Non-Registered Accounts: Saving After RRSP and TFSA
Beyond Registered Accounts
If you've already maximized your RRSP and TFSA contributions, congratulations! You're part of a minority of Canadians who fully utilize these tax-advantaged tools. But what to do with additional savings? This is where non-registered accounts, also called taxable accounts, come in.
While they don't offer the tax advantages of registered accounts, non-registered accounts have their own unique benefits and play an important role in a comprehensive financial strategy. Understanding how to use them effectively can make a significant difference in your long-term wealth accumulation.
What is a Non-Registered Account?
A non-registered account is simply an ordinary investment account that is not registered with the Canada Revenue Agency (CRA) like RRSPs, TFSAs, FHSAs, or RESPs. You can hold stocks, bonds, mutual funds, ETFs, GICs, and other types of investments in it.
Main characteristics:
- No contribution limit: You can invest as much money as you want, whenever you want.
- No withdrawal restrictions: Full and immediate access to your money at all times.
- Taxable income: Interest, dividends, and capital gains are taxable each year.
- Differential tax treatment: Different types of income are taxed differently.
The Advantages of Non-Registered Accounts
1. No contribution limit
This is the major advantage. Once you've exhausted your RRSP and TFSA contribution room, the non-registered account allows you to continue investing without restriction. For disciplined savers and high earners, this is essential.
2. Total flexibility
No tax penalty for withdrawals (unlike RRSP before retirement). You can withdraw any amount at any time. Ideal for medium-term projects or unexpected needs.
3. Preferential tax treatment of certain income
Canadian dividends and capital gains benefit from preferential tax treatment compared to ordinary interest income. We'll return to this in detail.
4. Income splitting
You can lend money to your spouse at the prescribed rate for them to invest in a non-registered account, allowing legal income splitting (with certain rules to follow).
5. Capital loss carryover
Capital losses can be used to offset capital gains, reducing your tax bill. These losses can be carried back 3 years or forward indefinitely.
6. Adjusted cost base (ACB) at death
At death, the cost base of investments is adjusted to market value, which can eliminate capital gains tax for your heirs in certain situations.
How is Income Taxed?
Unlike registered accounts where all income is treated the same way, non-registered accounts have three types of income taxed differently:
1. Interest (least advantageous treatment)
Interest (GICs, bonds, savings accounts) is fully taxable at your marginal tax rate. If you're in a 40% bracket, you pay 40% tax on your interest.
Example: $1,000 interest at 40% = $400 tax = $600 net
2. Canadian dividends (advantageous treatment)
Dividends from Canadian corporations benefit from the dividend tax credit. Depending on the type of dividend (eligible or non-eligible) and your province, the effective tax rate can be considerably lower than your marginal rate.
Example: $1,000 eligible dividends at an effective rate of 25% = $250 tax = $750 net
3. Capital gains (most advantageous treatment)
Only 50% of capital gains are taxable. If you sell a stock with a $10,000 gain, only $5,000 is added to your taxable income.
Example: $1,000 capital gain at 40% = 50% × $1,000 × 40% = $200 tax = $800 net
Tax comparison (40% marginal rate):
| Income type | Gross income | Tax | Net income | Effective rate |
|---|---|---|---|---|
| Interest | $1,000 | $400 | $600 | 40% |
| Canadian dividend | $1,000 | ~$250 | ~$750 | ~25% |
| Capital gain | $1,000 | $200 | $800 | 20% |
Tax Optimization Strategies
1. Strategic asset location between accounts
Place your investments according to their tax efficiency in the right type of account:
In your RRSP/RRIF:
- Bonds and fixed income securities (highly taxed interest)
- Canadian REITs (Real Estate Investment Trusts)
- US stocks (dividends exempt from withholding in an RRSP)
In your TFSA:
- High-potential growth stocks
- High-yield investments
- Speculative investments
In your non-registered account:
- Canadian dividend-paying stocks
- Canadian equity ETFs (tax efficiency of capital gains)
- Long-term held growth stocks (tax deferral until sale)
2. Tax loss harvesting
Strategically sell investments at a loss before year-end to offset realized capital gains. You can then repurchase the same investment after 30 days (superficial loss rule).
Example:
You realized a $10,000 gain on one stock and have a $10,000 unrealized loss on another. By selling the loss stock, you cancel the taxable gain, saving approximately $2,000 in tax (depending on your rate).
3. Deferring tax on gains
Unlike interest and dividends which are taxed annually, capital gains are only taxed upon sale. By holding your investments long-term, you defer tax and benefit from compound growth on the amount that would have been paid in tax.
4. Income splitting with prescribed rate loan
If you're in a high tax bracket and your spouse is in a lower bracket, you can lend them money at the CRA prescribed rate (currently very low). Investment income generated will be taxed at their lower rate.
Important rules:
- The loan must be documented in writing
- Interest must be paid annually by January 30th
- The rate is fixed at the time of the loan
5. Donating securities to charities
Rather than selling appreciated stocks and donating the money, donate the securities directly. You avoid capital gains tax AND receive a tax receipt for the full market value.
Example:
You have stocks purchased at $10,000 now worth $20,000. If you sell then donate, you pay tax on the $10,000 gain. If you donate the stocks directly, you avoid this tax and receive a $20,000 receipt.
Common Mistakes to Avoid
1. Neglecting to track adjusted cost base (ACB)
You must know the purchase price of your investments to correctly calculate your capital gains or losses. Keep all your transaction statements.
2. Triggering the superficial loss rule
If you sell an investment at a loss and repurchase it within 30 days (before or after), the loss is denied. Wait 31 days or buy a similar but different investment.
3. Ignoring income attribution
If you give money to your spouse or minor children for them to invest, the income could be attributed to you for tax purposes. Use legal strategies like prescribed rate loans.
4. Placing tax-inefficient investments in a non-registered account
Avoid holding GICs or high-yield bonds in a non-registered account if you still have room in your RRSP or TFSA.
5. Forgetting to report all income
Even small amounts of dividends or interest must be reported. The CRA receives copies of all your tax slips and verifies concordance.
When to Favor a Non-Registered Account?
You should consider a non-registered account if:
- You've maximized your RRSP and TFSA contributions
- You're saving for a medium-term goal (5-10 years) and have no more TFSA room
- You want to invest for your children (RESP maximized or not applicable)
- You're planning income splitting with your spouse
- You want maximum flexibility without any withdrawal restrictions
- You're investing in Canadian dividend stocks to benefit from preferential tax treatment
Recommended priority order:
- Emergency fund (3-6 months in an accessible savings account)
- RRSP up to the amount that maximizes tax refund
- TFSA to the maximum
- RRSP to the maximum (if applicable)
- RESP (if you have children)
- Non-registered account
Conclusion: An Underestimated but Essential Tool
Non-registered accounts are often perceived as a "second choice" after registered accounts. Yet, for serious savers who have maximized their RRSPs and TFSAs, they represent an unlimited opportunity to continue building their wealth.
With smart tax planning — strategic asset location, loss harvesting, income splitting — you can minimize tax impact and maximize your long-term growth.
The key is to understand tax rules, keep accurate records, and adopt a strategic approach. A well-managed non-registered account can become an important pillar of your overall financial strategy.
Remember: It's not how much you earn that counts, but how much you keep after taxes. Proactive tax planning can make the difference between a comfortable retirement and a luxurious retirement.
Want to optimize your investment strategy across your different accounts? Let's discuss your personal situation and the best tax strategies to maximize your wealth. Contact me for a consultation.
