Canadian Banking System 101: A Guide For New Immigrants

Prepare for banking in Canada.

One of the first hurdles newcomers face in Canada is understanding the banking system. You need to choose a bank, decide on a “newcomer account offer,” and accept or decline the credit card.

If you’re like most people, you default to the bank and account type of a friend or family member. However, this article is for you if you’re willing to spend five minutes choosing a suitable bank account.

Let’s get this out of the way. The Canadian banking system is one of the most stable in the world, with seven banks in the Global Top 100 World’s Safest Banks, 2023, and the Royal Bank of Canada (RBC) ranked No. 10.

Hey, hold your horses. Before deciding it’s RBC or nothing, read the article first. First, what types of financial institutions operate in Canada?

Types of Financial Institutions in Canada

In Canada, we have traditional banks, credit unions, and online-only banks, or “neo banks.” We’ll focus on the first three, but there are also the caisses populaires in francophone areas, which we’ll exclude due to their niche coverage.

Traditional Banks

The “Big Five” banks, which are the largest financial institutions in Canada, are Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD), Bank of Nova Scotia (Scotiabank), Bank of Montreal (BMO), and Canadian Imperial Bank of Commerce (CIBC).

These banks are often the go-to options for newcomers due to their strong capital base, extensive financial services, widespread branches, and ATM networks ensuring easy cash access.

Credit Unions

Credit unions are member-owned financial cooperatives. They offer similar services to banks but at lower fees. Some clients argue they provide better customer service.

It’s easier to provide bespoke customer service if you don’t attend to dozens of clients daily. So, if you prefer a community-focused banking approach, this might be right for you.

They operate as not-for-profits, so any profits or dividends are distributed among members annually. Sounds appealing, right?

Use the Canadian Credit Union Association’s Find a Credit Union to locate one nearby.

Online-only Banks

With neobanks, all banking services are online. Popular digital banks include Wealthsimple, Tangerine, and Simplii Financial.

They offer the same services as traditional banks. The lack of a physical office and overheads mean they can offer competitive, often lower interest rates and fees.

Keep This In Mind

Regardless of your choice, your funds’ safety is guaranteed up to a certain threshold.

The Canada Deposit Insurance Corporation (CDIC) protects eligible customer deposits up to $100,000, per depositor, per insured category, at each member institution.

Online banks are typically not CDIC-member institutions. However, they partner with several tier-1 CDIC-member banks that hold the funds in trust, providing similar insurance coverage.

If you open an account with Wealthsimple, the funds in your individual and joint cash accounts are placed in trust with up to five tier 1, CDIC-member, regulated Canadian financial institutions. This extends CDIC protection against these banks’ failure to Wealthsimple Cash account holders for up to $500,000 CAD across all cash accounts.*

Opening a Canadian Bank Account

Most Canadian financial institutions offer four major account types: Checking (Chequing), savings, registered, and non-registered accounts.

Checking and Savings Accounts

The two major account categories are checking and savings accounts.

Checking accounts are used for everyday transactions, like paying bills and purchasing goods or services, often at no extra cost. However, unless you get a newcomer offer like RBC’s no-monthly-fee banking for a year, you will likely pay an account fee.

Savings accounts are designed to help you save money and earn interest. Some banks may require a minimum balance to earn interest. For example, TD Bank’s High Interest Savings Account requires a minimum balance of C$5,000.

With a savings account, you won’t worry about a monthly fee.

Registered and Non-Registered Accounts

These accounts aren’t exactly types of bank accounts. But you can open any of them at your financial institution due to their government-regulated status.

Registered accounts are investment accounts registered with the Canada Revenue Agency (CRA). Well-known registered accounts include the Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA), Registered Education Savings Plan (RESP), and for all of you who are looking to buy a home, the First Home Savings Account (FHSA).

They offer tax savings or deferrals depending on which you open, and some have creditor protection. A Tax-Free Savings Account (TFSA) allows you earn interest, dividends, and capital gains tax-free, while a Registered Retirement Savings Plan (RRSP) account allows you to save and invest for retirement and defer your taxes until you withdraw them.

Non-registered accounts are investment accounts without special tax treatment. Your savings account can pass as a non-registered account, for example. Any account that can hold stocks, bonds, ETFs, or other financial assets not registered with the CRA is a non-registered account.

Opening an Account

Opening most account types is straightforward. Most requirements are similar to those in your local country.

You'll need to provide required documents, like a valid government-issued ID (passport or driver's license) and proof of address (utility bill or lease agreement).

Some banks may require your Social Insurance Number (SIN) for tax purposes. The process involves filling out an application form, online or in-person, and making an initial deposit. Once your account is set up, you’ll receive your debit card, if you’ve opted to bank with one, and can usually start using it immediately.

Banking Fees and How to Minimize Them

Banking fees are often the most disliked aspect of banking. You’ve likely encountered them during your usual transactions, regardless of where you moved to Canada from.

