A non registered account is an investment account opened with after tax money. Unlike registered accounts that begin with the letter R such as RRSP, TFSA, RRIF and similar plans, a non registered account does not receive special tax sheltering from the government. It is a flexible and taxable investment vehicle commonly used once registered account contribution room has been fully utilized or when liquidity and accessibility are priorities.
Specifications: What a Non Registered Account Looks Like
Contributions are made using after tax income, meaning there is no tax deduction at the time of contribution. These accounts are typically opened as either margin accounts or cash accounts and may be denominated in Canadian dollars or U.S. dollars. Liquidity is high, as funds can be withdrawn at any time without the contribution or withdrawal rules that apply to registered accounts. Margin accounts allow borrowing against investments if the investor chooses to do so. Investment income such as capital gains, interest, and dividends is taxable, with each type of income treated differently. There is no legal limit on how much money can be contributed or held in a non registered account.
How It Differs from Registered Accounts
Registered accounts provide tax sheltering and are governed by strict contribution and withdrawal rules. A non registered account is the opposite. It offers no tax shelter, does not require tracking of contribution room, and does not provide government grants or tax deductions for contributions. For this reason, non registered accounts are generally used after TFSA and RRSP contribution limits have been maximized.
Types of Non Registered Accounts
Most brokerage firms open non registered accounts as margin accounts by default, though cash accounts are also available. A margin account allows investors to borrow against their holdings, which can increase purchasing power but also increases risk. A cash account only allows the use of settled funds to purchase investments and does not provide any borrowing capability. Both account types are fully taxable, and the appropriate choice depends on the investor’s risk tolerance and willingness to use leverage.
Tax Treatment Explained
Understanding taxation is essential when using a non registered account. Capital gains are taxed favorably, as only 50 percent of the gain is included in taxable income. Interest income from bonds, GICs, bank accounts, and debentures is taxed at the investor’s full marginal tax rate. Dividends from Canadian corporations receive preferential tax treatment, while dividends from foreign corporations are generally taxed like interest or may be subject to withholding tax depending on the country of origin. Because different investments generate different types of income, the overall tax impact depends heavily on the assets held in the account.
Best Practices for Non Registered Accounts
Tax efficient asset placement is critical. In general, investments that are taxed more lightly should be held in taxable accounts, while heavily taxed investments should be placed inside registered accounts whenever possible. Assets that generate capital gains or eligible Canadian dividends are often better suited for non registered accounts due to their favorable tax treatment. Interest generating investments such as GICs and many bonds are usually better held in registered accounts. Certain private investments or real estate partnerships may require a non registered structure for liquidity or legal reasons, but tax implications should always be carefully evaluated.
When to Open a Non Registered Account
A non registered account becomes a logical option once TFSA and RRSP contribution room has been fully used. It is also useful when investors need access to funds without the penalties or tax consequences associated with RRSP withdrawals. Additionally, when investment strategies require margin borrowing or holdings in specific currencies such as U.S. dollars, non registered accounts provide the necessary flexibility.
Advantages and Disadvantages
The main advantages of a non registered account include high liquidity, flexible withdrawals, and unlimited contribution potential. Investors can accumulate unlimited wealth, hold investments in multiple currencies, and use margin if appropriate. Capital gains and eligible Canadian dividends benefit from preferential tax treatment. The disadvantages include the fact that all investment income is taxable in the year it is realized. Interest income is taxed at full marginal rates, which can significantly reduce after tax returns. Poor tax efficiency can erode long term returns, and investors must actively manage tax reporting, including tracking adjusted cost base for capital gains calculations.
Who Should Use a Non Registered Account
Non registered accounts are suitable for investors who have already maximized their TFSA and RRSP contributions or have limited registered room remaining. They are also appropriate for those who require liquidity and unrestricted access to funds. Investors building substantial wealth may find that non registered holdings eventually make up a large portion of their net worth. These accounts are also useful for investors who require U.S. dollar holdings or margin functionality for specific strategies.
Actionable Recommendations
Registered accounts should always be prioritized first, with TFSA and RRSP contribution room filled before using a non registered account for long term investing. Investments should be matched to the appropriate account type, placing interest generating assets in registered accounts whenever possible and reserving non registered accounts for assets that produce capital gains or eligible dividends. Non registered holdings should remain relatively liquid, serving as a primary source of accessible capital. Investors should also coordinate with a tax or wealth professional to minimize annual tax drag and properly manage issues such as adjusted cost base tracking and dividend tax credits.
Final Recommendation
A non registered account is a powerful and essential tool for investors who have exceeded registered contribution limits or who require flexibility and liquidity. While it is not the most tax efficient vehicle for every investment, strategic use with careful asset placement and tax planning allows it to complement registered accounts effectively. Investors should assess the purpose of their after tax funds, the tax characteristics of potential investments, and their desired access to capital before deciding which assets to hold in a non registered account.