A growing number of investors are concerned about the environmental, social, and governance (ESG) aspects of economic activities and want their investment portfolios to reflect this concern. This demand has been met by the investment industry with an explosion of new mutual funds and ETFs described as sustainable and socially responsible.

However, as the landscape for sustainable investment products grows, investors need to look with a critical eye to ensure that what’s under the hood (the investment methodology) aligns with their values.

Last July, CIBC Asset Management launched a suite of sustainable ETFs designed to help DIY investors build their own sustainable portfolios. The product suite includes three individual ETFs representing Canadian equities, global equities, and Canadian bonds. It also includes three all-in-one ETF solutions for conservative, balanced, and growth investors.

I reached out to Aaron White, Vice-President, Sustainable Investments at CIBC, to get his take on these issues and more. Here’s our Q&A session:

CIBC Sustainable ETFs

1. Sustainable or responsible investing can mean different things to different investors. How did CIBC determine the appropriate ESG criteria for these funds? Is there a lot of turnover in these funds?

This is a great point and highlights the challenge facing investors looking to integrate their values with their investment portfolios. With no two solutions being the same, investors can find it confusing to navigate the market and really must do an extra layer of due diligence and understand the methodology that drives the responsible or sustainable outcome.

CIBC Asset Management undertook a consultation with our existing clients to understand what criteria were most important to investors. We developed a methodology that offers broad exclusions that we believe aligns with a diverse group of investors seeking more sustainable investments. The funds will typically be lower turnover due to their focus on higher quality ESG companies.

2. What’s the difference between positive and negative screens and how did CIBC use these to build their sustainable funds?

Negative screening refers to restricting the investible universe by excluding companies based on their business involvement. Positive screening, on the other hand, focuses on investing in companies based on favourable characteristics. 

For example, with CIBC Asset Management’s Sustainable Investment Solutions, our portfolio uses a combination of both. We restrict investment in industries like tobacco, alcohol, gambling, adult entertainment, weapons, recreational cannabis, and fossil fuels. The specifics of how we determine the companies to restrict are outlined in our publicly available framework. 

We then employ positive screening by implementing a “best-in-class” approach, where portfolio managers will only invest in companies who relative to their sector peers are median or better at managing ESG risks as determined by our own primary research. We believe this approach provides investors with values alignment by avoiding companies with certain business involvement and produces a portfolio of high quality companies that have strong peer relative ESG characteristics.

3. Do ESG investors sacrifice returns by investing with their values? How do ESG funds compare to similar non-ESG funds over time?

First, I think we need to reframe what it means to be an “ESG investor”. The term has become a catch-all that does not clearly define what it means to invest responsibly and has created a lot of confusion for investors. 

ESG is primarily focused on uncovering non-financial factors that are financially material to a company and ensuring that those considerations are integrated into the holistic assessment of a company and industry. This leads to more informed decision making and we believe to better results for clients. This type of investing does not restrict in any way the investment universe. 

There are then investment solutions that are focused on delivering additional outcomes to investors beyond financial returns. These include negative and positive screening that we have already discussed but also include thematic and impact investing. Depending on the specific strategy that an investor selects the investment universe may be constrained or the opportunity set more narrowly defined.

Ultimately, investors need to weigh their non-financial objectives alongside their financial goals to determine an appropriate approach that meets their holistic needs. Some investment options that are more restrictive may perform very different from a broad benchmark and may narrow the set of available investments. 

For example, an investor who chose to not invest in traditional energy companies due to their personal values would have outperformed from 2015-2021 and would have underperformed over the last 18 months. An investor who chooses to align their investment portfolio with their values must understand the implications and how the decision may impact their portfolio over a cycle.

4. Let’s talk about portfolio construction. I’m a big fan of all-in-one products, and I see that CIBC offers three all-in-one sustainable ETFs, depending on the investor’s risk profile (conservative, balanced, and growth). You also offer three individual ETFs (Canadian bonds, Canadian equities, and global equities), presumably for investors to construct their own portfolio weightings. Do you see these as core portfolio holdings, meaning investors can properly diversify with a single all-in-one ETF or a selection of the three individual ETFs?

Yes, we believe that our balanced portfolios provide broad enough diversification to meet the needs of the majority of investors. These all-in-one solutions are tactically managed to take advantage of market opportunities as they present themselves. This allows investors to select a portfolio that matches their risk tolerance and take a set it and forget it approach. 

For investors that would like to be a bit more hands on, our three core asset class options allow them to customize a portfolio that meets their unique needs and complement those core positions with other solutions.

