Starting from scratch

Posted by Steve Harmer on Thursday, August 11th, 2016 at 2:38pm.

Millions of immigrants come to Canada and quickly discover that getting established financially isn’t easy

Overview

Last year, Canada welcomed more than half a million newcomers to our country as immigrants, international students and temporary foreign workers. The number one source for new permanent residents is now the Philippines, followed by India, China, the U.K. and the States. Canada may be the best country in the world to live in, but that doesn’t mean that it’s easy to get established. People come to Canada dreaming of obtaining greater financial security and opportunities for themselves and their families, but they often spend years struggling to build up credit, find a decent job and grow their wealth.

In the pages that follow, we provide a quick overview of the most important things you need to know to build a strong financial future here. We’ll tell you the essential things to do during your first days in the country, and show you how to get a head start on getting a job, building credit, buying a home and investing. Along the way, you’ll meet people who have been through the immigration process already, who share their tips for making the transition easier.

1. Getting a job
2. How to build your credit score fast
3. Property buying tips
4. Pay less tax
5. Invest wisely

Even if you’re a long-time citizen, if you’re new to investing, or buying insurance, or you’re trying to establish a strong credit history for the first time, this report is for you. When it comes to our finances, we’re all beginners at one time or another, and every beginner can use a helping hand.

Getting a job

My first job was in Canada was a bouncer in a club,” recalls Fernando Margueirat, now a 37-year-old living in Toronto. It was quite a departure, considering he was an experienced IT manager back in Buenos Aires, Argentina. Margueirat came to Canada to build a better life, but instead he found that without Canadian experience, he couldn’t get work in his field. “I took the job as a bouncer because I thought it would be better than sitting at home doing nothing. Any opportunity to build Canadian experience is going to pay off in the long term.”

After several years working in various “survival jobs,” such as working in a Spanish-speaking call centre, a friend told Margueirat about an IT job opening at the National Ballet of Canada. Having some Canadian experience and a contact at the company helped him get the job. “I was finally given a chance and a huge door was opened for me,” he says. “Getting this job completely changed my view of Canada. My company has a great work environment and they’ve given me many opportunities to grow.”

The language barrier

Language is often the biggest obstacle for newcomers. Nick Noorani, immigrant entrepreneur and author of Arrival Survival Canada, says that many think they’re well equipped if they speak some English, but they don’t realize that their beginners’ grasp of the language won’t cut it in a professional environment. “They don’t understand the level of English required is different than the level of English they might have spoken in their home country,” he says.

It’s not just learning how to speak clearly—newcomers need to master the subtleties of business communication as well. For example, Noorani describes how one newcomer, who wanted to emphasize the importance of his skills, sent out his resume in ALL CAPS, which comes across as “shouting” and was sure to turn off employers. To learn how to communicate better in a business environment, Noorani urges newcomers to take advantage of free language and employment services offered by government-sponsored immigrant settlement services.

Immigrant entrepreneurs

Newcomers often start their own small businesses so they can take advantage of their specialized knowledge, have more control over their career—and sidestep some of the discrimination that can exist in established Canadian companies. A good way to get off the ground is to take advantage of various government-funded local business centres that help entrepreneurs. Juan Guido, an immigrant from Colombia, for instance, is working with Service d’aide aux jeunes enterprises du Montreal Centre to launch uild your Canadian business network a food import/export business. “You get some grants from the government and get assistance on writing your business plan,” says Guido. “I’d recommend it to anyone who wants to start a business.”

Building a network

Entrepreneurs and professionals alike need to make efforts to build up their network of contacts. By going to industry events and networking online, immigrants are more likely to hear about unadvertised jobs and business opportunities.

Salil Shah, a 31-year-old marketing manager in North Vancouver, B.C., used the online social network LinkedIn to land his first job in Canada. Shah, who is originally from India, was working in the U.S., but he wanted to come to Canada because it would be easier to bring his parents here. He applied for a job at a Vancouver technology company that had a business relationship with his California firm, but he got no response. “Eventually, I contacted someone at the company through LinkedIn who was able to get in touch with the hiring manager,” says Shah. “I did an interview and got a job offer. Most people who come to Canada start by looking for job. I was very lucky—I had one already.”

Finding yourself a mentor is another great way to expand your network and get advice. “I once contacted someone who was interviewed in the newspaper and I asked if I could buy him lunch,” says Noorani. “He’s still my mentor today.” For entrepreneurs, he advises hiring a coach on an hourly basis to help create a business program.

