How to get rich in Canada? What does being rich even mean? Well, to me, it means at least a million dollars in income producing assets, not just net worth. A million dollars with a 3.5% average dividend yield will give you $35,000 passive income per year (obviously not enough for a family and not Fat FIRE but not bad for an individual). To me, net worth can be more of a vanity metric because there are plenty of Vancouverites I know who are house rich but cash poor, yet they still might be part of the top 1% net worth in Canada.
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WHAT IS A RICH CANADIAN?
The number of Canadians who will be millionaires (part of the 7 figure club) is set to be almost 2 million by 2023, according to CBC. It will increase by 54% from what it is right now, around 1.3 millionaires. Most of this high net worth is due to high property values. According to Zolo, the average sale price of a detached home in Vancouver from December 2018 to January 2019 was $1.1 million.
According to a Cap Gemini/RBC Wealth Management 2015 World Wealth Report as mentioned by this Financial Post article on how to tell if you’re rich and why you should care:
- Less than 1% of Canadians have $1-5 Million USD in investable assets, considered high net worth
- Less than 0.1% or 30,000 Canadians have $5-30 million USD in investable assets, considered mid-tier millionaires
- More than $30 million USD in investable assets, considered ultra high net worth, with only 3300 Canadians who can claim this title as of 2015 (I’m sure it’s higher now)
How to Become a Millionaire in Canada
Unless you win the lottery, just like this Surrey mom of three did (she won $39.5 million dollars), or create a very popular Youtube channel just like Lilly Singh did (she made over $10 million in 2017 and has a reported net worth of $16 million), sorry to burst your bubble but you won’t become rich overnight. Building wealth in Canada takes time.
But…Lilly Singh obviously did something right because she earned over $10 million from making videos in 2017!!
How to get rich in Canada, then? It’s more boring than making Youtube videos unfortunately.
Related: How Much Should I Have Saved by 40?
Becoming a self-made millionaire in Canada the traditional route (non-entrepreneurial, working as an employee and investing your salary earned) takes a lot of time, compounding, and discipline. If you’re starting young and you know what to do in your 20’s, you are way ahead of the pack.
I’ve been at it (meaning in the workforce) for almost 20 years and I have 7 figure net worth (compounding really works). I have meandered the path a bit and made a lot of investing mistakes in my 20’s along the way when I tried to build wealth.
Compounding really is your friend, but you won’t know it or realize it until your investable assets are a sizeable amount, like over $500,000.
I remember a money savvy friend telling me (the same friend who recommended I read The Wealthy Barber to me, which changed the way I look at money when I was in college) that people don’t get rich or become millionaires typically from their day job. They gain wealth from using the money that they make from their day job work for them.
If you start with $25,000 and you invest $1000 on a monthly basis, it will take 28 years at a rate of 6% rate to grow that balance to over $1,000,000. So if you start at age 25 with $25,000, you will become a millionaire by age 53….and sooner if you invest more than $1000 a month. See the below calculations using a calculator from Financial Mentor.
Focus on Income Producing Assets and Cash Flow
As mentioned previously, net worth means nothing if you don’t have cash flow. Focus on investing in income-producing assets and cash flow. Investable assets for the win.
Income producing assets to help achieve financial freedom are things like:
- Money saved in a high interest savings account or GIC like Canadian Tire’s HISA
- Investments in REITs (Real Estate Investment Trusts)
- Investments in Bonds
- Investments in Dividend stocks (my favourite income producing asset)
- ETFs that track the index and pay distributions, such as VXC.
- Renting out property
- Peer to peer lending like Lending Loop
Canadian Real Estate Within Reason
For me (and probably many other Canadians), the source of my net worth growth has been primarily due to my primary residence. My primary residence has approximately doubled in price in the five years that I have owned it. I had also made over $100,000 in a previous primary residence getting out of a mortgage pit and an unhealthy relationship prior to finding Mr. Right.
Of course, if you aren’t able to sell it and take advantage of geo-arbritrage (e.g. move to a cheaper home or location), then it would be hard to get out of the cycle of cash poor house rich. Canadian taxation laws for primary residence are very generous and when you sell your primary residence, you don’t have to pay taxes or capital gains on the profit. You do have to report the sale of your primary residence but because of the principal residence exemption, you do not have to pay any taxes on the gains. Here’s how to calculate the ACB on a principal residence exemption.
Unfortunately I feel that the principal residence exemption has fuelled speculation and ridiculous real estate prices in Canada, and encouraged home flipping. Even though there is no taxation on the profit of the primary residence, there are things that you need to consider like your mortgage interest that you paid, or maintenance fees over time that eat into the ‘profit’ of selling your primary residence.
Alternatively, although you can’t get rich per se since you can only invest $1500 at a time, you could invest with addy and crowdfund real estate in Canada. The distributions (if any, and it depends on the offering memorandum) will be included with T5 slips. The gains if the crowdfunded property is sold, are taxed as capital gains, which are still tax favourably in Canada compared to other income, such as interest income.
Real estate crowdfunding allows you to invest in Canadian real estate without going into mortgage debt or coming up a huge capital investment. It allows you to be more hands off and not have to worry about repairing a leaky toilet at 3:00am on a Sunday night.
How to get rich in Canada may mean having housing in Canada. There are millionaires in Toronto and millionaires in Vancouver mainly because of real estate. “House rich and cash poor”.
Minimize Taxes and Spending
Tax minimization strategies in Canada are important not only in regards to income (in which taxes are one of the major expenses that Canadians have to pay) but also in regards to investing. After all, it’s not ideal to pay a lot of tax on your investments when you already paid tax in the first place (from income earned) with that money you saved to purchase for that investment.
Making sure your allocations are correct (for example, don’t put REITs, or real estate investment trust, outside of the registered investment accounts) will help you minimize taxes that you pay and ultimately increase your wealth.
Taking advantage of investing in RRSPs and TFSAs helps you minimize taxes. Focus on saving money fast by cutting out the fat in your daily spending or making a few phone calls to negotiate things like your cell phone bill or Internet bill.
You may also be interested in:
- The Guide on Tax-Efficient Investing in Canada
- Investing as a Student in Canada
- Average Savings by Age in Canada
Become a Millionaire in Canada
Becoming a millionaire in Canada is not that difficult in my opinion, especially in recent years because of the ridiculous housing boom Canada has experienced.
However, to ultimately get rich in Canada, you would need to increase your investable assets and not just count your primary residence.
Having liquid cash and investable assets, and not just money socked in a primary residence gives you peace of mind, gives you confidence in knowing that you don’t have huge mortgage debt hanging over your head, and gives you increased appetite for risk, which may increase your investing gains and profits.
Investable assets give you cash flow. This is why having a liquid net worth is a measure of true net worth.
There are many millionaire households in Vancouver right now who live on million dollar land but can’t pay their expensive property taxes or luxuriate by getting a two-fer to celebrate Canada Day because their income is low. Not having that freedom to cover your expenses does not sounds any bit glorious nor freeing, eh?
For more dividend investing ideas, you can click here for a list of books.
Once you’re a millionaire in investable assets, you should review your retirement projections to make sure you money lasts you throughout retirement.
How do you define wealth?
Do you go with net worth or do you go with investable assets when you’re pondering how to get rich in Canada?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.