5. The clean energy ETF (CCLN) looks interesting. Is this an add-on, more speculative play for investors looking for exposure to the clean energy sector? Is there a manager at the helm, or does the clean energy index follow a more systematic approach to stock selection?

We view the clean energy ETF as an add-on for longer term investors that would like to participate in the opportunities presented by the climate transition. Investors in this industry need to be prepared to weather volatility as there has been significant speculation in the space.  However, we believe that a patient investor that is committed to the long term can significantly benefit from the structural tailwinds afforded by government regulation and the pressure to transform our energy system.

While the index follows some systematic guidelines, our energy specialist team in Denver, headed by Lance Marr is responsible for the oversight of the index. The intent is to ensure investors have a pure play exposure to the companies and industries that will be the leaders of the new clean energy economy.

6. As ESG investing becomes more mainstream there’s concern about so-called greenwashing. How would you say that CIBC and its sustainable investment strategies represent a commitment to ESG mandates and is not just following a popular investing trend?

At CIBC Asset Management, we believe in authenticity and transparency. Investors need to understand exactly what you’re trying to accomplish and then you must do what you say. On this basis, we have published the framework that outlines the exact methodology that underpins our sustainable investment solutions. This allows investors to understand exactly how the investment universe is constructed and whether that aligns to their values and personal goals. 

We also produce monthly commentaries, annual ESG and Stewardship reporting, and various pieces of thought leadership, which allows our investors to understand our firm’s beliefs and how we are actioning those beliefs in the market. We believe this transparency allows investors to judge our authenticity and make an informed decision when choosing to invest with us.

7. Finally, tell us about impact donations and where that money goes.

We felt it was important to align the causes our organization participates in with the values of our clients. To this end, we are donating a portion of the management fees we earn from our Sustainable Investment lineup to charities and non-profits that are focused on facilitating the climate transition.

In 2021 we donated to the Pembina Institute, a Canadian think tank that advocates for strong and effective policies that support Canada’s clean energy transition. We are excited about continuing to grow our annual charitable footprint and contribute to facilitating a just energy transition.

Final Thoughts

Thanks to Aaron White for taking the time to answer my questions about sustainable investing and CIBC’s approach to its Sustainable Investing Solutions.

Readers can learn more about CIBC’s sustainable ETF products here.

Again, these funds include:

• CIBC Sustainable Canadian Core Plus Bond Fund (CSCP) – MER 0.40%
• CIBC Sustainable Canadian Equity Fund (CSCE) – MER 0.60%
• CIBC Sustainable Global Equity Fund (CSGE) – MER 0.75%

And the all-in-one ETFs:

• CIBC Sustainable Conservative Balanced Solution (CSCB) – 40% stocks / 60% bonds – MER 0.65%
• CIBC Sustainable Balanced Solution (CSBA) – 55% stocks / 45% bonds – MER 0.70%
• CIBC Sustainable Balanced Growth Solution – 70% stocks / 30% bonds – MER 0.75%

This article was sponsored by CIBC Asset Management. All opinions are my own.

Canadian investors have several account types at their disposal to build an investment portfolio. This typically starts with registered accounts – RRSPs and TFSAs – to take advantage of tax deductions, tax deferred growth (RRSP), and tax-free growth (TFSA). But registered accounts come with contribution limits, so once those accounts are filled up many investors will open a non-registered account to invest any extra cash flow or a lump sum of money.

In this article I will explain what is a non-registered account, how it works, how it’s taxed, who should use one, and who shouldn’t. Plus, I’ll look at the pros and cons of using a registered account versus a non registered account to save and invest.

What is a non-registered account?

A non-registered account is something that can be used for savings – such as an emergency fund – or as a complement to your other investment accounts. It does not have any special tax attributes, contribution or withdrawal limits, or age restrictions – other than the fact that you must be 18 (or 19 in some provinces) to open an account.

At its core, a non-registered account is a taxable account. That means any investment income earned inside the account will be taxable to the investor each year. Investment income typically comes in the form of interest or dividends. I’ll explain how those are taxed later.

Investors using a non-registered account don’t have to pay tax when their investment(s) increases in value. That taxable event doesn’t occur until an investment is sold inside a non-registered account. If the investment increased in value, the investor would have to pay taxes on 50% of that gain (called capital gains tax). If the investment decreased in value from when it was purchased, the investor could claim a capital loss on 50% of that loss in value. Capital losses can be carried forward indefinitely but can only be used to reduce or eliminate a capital gain.