Volunteering is another way to meet new people and gain valuable Canadian experience. When Sobia Ali came to Canada from Pakistan, she wasn’t able to find a job, so she started volunteering at her local employment centre. “Volunteering isn’t as common back home. It’s something I learned here,” she says. “Some people questioned why I was working without getting paid, but I knew I was doing the right thing.”

A few months later, a contact Ali met through networking told her about a temporary job with the federal government. She got the gig, which she later leveraged into a permanent position. Since then she’s worked at a variety of government departments, including Human Resources and Skills Development Canada, a position she got thanks to her volunteering experience.

How to build an impressive credit score fast

When Eran Barlev, a new immigrant from Israel, opened his first bank account in Canada five years ago, he didn’t understand why the bank wanted to set up his wife Ella with her own credit card, rather than taking out a second card in his name. “They said it would be good when we bought a house,” says Barlev, a 36-year-old technology trainer who lives in North York, Ont. “That was so far away in my mind, but we did what they recommended.” Several years later, when the couple went to a mortgage broker to finance their first home in Canada, the broker was surprised to find that both newcomers had excellent credit scores. By using their own credit cards regularly, and paying all their bills on time, the couple was able to get approved for a mortgage and get a competitive interest rate. The North York bungalow they purchased is now home to four: Eran, Ella, their two-year-old son Ilai, and their brand new six-week-old daughter Rona.

The credit system in Canada is notoriously unfriendly to newcomers. Immigrants are often disappointed to learn that their credit histories in their home country are worthless. For some, the whole idea of building up a good credit history is foreign. “Building credit is the number one challenge for my clients who are coming from China,” says Wendy Seto, a private banker with RBC. “They don’t understand the concept of credit history, because back home, you show you’re capable of paying a debt by having a big deposit in your bank account, not through your payment history.”

Your first Canadian credit card

If you’re still in your home country and planning to immigrate to Canada, it’s worth looking at developing a relationship with a global bank. HSBC, for example, has banking packages aimed at globally minded citizens. Their Premier and Advance packages allow you to build up a credit history that will be applicable if you apply for HSBC mortgages, credit cards and loans in Canada. Depending on what country you’re coming from, American Express may also allow you to transfer your credit card to Canada.

Get a Canadian credit card Once you arrive in Canada, try to get a credit card quickly. If you’re meeting with a bank manager, bring any documents that show you have a good track record for paying your bills. Some banks have multilingual staff who can assess foreign documents.

If you’re turned down, ask about getting a secured card, where you give the issuer a deposit. It’s also a bit easier to qualify for cards from department stores such as The Bay and Canadian Tire, but be sure to pay off the balance each month, as these cards have very high interest rates.

If you’re coming from the U.S., your credit history can’t be combined with your credit history in Canada, but that doesn’t always mean you need to start from scratch. Unbeknownst to many, “the credit card company here can actually call the credit bureaus in the U.S. to get your credit history,” says Camon Mak, director of multicultural markets at RBC. “It’s not perfect, but in the majority of cases, it’s simpler than if you’re coming from another country.”

Once you’ve got a card, be sure to use it. “New immigrants who aren’t used to having credit cards tend to use it only for emergencies,” says Nick Noorani, an immigrant entrepreneur who gives workshops on the secrets of immigrant success in Canada. “If you keep the card in your wallet and don’t use it, you’re not building your credit. When you get a card, start using it every month and pay off the entire amount each time.”

Rodolfo Martinez, a former financial planner and current executive director of the Ontario Immigrant Network, advises newcomers to take out one or two credit cards or lines of credit that total around $3,000. “Make sure you make at least the minimum payment each month, and if you have to carry a balance, never let it go over half of your available limit.”

The irony is that once immigrants do establish a good credit rating, they can be flooded with credit card offers. At first Fernando Margueirat, an immigrant from Buenos Aires, Argentina, was rejected from getting a card at virtually every major bank. But after finally getting one and using it responsibly for a few years, he was swamped with applications. “It was kind of comic, because I got excited and started applying for cards. At one point, I had twice my annual salary in credit.” Margueirat decided to close some accounts before applying for a mortgage: a wise move, as mortgage lenders assume that people with access to too much credit are at risk of defaulting.

You always need to remember that while credit is important in terms of getting established in Canada, it has also driven many into a cycle of debt that has crippled their future. Credit card interest rates in Canada are high compared with other sources of debt, so never purchase something on a card that you can’t pay off quickly.

Property Buying Tips

The ultimate goal for many immigrants who come to Canada is to buy their own home. “One of the first things my Chinese clients want to do when they land is to buy a house,” says RBC’s Wendy Seto. “They want to provide a feeling of home for their family. Plus, most of the Canadian homes are very affordable for Chinese people because it’s a lot cheaper than back home.”