The bad news is that you will experience the same in Canada, but the good news is that there are ways to manage them.

Most Canadian financial institutions charge monthly account, ATM, and overdraft fees. To reduce costs, choose a no-fee or low-fee account. Look for accounts that offer low-volume users to pay little to no fees all year.

For example, most banks have a newcomer category where immigrants get free banking services for one to two years.

I find the bazillion types of checking and savings accounts at banks overwhelming, each with unique benefits. Is it on purpose? When choosing an account, don’t skim over the details.

Most Canadian banks strive for transparency, but some accounts may have hidden fees or costs. Here's a list of potential hidden charges:

• Minimum balance fees

• Inactivity fees

• Paper statement fees

• Interac e-Transfer fees

• Non-sufficient funds (NSF) fees

• Overdraft protection fees

• ATM fees for using other banks' machines

• Foreign currency conversion fees

• Account closure fees

• Safety deposit box fees

• Wire transfer fees

• Returned item fees

• Stop payment fees

• Replacement card fees

You should take the following steps to avoid unexpected charges:

• Read the account agreement and fee schedule.

• Ask your bank representative about potential fees.

• Consider online-only banks, which often have fewer fees.

• If required, maintain minimum balances.

• Use your bank's ATMs to avoid extra charges.

• Regularly monitor your account for unexpected fees.

• Avoid exceeding your overdraft limit.

• Take advantage of special promotions from your financial institution.

Banks must disclose all charges, even if some fees may seem hidden. Always ask questions and seek clarification if you're unsure about potential account costs.

4. The Interac e-Transfer System

In 1984, Canada’s major financial institutions collaborated to provide shared cash dispensing to their customers. This resulted in Interac and Canada’s first electronic payment network.

You can transfer funds directly from your bank account to another person's account via Interac e-Transfer using just their email or mobile number. Interesting, right?

Interac e-transfers can only be received within the Canadian interbank network, and no international transfers are allowed. Every Canadian financial institution offers Interac e-Transfer services, and the funds are usually available within minutes.

How Interac Works

Send Money: Log into online banking, select Interac e-Transfer, enter the recipient’s email or phone number, enter the amount, and hit send. Some recipients may require a security question and answer.

The answer is provided to the receiver to include before the transfer can be completed. This prevents e-transfer to the wrong recipient. If the recipient has set up Autodeposit, there's no need for security questions and answers.

Users can set up Autodeposit through their online banking platform by registering their email or mobile number and linking it to a specific bank account.

When you send an e-Transfer to an Autodeposit email or phone number, the system automatically deposits the funds into the linked account.

Receive Money: The recipient gets a notification that someone has sent money. For accounts with a security question, the process isn’t complete until the recipient answers it and deposits the money. If the account has Autodeposit, the system automatically deposits it.

Request Money: The system allows a user to request money from another user, who can accept or decline the request.

5. The Credit System

The credit system. Whew!

Understanding this is crucial for managing your finances, especially if you're new to the country. The Canadian credit system helps individuals build a credit history, which is essential for applying for a loan, getting a mortgage, and renting an apartment.

Here’s how it works...

In Canada, your creditworthiness is determined by your credit score, a numerical representation of your credit history, ranging from 300 to 900. Higher scores indicate better creditworthiness, while lower scores indicate heavy reliance on credit or missed payments. The scores are obtained from your credit report, which includes your credit history, outstanding debts, and payment history, produced by the two main credit bureaus, Equifax and TransUnion.

As a newcomer to Canada, it’s vital to build and maintain good credit. Here are some tips.

Pay Your Bills on Time. Consistently paying your bills on time is a significant factor affecting your credit score. Ensure the account being paid is in your name, so the regular payments are recorded in your favor.

Keep Credit Utilization Low. Use less than 30% of your available credit limit. While this is the advised threshold, it should depend on your available credit. For example, a 30% usage of a $40,000 credit means a $12,000 debt, which is high for an average Canadian, especially a newcomer.

Avoid Frequent Credit Applications. Applying for multiple credit accounts in a short period can lower your score, especially if they’re “hard checks.” A hard check refers to a detailed inquiry into an individual credit history, while a soft check is a less detailed request.

Monitor Your Credit Report. Regularly check your credit report for errors. Erroneous information can misrepresent your credit status. Equifax and TransUnion offer a free detailed report once a year.

Time to Choose

When you move to Canada, one of the first things you’ll need to do is choose a bank. There’s no one-size-fits-all solution, so take your time to compare options and find the financial institution that suits your needs.

The stable Canadian banking system offers numerous options to manage and grow your finances, whether you choose a traditional bank, credit union, or online-only bank.

Start researching, ask questions, and reach out to financial institutions about their newcomer packages. Your financial future in Canada begins with this decision.

Welcome to Canada!