A non-registered account could be an individual investment account, a joint investment account, or a high-interest savings account.

How does a non-registered account work?

Anyone age 18 or older (or 19 in some provinces) can open a non-registered account for the purpose of saving or investing. For most people, their first non-registered account is a savings account. Any interest earned inside the account is taxable to the investor. For example, if you held $10,000 in a non-registered savings account and earned 1% interest for the entire year – you would add $100 to your taxable income for that year.

A non-registered investment account is typically used by investors who have reached the contribution limit inside their registered accounts – their RRSP and TFSA. There’s no contribution limit in a non-registered account. Some investors may choose to invest in a non-registered account instead of their RRSP if their tax bracket is lower now than it is expected to be later in life.

Investors can purchase stocks, mutual funds, exchange-traded funds (ETFs), and other investments inside their non-registered account. Any investment income earned, such as interest on cash savings, interest from bond investments, and dividends distributed by stocks, mutual funds, or ETFs, are taxable in the hands of the investor each year.

Non-registered investors need to pay close attention to their buying and selling activity inside the account. Unlike RRSPs and TFSAs, where investments can be bought and sold without any tax consequences, selling a non-registered investment is a taxable event and subject to capital gains. One tip is to use the website AdjustedCostBase.ca to track your non-registered transactions.

When to use non-registered accounts

Most people should strive to max out the contribution room inside their registered accounts first before opening a non-registered account to invest. But non-registered accounts can and should be used as part of your financial plan for savings and investing.

The easiest way to utilize a non-registered account is to open a high interest savings account to start building your emergency fund, or as a place to fund your short-term goals. I’d suggest doing this in a non-registered savings account rather than your TFSA for two reasons:

1. Your TFSA should be used to invest for longer term goals like retirement
2. The taxable interest earned on your “high interest” savings account will likely be so minimal that it’s not worth using up your valuable TFSA contribution room to shelter that interest income

I’ve already mentioned two situations when investors should open a non-registered investment account:

1. When you’ve maxed out the contribution room inside your RRSP and TFSA and still have extra cash flow available to invest
2. When you’ve maxed out the contribution room inside your TFSA but your tax bracket is lower now than you expect it to be later in life – meaning an RRSP contribution would be less advantageous today

There’s also a third scenario that makes sense to use a non-registered investment account: If you’re the type of investor who likes to carve out a small percentage of your portfolio to speculate on individual stocks, sector ETFs, or cryptocurrency.

Related: The Problem With Core and Explore

Speculative investments are more likely to suffer losses than a broadly diversified portfolio of passive index ETFs. Why use your valuable RRSP and TFSA contribution room to speculate and potentially lose money on an investment when there are no tax advantages? Furthermore, any money lost on a bad investment means contribution room is also lost forever.

Instead, if you must scratch that itch, use a non-registered investment account to house your speculative bets on meme stocks, tech ETFs, and crypto coins. If you strike it rich and then sell, only 50% of the gains are taxable. And, more likely, if your investments lose money, you can sell and claim 50% of the loss as a capital loss. This can offset future capital gains down the road.

Types of non-registered investment accounts

Outside of the non-registered savings account there are two types of non-registered investment accounts: a cash account and a margin account.

A cash account is a regular non-registered investment account that can be used to hold cash, bonds, stocks, mutual funds, ETFs, and other investments. These accounts can be held individually or jointly.

A margin account can hold the same investments as a cash account, but with a margin account the investor will have the ability to borrow money to invest – i.e., use leverage. Investors cannot use margin in a registered account.

Certain online brokerages have different names for their non-registered accounts. I’ve heard it called a non-registered account, an unregistered account, a cash account, an open account, or a margin account. Questrade calls its non-registered accounts “margin accounts”, even though investors don’t need to use margin to invest in one. Wealthsimple Trade calls its non-registered account a “personal account”.

Pros and cons of non-registered investments

Here are the pros of using a non-registered account:

• No contribution or withdrawal limits
• Anyone can open an account once they’ve reached the age of majority in their province
• Capital gains are only taxed when sold, and only 50% of the gain is subject to taxes
• 50% of investment losses can be used to reduce or eliminate future capital gains.
• Useful when you’ve reached the contribution limits of your registered accounts, or when you don’t want to use your RRSP or TFSA contribution room to hold your emergency savings or speculative investments

Here are the cons of using a non-registered account

• Investment income is taxable in the hands of the investor
• Capital gains are taxable (50%) when realized
• Contributions are not tax deductible
• Switching banks / brokerages can be difficult if taxable investments must be sold
• Rebalancing and frequent buying and selling can complicate your tax situation

Registered vs non registered investments

A registered account is a type of account that has special tax attributes. These account types include RRSPs, spousal RRSPs, Locked-in Retirement Accounts (LIRAs), TFSAs, RESPs, and Registered Retirement Income Funds (RRIFs).

