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.
