A non-registered account refers to an investment account devoid of special tax privileges. Any investment profits, including interest, dividends, fund distributions, and capital gains from asset sales, are subject to taxation at your marginal tax rate in the year they are realized. There are no restrictions on the amount of money you can invest in a non-registered investment account, and you have the freedom to contribute to it indefinitely. A non-registered account is sometimes called a “taxable” or “open” account.
Benefits of Non-Registered Accounts
A non-registered account can be useful if you’ve reached your contribution limit on an RRSP or a TFSA.
- No Limits: You can contribute or withdraw as much as you want, whenever you want
- Open to All Asset Classes: These accounts can hold mutual funds, segregated funds, Exchange Traded Funds (ETFs), stocks, bonds, cryptocurrency, real estate and collectables
- Simple Administration: Some investment firms may offer better terms to handle these no-fuss accounts
Disadvantages of Non-Registered Accounts
If you choose to move funds from a non-registered account to a registered account (like an RRSP, TFSA or RESP), there can be tax consequences.
- Higher Tax Burden: Paying taxes on investment gains as you go reduces the benefit of compound returns
- Complex Tax Preparation: You’ll have more to report at tax time
How are Non-Registered Investments Taxed?
Various investment gains are subject to different tax treatments. Interest earned from savings accounts, GICs, and bonds, as well as dividends from foreign corporations, are fully taxable at your highest marginal rate in the year they are received. This means they are added to your total taxable income, including employment earnings, during tax season.
Dividends from Canadian corporations enjoy a more favorable tax treatment due to the dividend tax credit. The amount you owe in taxes on these dividends depends on your individual circumstances and tax bracket.
Capital gains taxes apply to the appreciation of your stock or fund holdings upon sale. Only fifty percent of the gain is taxed, meaning if you made a $1,000 profit from selling a stock, only $500 would be subject to taxation.
Capital Gains Triggered in Non-Registered Accounts
Capital gains from investments in non-registered accounts are taxable at only 50% of the account holder’s marginal tax rate. However, interest income is fully taxable at the account holder’s marginal tax rate.
Dividends Paid in Non-Registered Accounts
Dividends are taxed on a gross amount but benefit from a dividend tax credit. Your dividend income for the year will usually be shown to you on your tax slips including T5, T4PS, T3, or T5013. If you need more information about the type of dividends you received, contact the payer.
- Add up your eligible dividends. These include most dividends from Canadian public companies and certain dividends from private companies
- Multiply by 1.38. This number is your grossed-up dividends
- Add your grossed-up dividends to your income for the year
- Calculate the tax on that grossed-up amount
- Claim a federal dividend tax credit of approximately 15% of the grossed-up dividends
- Claim a provincial tax credit based on where you live
Interest Collected in Non-Registered Accounts
Interest is money paid regularly at a particular rate as compensation for lending company money. Interest may be paid out from bonds and money market securities and is 100% taxable.
Return of Capital (ROC) in Taxable Accounts
Received from your invested principal. If you withdraw a set amount from your investment and there isn’t enough interest and dividend income, the difference is made up of ROC. There is no tax due on the ROC, given it is the capital you invested. ROC, however, reduces the adjusted cost base of the investment, which generally results in a larger capital gain when the investment is sold, hence taxes are effectively deferred.
Is a Savings Account a Non-Registered Account?
A savings account may be registered or not. Because interest income is 100% taxable at your top marginal rate, it can make sense to take advantage of registered accounts for savings.
Death & Taxes
Though special rules apply to registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs), a taxpayer is generally deemed to have disposed of all his or her capital property (including stocks, exchange-traded funds, bonds, mutual funds, real estate, farm property, etc.) immediately before death at fair market value (FMV). When the proceeds of disposition exceed the property’s adjusted cost base (ACB), the result is a capital gain. One half (50%) of the capital gain is taxable to the deceased and must be reported in the deceased’s final tax return (known as the terminal return). Any taxes owing as a result of this deemed disposition would generally be payable by the estate of the deceased. On the terminal return, a capital gains deduction may be claimed against any capital gains arising from qualifying property, such as shares of a qualified small business corporation or qualified farm or fishing property.
A non-registered asset generally belongs to the deceased individual’s estate after death (except when the property is held as joint tenancy with right of survivorship) and subsequently distributed according to the deceased’s Will, or the provincial/territorial intestacy law if no Will exists. Per the deemed disposition described above, the estate’s ACB upon receiving the ownership of the property is equivalent to the FMV of the property immediately before the death of the individual. Depending on the instructions in the deceased’s Will, typically the estate may either liquidate the non-registered capital property and distribute cash, or transfer the property in-kind to one or more estate beneficiaries.
If the estate liquidates the property before distribution, the capital gain or loss triggered by the disposition is generally taxable to the estate, which may be allocated to the estate beneficiaryies). If the estate distributes the property in-kind to an estate beneficiary, the transfer automatically occurs at ACB and no capital gain or loss is incurred until the receiving beneficiary later disposes of (or deemed to have disposed of) the property. The estate may alternatively elect out of the automatic treatment and choose to transfer the property at FMV, for example, to take advantage of an unused capital loss within the estate.
Spouse or common-law partner as beneficiary
The most common exception to the deemed disposition rules occurs when the capital property is transferred to a deceased taxpayer’s spouse or common-law partner, or testamentary spousal or common-law partner trust. A testamentary spousal or common-law partner trust is typically created through a taxpayer’s Will. It must meet specific criteria, but generally entitles the spouse or common-law partner to receive all the income of the trust during his or her lifetime. When property is transferred to a spouse, common-law partner, or testamentary spousal or common-law partner trust, the transfer may be done without triggering any immediate capital gains and the associated tax liability. This “spousal rollover” treatment is available pursuant to subsection 70(6) of the Canadian Income tax Act (ITA), which automatically deems the transfer of capital property to a spouse or common-law partner to have occurred at the transferring spouse’s ACB. Upon the death of the last surviving spouse or an earlier (deemed) disposition, the resulting capital gain or loss from the (deemed) disposition is generally taxed to the last surviving spouse.
ACB transfer to spouse or common-law partner not always called for
Sometimes it may not be beneficial to transfer all mutual fund investments to a spouse or common-law partner, or testamentary spousal or common-law partner trust, at the ACB. It may be preferable to have the deceased’s legal representative (e.g., the estate executor) elect out of the ACB transfer to a spouse or common-law partner to trigger a certain amount of capital gains on the terminal return. This would be advantageous in situations where the deceased taxpayer has unused capital loss carryforwards that would otherwise expire on death. These amounts could be used to reduce the tax on the capital gain that would otherwise result from the deemed disposition of the mutual funds at death.
