When it comes to the ETF credit in Canada, many questions need to be answered. What does ETF stand for, and what does it mean? How are ETFs different from mutual funds? How are ETFs taxed in Canada? And are ETFs safe? Today we will answer all of these questions and more.
What are ETFs?
ETFs, short for Exchange Traded Funds, are a type of investment. An ETF is similar to a mutual fund in that it contains a basket of securities. It’s also quite similar to stocks because they are traded on an exchange and are sold throughout the day.
Like mutual fund prices, share prices for ETFs fluctuate throughout the day. ETFs cover a variety of investment types, including stocks, bonds, and commodities. Some holdings are in the United States, while others can be International.
To date, there are actually 9 different types of ETFs:
- Index ETFs
- Actively Managed ETFs
- Sector-specific ETFs
- International ETF
- Fixed Income ETFs
- Equity EFTs
- Commodity ETFs
- Currency ETFs
- Leveraged ETFs
- Inverse ETFs
Of course, diving into all of the different aspects of the many types of ETFs is far too advanced for the purposes of this article, but if you are interested in investing, it will be well worth your while to look into them further.
How are ETFs different from mutual funds?
At first glance, ETFs may look very similar to mutual funds. And yes, they do have quite a bit in common. That said, there are also some significant differences between the two.
The main difference between ETFs and mutual funds is the time at which they are traded. Mutual funds can only be bought and sold at the end of the day. On the other hand, ETFs can be traded in real-time – very similar to stocks. This means that you can engage in day trading with ETFs.
Another difference is that while Mutual Funds tend to be long-term investments, ETFs can be short-term or long-term.
In terms of similarities, both mutual funds and ETFs can be invested in RRSPs, RRIFs, TFSAs, and RESPs. You can earn money with mutual funds and ETFs through distributions or capital gains.
Can you lose money with ETFs?
Yes. All forms of investments come with risks. And ETFs are no different. Like stocks, you will inevitably lose money if you sell your holdings at a lower price than what you paid. ETF prices fluctuate greatly throughout the day, and earning money can be time-consuming.
You can also lose money on ETFs by over-trading and losing money on your fees and commissions.
What are ETF Credits in Canada?
When filing for your taxes in Canada, you may be eligible for an ETF credit. How ETFs are taxed in Canada largely depends on their type of distribution.
For example, if your ETFs are filed under capital gain, 50% of those will be subject to tax and must be included in your taxable income.
If the distribution method is Canadian dividends, then dividend tax credits may be available to you. These credits are designed to compensate for income tax paid by the company you have invested in. Because of this tax credit, dividend income is generally taxed at a lower rate than any regular income.
Foreign tax credits may also be available for anyone who has made foreign investments.
If you aren’t sure where your ETFs should be distributed, speak to a tax representative. A tax representative will be able to teach you more about your ETFs and help you file for them correctly on your next tax return.