Investments Outside of TFSA or RRSP: Beyond the Basics

Investing outside of Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) can be a bit of a minefield but it's a big part of financial planning. We've brought in an expert from Tax Warriors of Toronto to help us explore this topic.

​

As Canadians, we have tax-sheltered investment vehicles like the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP). We can grow our wealth and defer or eliminate taxes on investment gains. But many of us end up with investments that don't fit into these accounts. We've maxed out our contribution limits or we're looking at investments that aren't eligible for TFSAs or RRSPs. Once we leave these tax havens, we enter a more complicated financial world.

​

Why Non-Registered Investments are Complicated

Unlike TFSAs and RRSPs, investments outside of these accounts are fully taxable in Canada. That means any income or capital gains from these investments must be reported on your tax return and may be taxable based on your tax bracket. The type of investment, how long you hold it and even how you manage it for income taxes, can have big tax implications.

​

Taxable Events in Non-Registered Investments

In TFSAs and RRSPs we can buy, sell and trade investments without tax consequences. Outside these accounts almost every transaction is a taxable event. For example:

• Selling a stock for a profit: This is a capital gain.

• Receiving dividends: This is taxable income.

• Rebalancing your portfolio: This can have tax implications in a non-registered account.

• Withholding tax on foreign income: When receiving dividends from foreign investments, withholding tax may be deducted, especially in non-registered accounts. The impact of withholding tax can vary based on tax treaties and the type of account.

​

Types of Investment Income

Understanding the different types of investment income is important when dealing with taxable investments:

• Interest Income: From savings accounts, GICs or bonds and fully taxable at your marginal tax rate.

• Dividend Income: Canadian dividends get preferential tax treatment through the dividend tax credit which reduces the effective tax rate on this income.

• Capital Gains: Only 50% of capital gains are taxable in Canada making them a tax efficient form of investment income.

• Foreign Income: Foreign dividends don't qualify for the dividend tax credit and may be subject to withholding taxes by the source country. You can often claim a foreign tax credit to avoid double taxation.

​

​

Strategies for Non-Registered Investments

Here are some strategies to manage non-registered investments:

Tax-Efficient Asset Location

Put your investments in the most tax efficient accounts possible. Consider your RRSP contribution room when placing highly taxed investments (like interest bearing ones) in RRSPs and more tax efficient investments (like Canadian dividend paying stocks) in non-registered accounts.

​

Harvesting Tax Losses

In non-registered accounts you can use capital losses to offset capital gains. By selling investments that have decreased in value you can realize capital losses that will reduce your tax bill on realized gains. Be aware of the “superficial loss” rules which prevent you from claiming a loss if you repurchase the same or a similar investment within 30 days.

​

Corporate Class Funds

These funds allow you to switch between different funds within the same corporate structure without triggering capital gains. This can be useful for rebalancing your portfolio or changing your investment strategy without a capital loss or tax consequence.

​

Tax Efficient Investment Vehicles

Some investments are more tax efficient than others. For example, Canadian listed ETFs that hold US stocks are often more tax efficient for Canadian investors than US listed ETFs because of the how tax rates vary the way foreign withholding taxes are applied.

​

Another example of tax benefits of a tax-efficient investment vehicle is the registered education savings plan (RESP), which allows families to save for children's post-secondary education with contributions eligible for government grants and income growing tax-deferred until withdrawal.

​

Buy and Sell Timing

The timing of when you buy or sell an investment can have tax implications. For example, mutual funds distribute capital gains at the end of the year. Buying just before this distribution means you'll be taxed on gains you didn't actually benefit from.

​

Record Keeping

Keep track of the adjusted cost base (ACB) of your investments which is important for calculating capital gains or losses when you sell. This can be tricky with many investments and taxes that offer return of capital or reinvested distributions.

​

Attribution Rules

If you're considering gifting or lending money to a family member for investment income tax purposes be aware of the attribution rules. These rules prevent income splitting and can attribute investment income back to you for tax purposes.

