What is ETF Credit in Canada?

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When it comes to the ETF credit in Canada, there are lots of questions to be answered. What does ETF stand for and what does it mean? How are ETF’s different from mutual funds? How are ETF’s 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 purely 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 ETF’s 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. With that being 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. ETFs, on the other hand, 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 a long-term investment, ETFs can be short or long-term. 

In terms of similarities, both mutual funds and ETFs can be invested into RRSPs, RRIFs, TFSAs and RESPs.  You can earn money with both 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, if you sell your holdings at a lower price than what you paid, you will inevitably lose money. Prices for ETFs fluctuate greatly throughout the day, and earning money can be a time-consuming process.

You can also lose money on ETFs by over-trading and lose 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. The way in which ETFs are taxed in Canada largely depends on their type of distribution.

If your ETFs are filed under capital gain for example, 50% of those will be subject to tax and must be included in your taxable income.

If the method of distribution 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.

In Conclusion…

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.

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Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.