Registered vs. non-registered accounts: What you should know

The favorable tax treatment of registered investing leads many investors to first maximize their contributions to their registered accounts. Where they have further money to invest, they turn to non-registered accounts.

Registered accounts are intended for specific purposes, such as retirement in the case of an RRSP, education savings in the case of an RESP or a new home purchase, in the case of a TFHSA. Depending on the type of account, the tax benefits include deductible contributions, tax deferred or exempt growth, matching grants or even complete exemption from taxation.

Essentially, the money you put inside a registered account can grow on a tax-sheltered basis, while money held in non-registered accounts will be subject to tax on income and realized capital gains each year, The right investment vehicle depends on each investor’s own circumstances. Below, we’ll explain some of the pros and cons of each type of account.

What is a registered investment account?

Registered investment accounts receive special tax treatment from the Canada Revenue Agency (CRA). These accounts either allow you to defer, minimize and, in some cases, eliminate the taxes you would pay on investment income, capital gains or dividends, all of which are taxed inside of non-registered accounts. In the case of a Registered Retirement Savings Plan (RRSP), your contributions are deducted from your income when you file your taxes, which may reduce the amount of tax you pay in the year the contribution is paid. In the case of a Tax-Free Savings Account (TFSA), contributions are not deductible for tax purposes, however plan growth is not taxed.

Benefits of registered investment accounts

• Tax deferral: In some types of registered accounts, such as an RRSP, you only pay taxes on the money when you withdraw funds. In the case of TFSAs, you don’t pay any tax upon withdrawal (we explain more on how this works below).
• Tax savings: Each account works a bit differently, but when used correctly, you may pay less tax on your investments than you would if you held them in a non-registered account.
• Reach savings goals faster: Because you don’t have to pay tax on investment income, dividends or gains, the money inside each account can compound faster than it would in a non-registered account.
• Creditor protection: In the event of bankruptcy, funds held in some registered accounts, such as an RRSP, are protected from creditors.

Limitations of registered investment accounts

• Contribution limits: Registered accounts have contribution limits — some annual, some lifetime, or both. If you exceed the limit,  the CRA will assess penalties.
• Limits on the types of investments: Only qualified investments can be held in a registered account. This excludes certain hard asset classes, such as real estate, cryptocurrency and collectibles. However, Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs) or mutual funds that hold these assets qualify for investment in registered funds.
• Withdrawal requirements: Unless your funds are in a locked-in account, you can make a withdrawal at any time. However, in some cases, such as with an RRSP, you may pay a withholding tax and you will need to report the amount as income on your annual tax return.
• Limited creditor protection: While RRSPs offer creditor protection, the funds held in TFSAs and Registered Education Savings Plans (RESPs) can be made available to creditors in the case of bankruptcy or litigation.
• Differences in dividend tax treatment: While you won’t pay tax on your dividend income inside a registered account, everything is treated as income — and taxed at your marginal tax rate — when you withdraw.
• Different investment terms: Additional set-up procedures and reporting requirements can make registered accounts more expensive for investment firms to administer than non-registered accounts.

Types of registered investment accounts in Canada:

Registered Retirement Savings Plan (RRSP)

The RRSP was designed to help people save for retirement. Unlike contibutions to some of the other accounts,  RRSP contributions reduce your taxable income dollar-for-dollar and could potentially put you into a lower tax bracket. When that happens, you may get a tax refund for any tax you have already paid to the CRA. The money inside of the account is not subject to tax until you withdraw it. Ideally, withdrawals occur in retirement when you may be in a lower tax bracket. RRSPs are designed for long-term retirement savings, which means there are penalties for withdrawing early.

Tax-Free Savings Account (TFSA)

The Tax-Free Savings Account was introduced in 2009 to help Canadians save for short- and long-term goals. Unlike an RRSP, a contribution to a TFSA will not reduce your current year taxes, as you’re using after-tax dollars to invest. Because of that, you are not taxed on investment income, gains, or dividends when you withdraw. The federal government sets the TFSA limit each year. In 2023, Canadians over the age of 18 can invest up to $6,500 in a TFSA (the amount is indexed to inflation and may change in future years). Since this account is for any kind of savings, you can remove money at any time without penalty. You can re-contribute the amount you withdraw, but you must wait until January 1 of the following year.

Registered Retirement Income Fund (RRIF)

By December 31 of the year in which you turn 71, you must convert your RRSP accounts into a RRIF or annuity. Instead of paying into this fund — you can’t add money to a RRIF — you’ll be provided with a monthly or annual income based on minimum withdrawal rates set by the CRA (you can withdraw more than the minimum, though). The money inside of a RRIF can continue to grow tax free, but withdrawals are taxable at your marginal rate.

