Canadian-US Investing Differences
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 between Canadian and US investing.
- 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 (based on data as of close-of-market May 29, 2012):
|S&P Total Market Index
|Number of Constituents||252||3763|
|Adjusted Market Cap. ($ Billion)||C$1389.54||US$14,769.73|
|Top 10 Holdings (% Market Cap Share)||33.41%||16.85%|
- 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: Financials, 31.77%; Energy, 25.16%; and Materials (gold and mining), 18.90% (data as of June 30, 2012). Therefore, an investor who purchases only Canadian securities may have insufficient sector diversification (see Portfolio Design and Construction - Sector Diversification and Index Concentration).
- 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).
- 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 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.
- Canada does not allow tax-free treatment of 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 whereas for Canadians, CDIC protection limit is $100,000 per account.
- Accrued interest calculations on bonds generally follow an "actual/365" day count. This differs from American practice, which is usually "actual/actual" for terms longer than one year.
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.
Real estate and estates
- Canada does not have a mortgage-interest exemption. Instead, the capital gains from a principal residence sale are not taxed.
- 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).
Settlement dates can be different due to difference in holiday dates, thus business days. For example, Canada has an extra holiday on December 26, between Christmas and New Year's, which may impact year-end tax planning.
- Standard and Poors, S&P/TSX Composite, viewed May 30, 2012. Data as of close-of-market May 29, 2012.
- Standard and Poors, S&P Total Market Indexviewed May 30, 2012. Data as of close-of-market May 29, 2012.
- MSCI Indices, Global Industry Classification Standard (GICS®) Structure - GICS - MSCI, retrieved November 28, 2012.
- iShares Canada, XIC - iShares S&P/TSX Capped Composite Index Fund Fact Sheet, viewed September 12, 2012.
- 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.
- Financial Webring Forum, T1135 - Just the beginning?
- TMX Group, Stock Market Trading Hours, Stock Market Hours and Holidays, viewed Aug. 1, 2012.