NON-REGISTERED ACCOUNT

A non-registered (taxable or open) account is an investment account that is not registered with the Canada Revenue Agency under any plan. It carries no contribution limit, no restriction on withdrawals, and no restriction on the types of investment held beyond those imposed by the dealer. Income and gains are taxed in the year earned or realised, and the investor is responsible for tracking cost base and reporting all amounts on the T1 return. Non-registered accounts are generally used once registered room has been exhausted, for funds required on a flexible basis, or for investments not permitted in registered plans.

ACCOUNT TYPES

• Cash account: securities are purchased with funds held in the account.

• Margin account: the dealer lends funds against the value of eligible securities, subject to margin requirements; interest on the loan may be deductible where the borrowed funds are used to earn income from property.

• Joint account: held by two or more persons, either with right of survivorship (joint tenancy, except in Quebec) or as tenants in common. The income attribution rules determine who reports the income, generally in proportion to each person's contribution of capital.

• In-trust account (informal trust): opened by an adult for a minor; income is generally attributed to the contributor, while capital gains are taxable to the minor.

• Corporate and trust accounts: held by a corporation or formal trust, taxed under the rules applicable to that entity.

TAXATION OF INCOME

Interest income

• Fully included in income at the investor's marginal rate.

• Interest on compound-interest investments, such as multi-year GICs and strip bonds, must be reported annually on an accrual basis on each anniversary date, even if not received.

• Reported on a T5 slip where the amount is $50 or more; amounts below the threshold must still be reported.

Canadian dividends

• Eligible dividends (generally paid by public corporations and from income taxed at the general corporate rate): grossed up by 38%; federal dividend tax credit of 15.0198% of the grossed-up amount.

• Other-than-eligible dividends (generally paid by Canadian-controlled private corporations from income taxed at the small business rate): grossed up by 15%; federal dividend tax credit of 9.0301% of the grossed-up amount.

• Each province and territory provides its own dividend tax credit.

• The gross-up increases net income, which may affect income-tested benefits and the Old Age Security recovery tax.

Foreign income

• Foreign interest and dividends are fully taxable in Canadian dollars and are not eligible for the dividend tax credit.

• Foreign withholding tax may be claimed as a foreign tax credit on Form T2209 (federal) and the corresponding provincial form, within limits.

• Form T1135 Foreign Income Verification Statement must be filed where the total cost of specified foreign property exceeds $100,000 at any time in the year. Securities of foreign issuers held in a Canadian brokerage account are specified foreign property.

Capital gains and losses

• A capital gain or loss arises on the disposition (sale, deemed disposition, or transfer) of capital property, equal to proceeds of disposition less the adjusted cost base (ACB) and outlays and expenses of disposition.

• One-half of a capital gain is included in income as a taxable capital gain; one-half of a capital loss is an allowable capital loss, deductible only against taxable capital gains.

• Net capital losses may be carried back three years (Form T1A) or forward indefinitely.

• Gains and losses are reported on Schedule 3 and summarised from T5008 slips and dealer statements.

• A capital gains reserve may be claimed where proceeds are receivable over time, generally over a maximum of five years.

Distributions from investment funds

• Mutual fund trusts and exchange-traded funds distribute interest, dividends, capital gains, foreign income, and return of capital, reported on T3 slips (or RL-16 in Quebec).

• Reinvested distributions increase the adjusted cost base of the units held.

• Return of capital is not taxable when received but reduces the adjusted cost base; where the ACB becomes negative, the negative amount is a capital gain.

ADJUSTED COST BASE

• The ACB of identical properties is calculated as the weighted average cost of all units held, including commissions and reinvested distributions.

• The ACB is adjusted for return of capital, stock splits and consolidations, and reorganisations.

• Investors are responsible for maintaining ACB records; dealer-reported book values may not reflect all adjustments, particularly for securities transferred between institutions.

ANTI-AVOIDANCE AND SPECIAL RULES

• Superficial loss rule: a capital loss is denied where the investor or an affiliated person (including a spouse, a controlled corporation, or the investor's own RRSP or TFSA) acquires identical property within 30 days before or after the disposition and still holds it 30 days after the disposition. The denied loss is added to the ACB of the substituted property, except where the repurchase occurs in a registered plan, in which case the loss is permanently lost.

• Contributions in kind to a registered plan are deemed dispositions at fair market value; gains are taxable and losses are denied.

• Attribution rules: income from property transferred or loaned to a spouse or common-law partner is attributed to the transferor, as are capital gains; income (but not capital gains) from property transferred to a minor child is attributed to the transferor. Prescribed-rate spousal loans, with interest paid by January 30 of each following year, avoid attribution.

• Traders versus investors: frequent trading, short holding periods, and use of specialised knowledge may result in gains being taxed as business income, fully includable rather than at the one-half inclusion rate.

• Deemed disposition on death: capital property is deemed disposed of at fair market value immediately before death, unless it passes to a spouse or spousal trust on a rollover basis.

• Deemed disposition on emigration: most property is deemed disposed of at fair market value on ceasing Canadian residency (departure tax).

DEDUCTIBLE CARRYING CHARGES

• Interest on money borrowed for the purpose of earning income from a business or property (including interest and dividends), deductible under paragraph 20(1)(c) of the Income Tax Act.

• Investment counsel fees for advice on buying or selling specific shares or securities, or for administration and management of investments, in a non-registered account.

• Fees for the safekeeping of investments and accounting fees for recording investment income.

• Fees for registered plans and interest on money borrowed to contribute to an RRSP, TFSA, or FHSA are not deductible.

ASSET LOCATION CONSIDERATIONS

• Because interest is taxed most heavily, interest-bearing investments are commonly held within registered plans where room permits.

• Canadian dividends and capital gains are taxed at lower effective rates and are commonly held in non-registered accounts.

• Foreign dividends held in a TFSA or RESP are subject to non-recoverable withholding tax; U.S. dividends held in an RRSP or RRIF are generally exempt from U.S. withholding under the Canada-U.S. tax treaty.