​

Lifetime Capital Gains Exemption for Capital Gains

If you own qualified small business corporation shares or certain farm or fishing properties the lifetime capital gains exemption can be useful. This exemption allows you to realize significant capital gains tax free over your lifetime but the rules are complex and professional advice is usually required.

​

Charitable Giving

Donating appreciated securities from your non-registered account to a registered charity can be a great way to support causes you care about while managing your tax liability. When you donate securities in-kind you get a tax receipt for the fair market value and you don't have to pay tax on the capital gain.

​

Trusts

Setting up a trust to hold investments can offer tax advantages and estate planning benefits. But trust taxation is complex and recent changes have made this strategy less attractive.

​

​

Beyond the Basics: Additional Considerations

Passive Income

Passive income is money earned with little to no effort on your part. For non-registered investments this includes things like dividends, interest and rental income. You need to understand how passive income is taxed and managed.

• Dividends from Canadian Companies: These receive favourable tax treatment through the dividend tax credit.

• Interest Income: This is fully taxable and includes income from bonds, GICs and savings accounts.

• Rental Income: Income from rental properties is fully taxable but you can deduct expenses related to the property like maintenance, property taxes and mortgage interest.

​

Investment Income from Private Companies

Investing in private companies can be profitable but comes with its own set of challenges and tax implications. For example income earned from private corporations can be taxed differently than public company dividends. And understanding the rules around income sprinkling and how they apply to private corporations is important for tax planning.

​

Estate Planning

Investments held outside of registered accounts are part of your estate and will be subject to probate fees and taxes when you pass away. Proper estate planning can help minimize these costs and ensure your assets are distributed as you wish.

• Joint Ownership: Holding investments jointly with a spouse can avoid probate fees.

• Gifting Assets: You can gift assets during your lifetime to avoid probate fees but this may trigger capital gains taxes.

• Establishing Trusts: Trusts can be a good way to manage your estate and reduce tax liabilities but they come with their own complexities and costs.

​

Income Splitting

Income splitting is spreading income among family members to take advantage of a lower tax bracket. The CRA has rules to limit income splitting but there are still legal ways to do this, such as spousal RRSPs or family trusts.

​

Tax-Smart Withdrawal Strategies

When you have both registered and non-registered investments planning the order of withdrawals can have big tax implications. Generally it's best to withdraw from non-registered accounts first to take advantage of lower tax rates on capital gains and dividends. This way your RRSP and TFSA can continue to grow tax-free or tax-deferred.

​

​

Keeping Up with Tax Changes

Tax laws and regulations are always changing. Staying informed is key to managing your investments. The Canadian government updates tax rules periodically which can affect everything from contribution limits to the treatment of different types of investment income.

​

Recent Tax Changes

• Passive Income in Private Corporations: The rules around passive income in private corporations have changed. These changes will affect how much tax you pay on income earned in your corporation.

• Income Splitting Rules: The CRA has tightened rules around income splitting especially for private corporations to ensure fairness in the tax system.

​

Professional Guidance

Since non-registered investments are complex, professional advice is a must. A tax professional or financial advisor can help you understand the tax implications of your investments and develop a plan that suits your financial goals.

​

​

Conclusion: Turning Complexity into Opportunity

Investing outside of TFSAs and RRSPs adds complexity but with knowledge, planning and professional guidance you can turn that complexity into opportunity. By understanding taxable investing you can create a more robust and flexible investment strategy that will serve you well.

​

In the world of investing knowledge is power. Understanding taxable investing is an important step to achieving your financial goals and securing your financial future.

 

Investing outside of registered accounts can be overwhelming but with the right strategies and advice you can navigate this complex landscape. Remember tax efficiency is just one part of your overall financial strategy. Balancing it with your personal financial goals and risk tolerance will get you to long term success. Stay informed, seek professional advice when needed and review your investment strategy regularly to adapt to tax changes and market fluctuations.