Credit, savings, taxes: all about Canadian finances

Did you know that in Canada, we have what’s called a credit report which compiles your financial history and your personal information? 

You receive a score between 300 and 900 based on how well you manage your finances.  

We call this the credit score. 

It’s an important factor for borrowing from the bank, but also for renting an apartment or even buying goods, such as a car. 

Without a credit history, your purchasing power could decrease. 

So, how do you build your credit history when you arrive in Canada if you don’t already have one? 

A simple tool to start with is a credit card. 

A credit card gives you quick access to credit to pay for purchases or bills, and it has a set borrowing limit. 

But remember, you must pay your credit card bill before the deadline every month to show good financial management.

To maintain a good credit score, try to use less than 30% of your available credit. 

The more responsibly you use your card, the more your credit limit can increase. 

And that’s how you start to build your credit history. 

There are also other credit options: personal loans, lines of credit and mortgages designed specifically to purchase a home. 

Don’t apply for too much credit in a short period of time. This could have a negative impact on your credit score. 

A good credit history is built over the long term. 

Be patient and show that you’re trustworthy by paying your bills regularly and on time. 

To find out how to make the most of your credit and build a positive track record, see our practical guide. 

National Bank of Canada

- Your debt’s under control, you’ve got an emergency fund and some savings. Congrats!

Now you want to know how to put your money to work for some long-term gains.

I’ll explain in the time it takes me to get a hole in one... blindfolded.

- Whatever   

- First, you need to know where to put your savings. 

There are 2 main kinds of savings accounts: registered and non-registered. 

A registered account acts as a tax shelter. 

Non-registered accounts don’t have the same financial advantage but there’s no limit on how much money you can put in. 
 
So, which registered investment account should you choose? 

Because that’s usually the one you should take advantage of first. 

The Registered Retirement Savings Plan is used in retirement. 

It allows you to lower your taxable income and defer your taxes until you make a withdrawal. 

- Are we going to play golf when we retire?   

- This is not golf. It’s mini-putt.  

- This is not golf. It’s mini-putt.

- We usually withdraw our RRSPs during retirement when our income is lower.  

So, at the end of the day you could be paying less taxes. 

[whispering] 
Which means more money in your pocket. 

You can also withdraw from an RRSP for projects like buying a first home or going back to school. 

An advisor can give you tips on how to do that! 

- Did I get it? Did I get it? 

- Shhhh... 

A Tax-Free Savings Account can help you save for a project like buying a car or going on vacation, when the time is right.

Now, unlike RRSPs, the money you put into a TFSA doesn’t reduce your taxable income. 

But here’s the good news! 

The gains you make on a TFSA are not taxable, even when you withdraw them. 

[whispering] 
Which means more money in your other pocket. 

But be careful, both RRSPs and TFSAs have a maximum you can contribute each year. 

RRSPs and TFSAs are very well known.

But other investment solutions exist, like the RESP, Registered Education Savings Plan, that lets you save for your kids’ college, if you want kids, that is.  

- Do we want kids?  

- Uhm, let’s start with a dog 

- Yeah, we’ll name him Tiger.  

- You can speak to an advisor about the best investment solutions for you. 

[whispering] 
I just won. 

- Did I win?

- Are you wondering how taxes work?

I’ll explain in less time than it takes to run a kilometre on a treadmill. 

- We’re more likely to be running to an online sale…

- Taxes. The money you give the government to help pay for collective services, like schools, hospitals and roads.  

Each time you get paid, your employer keeps part of your salary, instead of you paying a huge amount at the end of the year.

Go take a look at your pay stub.

Your annual income is made up of your salary but also any other income you receive, like student loans or interest earned on investments. 

- “New…life…day…one.”   

- Your taxable income is the part of your annual income on which you pay taxes.

Tax rate is the percentage of your income that you have to pay in taxes.

The rate can change and is different at the provincial and federal levels. 

- Is a kilometre the same length all over the country?   

- Yep!

The more money you make, the more taxes you pay.

Because taxation works in brackets.

- Just like a treadmill.    

- Yeah, let’s say your income is $65,000, you might pay 15% on the first $50,000 and 20% on the next $15,000.

In the end, you haven’t paid 15% or 20% but a combination of both, which is what we call your effective tax rate. 

- Can we bring the treadmill back down to 0%, please? 

There are ways to pay less tax, like putting money into an RRSP, or deducting the interest on your student loan.  

Find out more from your financial advisor. 

- I think I ran 2 kilometres!? 

- Zero point two kilometres.