In Canada we have a handful of different account types to put our hard-earned savings to work: RRSPs, TFSAs, RESPs, RDSPs, FHSAs. This article is an exposé on OPEN or non-registered accounts. Unlike their tax-incentivized counterparts, these accounts offer no tax deductions, no grants and no tax deferral.
It’s as straightforward as it gets: in OPEN accounts you pay taxes on the income generated in the year it’s earned.
The term ‘non-registered’ may seem puzzling at first glance. It simply means that the contributions aren’t subject to government tracking – unlike the other accounts with contribution limits. The term ‘OPEN’ signifies that the interest, dividends or capital gains earned within these accounts are immediately exposed to taxation, unlike government sponsored tax-sheltered accounts.
OPEN accounts typically come into play when you’ve maximized other relevant account types and still have extra savings. This is a good place to be.
This may sound odd but OPEN accounts can be challenging to adjust to. OPEN accounts can pose challenges, particularly when unexpected tax obligations arise. Imagine receiving a T-slips for income generated by your investments when you didn’t initiate one transaction. It can feel like getting a bill in the mail for a service you didn’t request.
Let’s have a look at an example. Here a client receives a T3 showing they made $2,300 in dividends, $7,800 in capital gains and $1,200 in other income. Importantly, the client did not initiate any transactions and the income was reinvested in their existing investments. They could have been on a worldwide trip for a year and the same result would have occurred. In the end, the client may need to write a cheque to the CRA for a few thousand dollars.
This scenario often catches people off guard especially if they don’t have idle cash to make the extra tax payment. Despite this, it’s crucial to not hesitate in withdrawing funds from your OPEN account to fulfill a tax obligations. It’s part of the financial plan. We don’t want people cutting back on things when it is not necessary.
Unlike employment or RRIF income tax can’t be taken off at source for OPEN accounts. You can’t prepay the tax to avoid a surprise. This can be particularly daunting for individuals new to the complexities of OPEN accounts, especially those who suddenly find themselves with significant sums due to a real estate sale, inheritance or business transaction.
Again, these are good financial problems to face. Yes, we want to minimize tax as much as possible but conceptually paying tax means that you are doing well financially.
There is an urban legend of a conference with a tax expert presenting. The speaker opened by asking who in the room wanted to pay $1 million in tax. No one put up their hand. He replied by saying: “Are you all out to lunch? Does no one want to make $2 million in a year!”
If you have any questions, please feel free to give us a call.
The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. This material is provided for general information and the opinions expressed and information provided herein are subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on the information presented, please seek professional financial advice based on your personal circumstances. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.