Investors receive a tax deduction when they contribute to an RRSP. Funds held inside an RRSP are sheltered from tax until the funds are withdrawn. The tax sheltering includes investment income as well as capital gains earned and realized inside the RRSP.

Contributions to a TFSA do not attract a tax deduction, but withdrawals from a TFSA are not taxable. Inside the TFSA, investment income or gains are also not subject to tax.

Related: TFSA Contribution Limit And Overview

A non-registered account does not have special tax characteristics other than the treatment of capital gains, where only 50% of the gain is taxable, or capital losses, where 50% of the loss can be used to reduce or eliminate a future capital gain.

Contributions to a non-registered account do not receive a tax deduction. Investment income from interest and dividends is taxable in the year it is earned. Investments sold for a profit are subject to capital gains tax.

How are non-registered investments taxed?

Interest, dividends, and capital gains are all taxed in different ways. That breakdown looks like this:

• Interest income earned from savings deposits, GICs, or bonds is fully taxable at your highest marginal rate (i.e., added to your income)
• Canadian dividends receive special tax treatment thanks to the dividend tax credit, with a greater advantage to investors in a lower tax bracket or who have no other income sources
• Foreign dividends from US and international stocks are fully taxable at your highest marginal rate.
• Capital gains are only taxable when the gains have been realized (i.e., when an investment is sold). 50% of the gain is taxable at your highest marginal tax rate.

Related: Forget About Asset Location – Why You Should Hold The Same Asset Mix Across All Accounts

Some investors prefer to hold Canadian dividend stocks inside their non-registered investment account, due to the more favourable tax treatment of Canadian dividends. In fact, it’s possible to receive up to $65,000 in Canadian dividend income tax-free in provinces like BC, Alberta, and Ontario (assuming no other income sources).

Final Thoughts

It’s important to understand the advantages and disadvantages of investing in a non-registered account, including the different ways investment income and gains are taxed.

Most people would do well to simply contribute as much as possible to their RRSP and TFSA, and never bother opening a non-registered investment account. But even in this scenario it’s useful to understand when best to use a non-registered account – like for an emergency fund.

And, for those who have managed to contribute the maximum to their RRSPs and TFSAs, understanding how to use a non-registered investment account is crucial to levelling up their financial game.

I’ve written before about how buying new vehicles every few years can be a major wealth destroyer. Indeed, next to housing costs, a car payment (or two) can easily be your largest monthly expense. 

A recent Globe & Mail article (subs) by Rob Carrick caught my attention when he wrote the average monthly car payment (for all loan terms) hit a record $781, while the most popular loan term was for 84 months (7 years!).

Canadians are stretching payments out to the max so they can afford new vehicles. Think about it. At $710 per month for 84 months you’ll pay a total of $59,640 for a vehicle. And that’s just the average.

The problems get worse when you consider that 0% financing deals have disappeared. Rates today typically range between 3.9% and 4.9%.

And, while the most popular term for a car loan is seven years, the average age of a trade-in is six years. Around 20-25% of people trading in their vehicles still owed more than the value of the car.

I get the appeal of wanting to drive a new vehicle every 3-6 years. New cars are safer, more reliable, often more fuel efficient, and come with the latest technology. If you’re the kind of driver who enjoys those advantages, consider leasing rather than financing. The payments are lower and the terms are shorter.

For me, I couldn’t care less about owning a new vehicle. We sold our second vehicle (’07 Tucson) last summer and drive our remaining vehicle (’13 Sante Fe) sporadically. I’ll happily take the savings from not having a vehicle payment and put it into our travel budget.

Where families can get into trouble is when they’re in a constant cycle of having two financed car payments. Imagine two payments of $700 per month – that’s $16,800 per year going towards your vehicles.

If you can break or split-up that cycle so that you only have one car payment at a time, you can free-up $8,400 per year to allocate to savings or travel or other financial goals. Even for a year or two that can make a big difference.

