What is a non-registered account and how does it work?

What is a non-registered account?

A non-registered account is a savings or investment account that allows you to invest as much money as you want but does not provide any of the tax advantages of a registered account. For example, with a non-registered account, you don’t get the tax-free growth of TFSAs, nor the tax deductions and tax-deferred growth of RRSPs. Still, non-registered accounts are flexible—you can save or invest as much as you want, whenever you want, in a wide range of financial instruments, depending on the type of account you open. 

Types of non-registered accounts

Cash, margin and high-interest savings accounts (HISAs) are the three most common types of non-registered accounts. Here’s what each of these are:

• Cash account: This is the simplest type of non-registered investment account. You can buy any security—stocks, exchange-traded funds (ETFs), bonds, mutual funds, real estate investment trusts (REITs) and more—with money you have transferred into the account. A cash account is what investors typically think of as a brokerage account. 
• Margin account: With a margin account, your broker loans you money to trade with, and it holds the securities you purchase as collateral. Because you’re trading with borrowed money, the risks are greater. Trading on margin can amplify your gains but also your losses—it’s possible to lose more than you invested. This type of account allows you to trade derivatives (financial contracts whose values are based on underlying assets) such as options.
• High-interest savings account (HISA): This type of account pays a higher rate of interest than a standard savings account, although the rate is subject to change. Unlike guaranteed investment certificates (GICs), HISAs allow you easy access to your money, and many have no minimum investment. HISAs are a good choice if you want to stash money away without risking it in the stock market.

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Benefits of non-registered accounts

• Unlimited contributions: Unlike registered accounts, which come with contribution limits, most non-registered accounts allow you to save or invest as much money as you want. (Some HISAs have maximums.) So, investors who have reached the contribution limits of their registered accounts can invest in their non-registered accounts. This allows all their money to grow, rather than just limited amounts. 
• Flexible withdrawals: Unlike with registered accounts, there are no rules that limit the amount or timing of your withdrawals.
• Diverse investment options: Between HISAs, cash accounts and margin accounts, you can access the whole spectrum of savings and investments to suit any risk profile—from conservative to aggressive.
• Fewer restrictions for investing: Some registered accounts, like the first home savings account (FHSA), come with specific eligibility requirements. But anyone 18 or 19 years of age or older (depending on your province) can open non-registered accounts—making them accessible to young investors and retirees, in addition to working-age investors. 

Disadvantages of non-registered accounts

• No tax advantages: Unlike registered accounts, non-registered accounts do not provide tax advantages such as tax-free growth, tax-deferred growth or tax deductions. 
• Yearly tax filing: All interest, dividends and capital gains earned in non-registered accounts are taxable—and the tax is payable for the tax year in which they are received.
• No creditor protection: Unlike in some registered accounts, the money you hold in non-registered accounts is usually not protected from creditors in the case of bankruptcy.

How are non-registered accounts taxed?

All the interest, dividends and capital gains earned in non-registered accounts are taxable even if you don’t withdraw the income. Here’s how:

• Capital gains: If you purchased an investment for $100 and later sold it for $120, you’d have a capital gain of $20. But the good news is that capital gains are only 50% taxable. So, in this scenario, $10 would be added to your income and taxed at your marginal tax rate.
• Dividends: Dividends represent the portion of a company’s profits paid to its shareholders—usually every quarter. Dividends from non-Canadian companies are taxed at regular tax rates, just like interest or employment income. Dividends from Canadian companies are taxed at a lower rate because of federal and provincial dividend tax credits. Reinvested dividends are taxable each year and increase your cost base for capital gains tax purposes.
• Interest: If your money is invested in a non-registered HISA, GIC or bond and you earn $100 in interest income, the entire $100 is added to your income and taxed at your marginal tax rate. Interest earned from foreign sources is also taxed this way. If you buy an investment like a GIC with compounded interest, the income is accrued and taxable annually, even though the interest may not be received until the investment matures.

The table below shows approximately how much $100 of investment income is taxed, assuming the investor earns $75,000 in Ontario.

Tax on Canadian investment income

Tax on foreign investment income

The best investments for non-registered accounts in Canada

From a tax perspective—as seen in the above table—capital gains and dividends are taxed more favourably than interest income. Note that capital gains are taxed at a lower rate than Canadian dividends at higher income tax levels. So, if you have a long time horizon and a growth-oriented risk profile, investing in stocks, ETFs or mutual funds in a cash account could give you growth coupled with relatively lower taxes. However, if safety, stability and the protection of your money are your primary concerns, then a HISA may be a better option.

Registered vs. non-registered accounts

Let’s look at the main differences between non-registered and registered accounts, using the RRSP and TFSA as examples of the latter. 

There are advantages to having a non-registered account, such as unlimited contribution room, flexible withdrawal rules and fewer eligibility requirements. So, non-registered accounts can be a good way to grow your money if you’ve maximized your registered contributions. (And, if you have money lying idle in a chequing account, a HISA could be an attractive alternative.) Just remember that you won’t benefit from tax advantages, such as tax-free growth, tax-deferred growth or tax-deductible contributions.

Read more about investing:

• What types of tax-free savings accounts (TFSAs) exist?
• TFSA vs RRSP: How to decide between the two
• When are TFSAs and RRSPs actually taxable?
• The top 5 questions about RESPs

About Aditya Nain

Aditya Nain is an author, speaker and educator who writes about Canadian investments, personal finance and crypto. He has co-authored two books and taught at universities for 12 years.

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