Most immigrants start off renting an apartment. As a general rule, the Canada Mortgage and Housing Corporation (CMHC) says that your entire monthly housing costs—rent as well as utilities such as heat, electricity and water—should be less than 30% of your household income before taxes. Before renting, ask if utilities are included in the rent, and if not, how much they will cost. Check to see that everything in the apartment works properly, such as front door locks, taps, toilets and appliances.

Before you sign the lease, make sure you understand everything in it. It’s common for a tenant to sign a lease agreeing to rent the apartment for one year, and after that the lease is renewed monthly. You usually need to give the landlord a damage deposit equivalent to one month’s rent to cover potential damage. You should ask to get this deposit back if the landlord finds no damage when you move out.

Can you afford to buy?

If you’re looking to buy a home, make sure you’re in it for the long haul. Rising real estate prices in the last decade have convinced many people that home prices can only go up, but there’s no guarantee they will always rise. Real estate is usually a good investment because if you stick with it, you will eventually pay off your mortgage and live rent-free, but you shouldn’t necessarily assume that your home’s value will zoom upwards.

When figuring out how much you can spend on a home, remember that your monthly housing costs shouldn’t be more than 32% of your monthly income before taxes—the Canada Mortgage and Housing Corporation (CMHC) has tools on its website to help you with the calculations. You’ll also want to understand how realtor fees work. In Canada, the buyer doesn’t directly pay the realtor: the commission is paid by the seller and divided between the buying and selling realtors.

When immigrant Fernando Margueirat learned that typically realtors in Canada get 5% of the sale price—a much higher rate than his home country of Argentina—he changed his home-hunting strategy. “Originally I was going to start by buying a small apartment and then sell it three or four years later,” says Margueirat. “When I realized that 5% would be lost in commissions, I decided to start with something bigger.”

Homebuyers should also factor in another 1.5% to 4% for other closing costs, such as lawyer or notary fees and land transfer taxes. You’ll also want to spend another $400 to $800 to have the property inspected before you close the deal to make sure there are no major problems with the house.

Choose the type of mortgage You can buy a home with just a 5% down payment and a 30-year mortgage, but financial educator Jim Yih advises against it. “Like any first-time home buyer, immigrants need to be careful they don’t get overextended. I don’t think you should buy a home unless you can put 10% down. Make sure you can afford the payments and more.” If you put less than 20% down, you’ll need to pay for mortgage loan insurance that protects the bank if you default: with 10% down on a $350,000 home, expect an extra $7,000 or so in fees.

Picking a mortgage

Make sure you shop around for the best rate on your mortgage by talking with several banks or a mortgage broker. There are two main types of mortgages to chose from: With a fixed-rate mortgage, your payment amounts won’t change during the term of the mortgage. This type of mortgage has a slightly higher interest rate, but gives you peace of mind because your payments won’t go up if interest rates suddenly surge. However, unlike in some countries, where it’s common to get decent rates on a 30-year fixed-rate term, in Canada, fixed-rate mortgages typically have terms of just three to five years.

With a variable-rate mortgage, the interest you pay fluctuates with market rates. You’ll start with a cheaper rate, but you have to accept the risk that your payments could increase. “If you go for a variable rate, make sure you could still afford your mortgage if rates rose by 1%,” says Yih. If you can make extra payments or increase the amount you pay each month, you’ll save big on interest over the course of your mortgage.

Pay Less Tax

When Jonathan Zhang, an immigrant from China, got his first paycheque in Canada, he thought there must have been a mistake. After all, a large chunk of his pay was missing. But when he brought the issue to the attention of human resources, he was dismayed to find that all that money had been siphoned off legally—in the form of federal and provincial taxes, Canada Pension Plan contributions and Employment Insurance premiums. “I was amazed at how much tax I was paying,” says Zhang.

RBC’s Wendy Seto says many of her immigrant clients are shocked when they realize how high the tax rates are in Canada. “The highest tax bracket back home in China is 12%. They’re not used to sales tax and they aren’t used to paying capital gains on stocks.” She says in some cases, she’s seen immigrants actually leave the country after they realize the extent of their tax obligations.

Even if immigrants are aware of the tax rates in Canada, they are often baffled by the complexity of our tax system. The good news is that if you learn about how the tax system works and get proper professional help, you will likely find some deductions and tax credits that can lower the amount you need to give to the tax man each year.