And, finally, try to avoid getting way over your head like this with monthly car payments in the $1,000+ range:

Does this dealership realize this makes them all look really bad???? pic.twitter.com/RGhOoMznXt

— Jessica Ray (@jessicaray0) August 27, 2022

This Week’s Recap:

I’m on the board at FAIR Canada and flew to Toronto this week for our first in-person meeting in several years. It was a great meeting, but the travel experience left a lot to be desired. It’s a reminder that it’s still incredibly challenging to fly within Canada without experiencing some sort of problem or delay.

My flight path home was Toronto to Calgary to Lethbridge, with the Lethbridge leg of the flight scheduled to leave at 11:10pm. I got a message from WestJet saying the Toronto to Calgary flight would be delayed by 90 minutes. Since that would cause me to miss my connection home, I quickly checked with Air Canada and booked a flight that would get me to Calgary on-time.

Or so I thought.

We boarded and sat on the runway for an hour waiting for the pilots to arrive. When they did, they needed another 30 minutes to get ready and in position for take-off. Crap! I missed that Lethbridge connection after all.

I booked the next available flight home (9:45am), booked a hotel room, and checked in at the in-terminal Marriott. An hour later I got a text from WestJet with a hotel voucher for one of three options (all off-site with no shuttle available). 

All-in-all the trip that should have cost about $1,300 ended up costing me $2,500, not to mention the lost time away from my family and work.

I’ll file the appropriate flight delay claims through WestJet and hopefully get reimbursed up to $1,000 for the “9 hours or more” delay. If that doesn’t work, I’ll go through my credit card’s trip interruption insurance process.

This past week I shared 5 retirement planning options to help you reach your retirement goals.

I also explained how to plan your own revenge travel year.

Next week, watch for a Q&A with CIBC’s vice-president of sustainable investments. I’ll also have a fun post to share about my investing journey had I made different choices along the way. Stay tuned for those!

Promo of the Week:

A shout-out to the American Express Aeroplan Reserve Card, and specifically the “other” perks that come with a premium card that often get overlooked.

I mentioned that I booked an Air Canada flight from Toronto to Calgary when WestJet informed me of the delay on my original ticket.

That meant being able to take advantage of perks like access to the Pearson Priority Security lane, where I breezed past the hundreds of people in line, access to the Maple Leaf Lounge to relax, eat, call my family, and finish making alternate travel arrangements, and priority boarding to ensure I had space for my carry-on luggage.

It’s those extras that make a stressful day of travelling more enjoyable. 

If you have a “revenge travel” year planned then you owe it to yourself to try one of these premium cards, at least for a year, and take advantage of perks often reserved for the super elite.

Weekend Reading:

One of the best business books I’ve ever read is Losing the Signal: The Spectacular Rise and Fall of Blackberry, by Jacquie McNish and Sean Silcoff.

That’s why I was excited to see that production has wrapped on a new film based on the events of the book. Can’t wait to see it.

Get ready for a new acronym. Details have been released on the proposed First Home Savings Account (FHSA). While there’s no specific date at this point, eligible Canadians can expect to be able to open and contribute to the new FHSA “at some point” in 2023.

Thanks to Tim Cestnick for quickly providing us with nine potential strategies for using a First Home Savings Account.

Dimensional Funds really puts out some terrific content. Here are four excellent articles worth your time:

• Tuning out the noise – how to avoid feeling overwhelmed by the relentless stream of news about markets.
• Active management hasn’t shined in volatile markets – in fact, traditional active investments may compound your concerns during times of market uncertainty.
• What drives investment returns? – why ingenuity will continue to reward investors, but owning a broad universe of stocks helps reduce the risk of betting on the wrong horse.
• The difference between a forecast, a wish, and a worry – and how to invest without doing any of those things.

One more Dimensional article deserves to stand out on its own and that’s this piece by professor Kenneth French on the five things he knows about investing.

A Harvard-trained economist says ‘early retirement is one of the worst money mistakes’.

A great piece by Nick Maggiulli on how retirees actually spend their money:

“For most retirees, spending money in retirement isn’t a financial issue, but a psychological one. It’s not about having the money, but convincing yourself to use it.”

Here’s why having enough money is just one piece of the retirement puzzle.

Now some advice for the younger generation:

Andrew Hallam says anyone who will be adding money to the markets for at least the next five years needs to try this test now.

And here’s why serious investors shouldn’t fall in love with growth stocks.

Here’s professor Meir Statman’s advice to young people on taking risks.

Finally, an interesting thought experiment by Ben Carlson on why people make dumb financial decisions on purpose.

Have a great weekend, everyone!