We’ve actually managed to save enough money in our chequing and savings accounts that I’m considering opening a new kind of brokerage account: a non-registered account. The very thought makes me nervous which should tell you how risk-averse I am. I can put money within a brokerage account into a daily interest savings account fund or into GICs, though, as I remind myself. I don’t actually have to bet the money we’re saving for our next car on Okinawan penny gold stocks or Russian computer-chip manufacturer high-yield bonds.
So What Exactly Is a Non-Registered Online Self-Directed Brokerage Account?
Basically, it’s an account this is NOT
- a RRSP
- a RRIF
- a RESP
- a RDSP
- a TFSA
See I’d say it’s an account without the word “registered” at the beginning, but then they invented the TFSA which IS a registered account but doesn’t have an R in its acronym.
Do Non-Registered Accounts Offer Tax Advantages?
Non-registered accounts are “real money” accounts.
Putting money into the account doesn’t get you a tax refund.
You have to pay taxes every year on any realized profits you make in the account. For example, you have to pay taxes if you
- earn interest
- receive dividends, even if you use the dividends to automatically buy more shares
- are paid distributions
- receive a return of capital
You don’t have to pay taxes on any “paper” capital gains you make when the value of your shares or bonds etc go up. You only pay the taxes when you actually sell the shares or investments and “realize” the profit. So if this year you buy some shares of Cineplex at $40 and they climb to $42, you don’t have to pay tax on the $2 per share capital gain if you don’t sell the shares. Once you sell the shares, though, you have to pay income tax on the capital gain.
Because you have to pay tax each year on your earnings, you don’t have to pay any extra tax when you take money out of the non-registered account. (This is different from a RRSP or RRIF where you must pay tax when you take money out unless you have an incredibly low income.)
Unlike a RRSP, RRIF, RESP, RDSP, or TFSA your money does NOT grow tax-free. You pay taxes each year.
Any money you make within the account is taxable under the regular tax rules.
That means if you sell an investment and make a capital gain, you have to pay capital gains tax on the amount.
It also means that if you sell an investment and suffer a capital loss, you can claim the capital loss on your taxes against taxable capital gains to hopefully reduce how much tax you pay on other gains.
Remember if you use a “self directed” brokerage account then you personally are responsible for tracking your investments for tax purposes. While your brokerage might provide you with some of the information you need to do the math, it’s up to you personally to ensure you get all of the information and that you use it properly. It’s not like a RRSP where you can just ignore capital gains, return of capital, adjusted cost bases and the like. Nor can you expect an accountant to sort out your mess. You have to give the accountant useful numbers before she can prepare your tax return!
What Can You Invest In with a Non-Registered Account?
For most online self-directed non-registered brokerage accounts, you can buy
- American Depositary receipts, ADRs
- Exchange traded funds, ETFs
- Guaranteed investment certificates, GICs
- Mutual funds
- Term deposits
- Units in a high interest savings account fund (that acts like a savings account)
There may be some other things you can buy as well depending on the brokerage.
CAUTION: Don’t buy anything if you don’t know how to collect the tax information and perform the tax calculations for it! For example, do you know what withholding tax you will face on a specific ADR? Do you know if and how you can re-claim some of that withheld tax? If not, don’t buy that ADR in your account!
(OK, here’s a hint for someone tripping over the word ADR. If you want to buy shares in a company like Toyota on the New York Stock Exchange you can’t. You can buy an ADR for Toyota on the NYSE though. It is NOT the same as buying shares of an American company listed on the NYSE though. Among other things, the taxes are handled differently.)
Who Offers Non-Registered Self-Directed Brokerage Accounts?
The list of financial institutions offering these types of accounts is almost identical to the list of brokerages for RRSP and TFSA accounts.
For example, you can open an account with
- BMO InvestorLine
- CIBC Investor’s Edge
- HSBC InvestDirect
- National Bank Direct Brokerage
- RBC Direct Investing
- Scotia iTrade
- TD Direct Investing
There are also brokerages that are not tightly linked to banks, including but not limited to
- Interactive Brokers
Newspapers like the Globe and Mail, magazines like MoneySense and various websites provide reviews and comparisons of the various brokerages.
Things to consider when evaluating brokerages include
- minimum account balance fees,
- inactivity fees,
- trading costs if you plan to buy shares or ETFs,
- minimum purchase sizes for GICs and daily interest savings account funds
- which ETFs and mutual funds are offered for sale
- fees to withdraw money from the account
- what reporting is provided
- how and when tax slips are provided
Why Am I Rambling On About Non-Registered Brokerage Accounts?
This isn’t just a theoretical topic. I’m actually considering opening a non-registered account. When I started writing a bit about some information I had found, though, it didn’t make sense as I’ve never provided an overview of these types of accounts. So this is meant to be the overview and gradually I will start reporting some details as I investigate further.
Please feel free to chime in with your opinions of and questions about non-registered accounts at any time! Why my articles usually start from a question I’m researching for myself, I often learn about new issues and considerations from email and comments from readers.
And for those of you thinking: “Why would she invest the money they’re saving for their next car?” I should mention that due to someone illegally driving on the 400-series highways two years ago, we have a car that’s only a year and half old. Based on our previous cars, that means we have 14-21 years before we’ll need this money.
- [Will I Have to Pay a Fee to Take Money Out of my Non-Registered Brokerage Account?]
Do you already have a non-registered brokerage account? Does anything about your account bother you? Did you trip over any unpleasant surprises during your first year or two of using the account? All views are welcome and please share them with a comment!