Locked-In Retirement Account (LIRA)

A LIRA holds money you may have built up in the pension plan of a former employer that is now in your control. As the name suggests, the money is locked in until you retire — you can’t add or remove any dollars — although the funds can grow tax-free in the account until a person turns 71. At that time, you must convert the LIRA to a Life Income Fund (LIF), which is also a registered, tax-sheltered account, similar to a RRIF. The amounts you can withdraw are capped each year and are based on your age and how much is in the account.

Registered Education Savings Plan (RESP)

An RESP is a way for parents (and others) to save for their children’s post-secondary education. The government contributes $0.20 on every dollar you contribute, to an annual maximum matching contribution of $500 per year, and a lifetime maximum of $7,200. Although contributions will not give you a tax refund, the money you put in the plan will grow tax-free. Withdrawals are taxed in the student’s hands, and given that most students earn little income, the tax hit could be minimal. You can contribute a maximum $50,000 over the lifetime of the plan.

Registered Disability Savings Plan (RDSP)

An RDSP allows people who are approved for Canada’s Disability Tax Credit to manage personal savings. It comes with certain grants and bonds, such as the Canada Disability Savings Grant and Bond. How much a person receives will depend on how much their family earns per year. The RDSP allows for a contribution of up to $200,000 without reducing provincial disability benefits. An RDSP can be opened if a person is under age 59, although government contributions end at age 49.

First Home Savings Account (FHSA)

The FHSA is a recently introduced account, created to give first-time homebuyers a new way to save for a down payment. Holders of this account can contribute $8,000 a year, up to a lifetime maximum of $40,000. Any unused contribution room will be added to the following year. The account combines the features of an RRSP and a TFSA. Like an RRSP, your contributions are tax-deductible. Moreover, withdrawals from the account are not subject to tax (more like a TFSA).

What is a non-registered investment account?

A non-registered account is an investment account that does not receive special tax treatment. Investment gains such as interest, dividends, fund distributions and capital gains from asset sales are taxable  at your marginal tax rate in the year they occur. You are allowed to invest as much money as you want in a non-registered investment account and you can contribute to it for as long as you want.

Benefits of non-registered accounts:

• No limits: You can contribute or withdraw as much as you want, whenever you want.
• Open to all asset classes: These accounts can hold mutual funds, segregated funds, Exchange-Traded Funds (ETFs), stocks, bonds and other products, as well as assets that are not allowed in a registered account like cryptocurrency, real estate and collectables.
• Simple administration: Some investment firms may offer better terms to handle these no-fuss accounts.

Disadvantages of non-registered accounts:

• Higher tax burden: Paying taxes on investment gains as you go reduces the benefit of compound returns.
• Complex tax preparation: You’ll have more to report at tax time.

Types of non-registered accounts:

• Cash account: A conventional account that may hold cash, stocks, bonds, ETFs or other financial assets.
• Margin account: An account for qualified investors that enables them to use leverage (that is, borrow money) to invest.

How are non-registered investments taxed?

Investment gains from different assets are taxed in a variety of ways. Interest from savings accounts, GICs and bonds, along with dividends from foreign corporations, are 100% taxable at your top marginal rate in the year they are received. That is, they are added to your employment earnings and other taxable income at tax time.

Dividends from Canadian corporations are taxed more favorably than interest income due to the dividend tax credit. What you’ll owe will vary depending on your circumstances and tax bracket.

Finally, there are capital gains taxes, these are you must pay on the appreciation of your stock or fund holdings when you sell. Only half the gain is taxed — so if you made $1,000 off a stock, only $500 would be subject to tax.

Registered vs non-registered accounts

• Registered accounts like RRSPs, TFSAS and RESPs allow you to grow your investments tax free. These accounts also limit how much you can contribute to them, although those limits may rise over time.
• Non-registered accounts don’t offer immediate tax deductions or tax-deferred growth, but they give investors flexibility as there is no limit to how much money you can add to the account. While you will pay tax on your investment income, there is no tax on withdrawals. Also, unlike some registered accounts, there are no age limits on non-registered accounts, which can be useful if you’re looking for other ways to invest after age 71 or have maxed out your TFSA or RRSP.

The type of account or accounts you choose should be right for your needs and goals, and should be part of a customized and well-planned pathway to attaining financial success.

Self-directed investing accounts

If you want to have more control over your investments, then you can open any type of account — registered or non-registered — as a self-directed account. As the name suggests, self-directed account leave it up to you to make all of the investments decisions within the account. Visit an online broker, such as TD Direct Investing, to learn more.