Tax essentials

The crucial thing for immigrants to understand is that you have to report all income, even if it comes from outside of Canada. You may get credit for tax already paid in another country, especially if there is a tax treaty between Canada and your home country. Any assets you have outside of Canada that are worth $100,000 or more must be reported. You must file your tax return by April 30 of the year after the tax year (June 15th if you run a business).

If you are hanging onto investments in your home country, figure out their value at the time of your immigration. That’s because when you sell the assets, you will only be taxed on their growth since you came to Canada.

Should you file?

You need to file a tax return if you owe tax or want to receive a refund. However, even if you have no income to report or tax to pay, you should file to get the GST/HST credit (a credit given to people with low and modest incomes to offset paying sales tax) and the Canada Child Tax Benefit (a monthly payment given to eligible families with a child under 18 years of age).

Often people who come to Canada to study don’t file a tax return because they have no income. But by filing, you will be eligible for tax credits that can be used in future years when you are working. If you didn’t file your taxes during your student years, you can go back and file them later.

Tax credits and deductions

Canada offers all kinds of tax credits that can reduce your bill—each one doesn’t offer huge savings, but their value can add up. For example, you get a credit if you buy a transit pass or if you pay for your child’s sports and fitness programs. It can get complicated, so for the first few years you file, it’s a good idea to pay for a tax professional’s services.

Business owners enjoy a wide range of deductions that can lower their income. “You can expense most things that you spend to earn income, such as your cell phone, advertising costs, and lunch when meeting with a client,” says accountant and immigration consultant Eric Cheung. “If you work at home, you can deduct a certain percentage of your home office expenses.” Once you’re making $90,000 or more in after-tax self-employment earnings, consider incorporating your business to save even more.

Income splitting

One important concept to understand is that in Canada, each spouse has to file his or her own tax return. Couples generally pay more tax in total if one has a high income and the other one has a low income or no income. Therefore, if you own a business, it’s better if each spouse gets an equal amount of income from it, rather than having it all taxed in one person’s hands. If one spouse isn’t working, accountant David Goldsmith says it’s a good idea to put any investments in that person’s name when you come to Canada. This means that income from the investments will be taxed in the hands of the lower income earner, and your family will pay less tax overall.

Invest Wisely

During Sobia Ali’s first few years in Canada, she found it almost impossible to save money. She first moved to Toronto from Pakistan in 1997, after marrying her Pakistani fiancé, who had already moved to Canada. Despite having teaching experience and a degree in math and statistics from the University of Karachi, Ali was unable to find a job.

Eventually, she found a gig with a temp agency making $10 an hour, but most of her salary went to pay for daycare for her three-year-old daughter, Abir. Undeterred, Ali, now 37, set up a savings plan at her bank that automatically funneled $100 a month into her savings account. “It worked,” says Ali. “At the end of the first year, I had $1,200, and I started investing. I kept saving, and I used some of the money to buy a house last year.”

What are your goals?

After the rush of your first few years in Canada is over, and you’ve got your career on track, it’s time to focus on saving money and investing for the future.

Your first goal should be to save three to six months’ worth of living expenses in case of an emergency. After that, how you invest your money will depend on the ultimate purpose of the money: if it’s for a short-term goal, such as purchasing a home or car in a couple years, you should stick with low-risk investments, such as a bond fund or GIC, or keep your cash in a high-interest saving account, such as the ones offered by Ally and ING Direct.

For goals that are more than five years away, such as retirement, consider putting a portion of your money in stocks. A good rule of thumb is that you should hold a proportion of safer investments, such as bonds or money market funds, that is equal to your age and put the rest in stocks. For example, if you’re 40 years old, you could hold 40% of your portfolio in bonds and 60% in stocks. As many immigrants come into the country in mid-career, they have a shorter length of time before retirement, so you should plan your portfolio accordingly. If you have investments in your native country as well as in Canada, make sure to look at your investments as a whole to ensure a proper balance.

If your employer offers a pension plan or a group retirement plan, you should almost certainly join. Pension plans often include contributions from your employers and Avoid risk either type of plan likely allows you to pay lower investing fees. So you’ll grow your retirement savings faster than you could on your own.

Avoid unnecessary risk

Immigrants are risk-takers by nature, and many come from rapidly growing countries where they are used to high returns. However, using your retirement funds to place bets with risky stocks is not a good retirement plan. “Immigrants have to understand that steady growth in a boring mutual fund is actually a good thing for them because it means less volatility, less risk,” says RBC’s Wendy Seto.

