Investment Savings Accounts (ISA): An Alternative Way to Invest Cash

If you have made investments using a brokerage account at one of the Canadian banks, you may have heard of the Investment Savings Account (ISA for short).

Traditional brokerage accounts allow you to invest in a wide range of asset classes from equities and fixed income to ETFs, mutual funds, commodities, and more.

However, there is one important component of investing strategy that hasn’t been named in the above: cash.

Despite not being a naturally appreciating asset in the same way as stocks or bonds, it is imperative to have a defined strategy for your cash when you are investing or trading.

Particularly if you are trading on margin, the importance of having adequate cash at all times becomes even more significant.

Even without that added complexity though, cash is the key medium used when:

• Markets are volatile and investors want to ride out the period of volatility while taking on minimal risk;
• Investors are waiting for the right opportunity or right timing. In such cases, it is essential to have liquid cash available to be able to enter into the chosen asset at the right time.

For every day that your cash is not invested, you are losing some purchasing power due to the effects of inflation.

The alternative is to get your cash to work for you and the Investment Savings Account is one of the best ways to do that.

In essence, the ISA is held within your brokerage account and allows you to park your idle cash while you are waiting to invest it into traditional assets.

You are paid a fixed return for it each month defined by the interest rate available on the ISA. 

Benefits of an ISA

There are several benefits to opening and using an Investment Savings Account in Canada.

If the ISA is used in the right way by an investor, it truly allows an individual to maximize income generation on idle cash while assuring security.

Key ISA advantages are as follows:

1. Liquidity

Instead of being locked up in an illiquid asset, your cash is in a liquid vehicle ready and able to be traded at virtually a moment’s notice.

If you are tracking a particular market or asset and just waiting for the right time to strike, the ISA allows you to park your cash securely in the interim period until it is ready to be deployed.

At that point, it is a simple transfer into your chosen asset.

Note: Some banks have ISAs with a ‘Notice Period’ stipulation.

For these ISAs, there is usually a lock-up period for your cash before it can be withdrawn.

If you are using an ISA for the purposes of facilitating investments, it is advisable not to enter into an account with such a stipulation.  

2. Interest income

The ISA enables you to unlock an extra, low-risk stream of income in your investment strategy.

While the exact amount of interest you earn depends on your cash holdings and the brokerage you open an ISA with, it nevertheless represents an attractive alternative to simply holding cash in your brokerage account. 

3. Flexibility

Depending on whether you hold the ISA in registered or non-registered accounts, your earnings may be tax-deferred or non-taxable.

Any interest earned on non-registered accounts is taxable.

However, registered accounts such as RRSPs and TFSAs offer tax advantages, so an ISA held within one of them can yield tax benefits as well.

4. Security

ISAs held with brokerage accounts at chartered Canadian banks are eligible for deposit insurance coverage by the Canada Deposit Insurance Corporation (CDIC).

The CDIC is an organization that insures eligible deposits up to a maximum of C$100,000.

ISA vs HISA

A popular account offered by Canadian banks is the High-Interest Savings Account (HISA for short).

Despite the similar naming, there are some key differences between the Investment Savings Account (ISA) and the High Interest Savings Account (HISA).

1. Type of account

The Investment Savings Account is an account held within your brokerage platform that enables you to transfer funds to and from other assets easily for investment purposes.

On the other hand, the HISA is similar to a regular savings account in that it is integrated with your daily banking platform alongside your chequing accounts, lines of credit, credit cards, and other products you may have.

2. Rate 

An ISA will usually provide a higher interest rate than a HISA.

Different providers each have different rates offered for ISAs and HISAs, but all else equal, the ISA will usually offer a stronger return on your investment than a HISA will provide on your deposits. 

3. Use case 

While there is no definite rule or law governing the use of these accounts, both ISAs and HISAs are generally used for differing purposes.

As aforementioned, the ISA is a medium used when investors are seeking to park cash when they haven’t yet identified the right asset or are seeking to enter an asset at the right time.

On the other hand, HISA is less used as an investment tool.

Instead, it is a part of your day-to-day banking and savings needs.

Many people use HISAs for purposes such as saving for a vacation or wedding or for building their ‘rainy day’ fund.

There is however nothing stopping you from using your ISA to park just about any idle cash, as long as you keep in mind that it may take 2 business days to transfer out of your brokerage account if you need it.

ISA Rates

Below is a table illustrating some of the options that Canadian investors have when selecting an ISA provider.

Most providers offer optionality for both Canadian Dollar and US Dollar cash holdings.

Note that if you see Series F ISAs online, these are only available through a financial advisor.