sale are not taxed.
Estate planning
At death, Canada deems that all property, including listed securities, were deemed to be disposed, thus resulting in a capital gain or loss.[14] 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. (Probate is often referred to as a tax, is levied by many Canadian provinces and US states, but its level is an order of magnitude lower than the US estate tax).
Transaction settlement dates
Settlement dates can be different due to difference in holiday dates, thus business days. For example, Canada has an extra holiday for Boxing Day,[15] between Christmas and New Year's, which may impact year-end tax planning.
For Canadian investors in taxable accounts, tax law says the you made the transaction on the settlement date. This differs from the US, where tax law states that you made the transaction on the trade date.[16][17]
See also
References
- ^ a b "S&P/TSX Composite Index". S&P Dow Jones Indices. Retrieved January 2, 2024.
- ^ "S&P Total Market Index". S&P Dow Jones Indices. Retrieved January 2, 2024.
- ^ "S&P 500®". S&P Dow Jones Indices. Retrieved January 2, 2024.
- ^ MSCI Indices, Global Industry Classification Standard (GICS®) Structure - GICS - MSCI, retrieved November 28, 2012.
- ^ "S&P/TSX Composite". S&P Down Jones Indices. Retrieved January 2, 2024.
- ^ "S&P Total Market Index". S&P Down Jones Indices. Retrieved January 2, 2024.
- ^ "S&P 500®". S&P Down Jones Indices. Retrieved January 2, 2024.
- ^ For example, see Fig. 4, "Real annualized returns (%) on equities versus bonds and bills internationally, 1900–2020", in Credit Suisse Global Investment Returns Yearbook 2021, viewed March 21, 2021.
- ^ FDIC, How Are My Deposits Covered?, viewed 7 January 2018.
- ^ CDIC, What We Cover, viewed 7 January 2018.
- ^ Investment Industry Association of Canada, Canadian Conventions in Fixed Income Markets - A Reference Document of Fixed Income Securities Formulas and Practices, Release: 1.1, viewed June 25, 2012.
- ^ Investopedia, How Are Day-Count Conventions Used in Bond Markets?, viewed March 20, 2021.
- ^ Financial Wisdom Forum, T1135 - Just the beginning?
- ^ CRA, Preparing Returns for Deceased Persons, viewed 7 January 2018.
- ^ TMX Group, Stock Market Trading Hours, Stock Market Hours and Holidays, viewed December 8, 2014.
- ^ IRS, Publication 17 (2013), Your Federal Income Tax, viewed January 1, 2014.
- ^ Last Day to Sell, viewed January 1, 2014.
Further reading
- Financial Wisdom Forum topic: "Differences between Canada and USA"
External links
- Gummy-stuff, ACB tutorial
- Gummy-stuff, ACB calculator
- Gummy-stuff, ACB spreadsheet (xls)
- Bogleheads Forum, Investing as a Canadian - Differences.