Instead of speculating on a few technology or mining stocks, you should consider investing in a low-cost balanced mutual fund to start, such as BMO Monthly Income, RBC Monthly Income or Mawer Canadian Diversified. The diversification you get will protect your savings even if some the companies you’re invested in hit unexpected hard times, while the bonds in your fund help protect you when the whole market crashes.

How much do you need?

While financial institutions selling retirement products may say you’ll need 70% of your working income in retirement, in most cases that’s not true. Typical Canadian retired couples can enjoy a comfortable retirement on 50% to 60% of their working income, as long as they own their own home and retire with no debts. That’s because when you retire, the costs of paying the mortgage, raising the kids and saving for retirement disappear.

As well, in Canada the government will help fund your retirement. If you worked in this country, you’ll get money from the Canada Pension Plan when you retire. How much depends on what you paid into the plan when you were working, so immigrants who came over mid-career will receive less than people who worked here for their entire lives. For example, an immigrant who worked in Canada for 20 years and made the maximum CPP contributions each year would currently get $480 a month in CPP benefits if he retired at age 65.

If you’re over 65 and you lived in Canada for at least 10 years as an adult, you’ll receive money from Old Age Security (OAS), although you probably won’t get the maximum amount unless you’ve lived in Canada for 40 years.

Going at it alone

Most immigrants start out in mutual funds with an adviser. But as you become more comfortable with the Canadian financial system, you might become interested in managing your own investments. Sobia Ali originally invested in her bank’s line of mutual funds, but after doing some research, she realized that index funds, which track a specific target index or benchmark, almost always perform better. “I don’t see any reason to buy expensive mutual funds anymore,” she says. “I get the same results cheaper through low-cost index funds.”

Today, Ali says she has a good understanding of the Canadian financial system. She’s saved some money in her daughter’s RESP and she’s building up her RRSPs. Ali plans to build up her workplace pension and pay off her mortgage before retirement, two things that will be the foundation for a prosperous retirement. “I’m pretty confident now in managing my finances,” she says. “Many of my Canadian-born friends come to me to ask for advice.” Insurance in Canada

What you need to know about insurance in Canada

Navigating the insurance industry is particularly difficult for immigrants, who may not have the same concepts back home. Rodolfo Martinez, a former financial planner who is currently the executive director of the Ontario Immigrant Network, says one of the big challenges for Mexican immigrants is auto insurance.

“Until recently, you didn’t even need to have car insurance in Mexico, so immigrants don’t understand it,” he says. Not only is car insurance mandatory for drivers in Canada, but for newcomers with no driving history here, it can cost a small fortune: Martinez says rates of $300 per month for one modest vehicle are common.

Bring your documents with you

Many immigrants aren’t aware that if they were living in the U.S. previously, they can use their insurance record there to get significantly lower premiums. Even if you’re not coming from the U.S., it’s a good idea to bring documentation with you. “When we came from Australia, we brought over as much information on our financial standing as we could and it was a huge help,” says Toni Byrnes, a 38-year-old project manager in Victoria. “We brought letters from our insurance companies saying how many years we’d been insured and how many claims we had. That helped us start out with lower premiums because we had no claims.”

Get life and disability insurance

Life insurance is a must if you work and support a spouse and children. But don’t overdo it. Think of it as “income replacement insurance” that will allow your family to get by without your paycheque. A good rule of thumb is to purchase enough life insurance to cover 10 times your income if you have kids under 10 years old (five times your income if you have kids over 10), plus the amount needed to pay off any debts. Disability insurance is also crucial. Often this is covered by your employer, but if you’re self-employed you need to take out your own policy. If you’re not supporting anyone else, you don’t need life insurance, and it doesn’t make sense to insure the lives of Checklist to do your children, as they have no income.

Checklist

What to do during your first few weeks in Canada:

Apply for your Social Insurance Number (SIN). You will need this to get a job and to get access to government programs and benefits.
Apply for the Canada Child Tax Benefit, a tax-free monthly payment given to parents caring for children under the age of 18.
Apply for a provincial health card. If there is a waiting period in your province before coverage starts, take out private medical insurance to cover you for the first few months.
Find an immigrant settlement agency close to your home and inquire about employment and English language programs.
If possible, set up your Canadian bank account before you leave your home country. Ask if the bank will waive fees for new immigrants in the first year.
When wiring large amounts of money from your home country, ask your bank for a preferential exchange rate, says Ngoc Day, a financial planner at Macdonald, Shymko & Co. For smaller amounts, shop for the best rate on currency exchange company websites.
Wealthy immigrants might want to consider setting up an Immigration Trust, which allows you to shelter investments from taxes during your first five years in Canada.