A counterfactual is when we create possible alternatives to events that have already occurred – something contrary to what actually happened. We do this all the time. “If only I had set my alarm, I wouldn’t have been late.” “If only I hadn’t been speeding, I wouldn’t have wrecked my car.”

We also use counterfactual thinking with our investing decisions. “If only I had put $10,000 in the Amazon IPO.” “If only I would have cashed out before the market downturn.”

Counterfactuals can be both negative and positive. “If I didn’t invest that lump sum in April 2020 I wouldn’t have as much money today.”

I made a big investing decision in January 2015 when I sold all my dividend stocks and switched to total market indexing. Sometimes I think about the counterfactuals – what would have happened if I made a different choice?

Related: Exactly How I Invest My Own Money

I could have stayed the course and stuck with my dividend paying stocks. I could have sold the stocks and bought a dividend ETF. I could have gone all-in on the Canadian, US, or international markets. I could have turned into a gold-bug and invested in gold ETFs (or buried it in my backyard!). I could have followed the five-factor investing model.

I thought it would be interesting to run a simulation, an investing multiverse of madness, that showed what my returns would have been if I made different investing choices with my $100,000 back in 2015.

I sought out help from Markus Muhs, a Senior Portfolio Manager at Canaccord Genuity Wealth Management, to pull together the return data and fancy charts to make this multiverse come to life. Markus also shared his thoughts on the various investing approaches and outcomes.

Robb’s Investing Multiverse of Madness

To set the scene, we started with a $100,000 portfolio on January 1st, 2015. That is approximately when, in real life, I sold 24 Canadian dividend stocks and put the proceeds into 25% VCN (Canadian equities) and 75% VXC (international equities). Then, on March 4, 2019, I sold VCN and VXC and bought Vanguard’s All Equity ETF, VEQT (which I still hold today).

In the multiverse, infinite variants of Robb could have made an infinite number of investing decisions from January 1st, 2015, to July 31st, 2022 (the date of our sample).

Markus and I looked at the following examples:

• Real life Robb’s returns using VCN/VXC to March 2019 and then VEQT to present
• Robb’s returns had he stuck with his portfolio of Canadian dividend paying stocks
• Robb’s returns had he sold the dividend stocks and bought iShares’ CDZ (his benchmark index)
• Robb’s returns had he sold the dividend stocks and bought the global dividend ETF trio of ZDV, ZDY, and ZDI
• Robb’s returns had he sold his stocks and invested in global equities, ex Canada (VXC)
• Robb’s returns had he sold his stocks and sunk everything into the S&P 500 (VFV)
• Robb’s returns had he sold his stocks and invested in French-Fama factor-based global equity portfolio (from DFA)
• Robb’s returns if he sold his stocks and bought iShares’ Gold Bullion ETF (GLD)

“I ran back tests on Robb’s previous strategy of owning a basket of Canadian dividend stocks, the ETF strategy he shifted to in 2015, and then various other assets he could have potentially pivoted towards instead. These back tests were done using Y-Charts’ portfolio modeller, which allowed me to periodically rebalance his hypothetical dividend portfolio and make the change in March 2019 to his ETF portfolio. Various other asset classes were also charted, measuring total returns from Dec 31, 2014 to July 31, 2022.” – Markus Muhs.

*Note that all return data is gross and excludes any trading commissions or fees.

Which variant of Robb had the best returns over the past 7.5 years? Read on to find out.

Robb’s Investing Decision #1: Total Market Indexing

For the first scenario – my real-life scenario, Markus ran an ETF back test to recreate almost exactly what I did: moving all of my money into 25% VCN (Vanguard FTSE Canada All Cap), and 75% into VXC (Vanguard FTSE Global All Cap ex Canada), with annual rebalancing, until March 4, 2019, when I swapped into the more convenient all-in-one ETF portfolio, VEQT (Vanguard All Equity Portfolio), when it became available.

In this scenario $100,000 grew to $186,930; a compound annual growth rate of around 8.5%.

Robb’s Investing Decision #2: Canadian Dividend Stocks

This is my most common counterfactual – what if I had stayed in Canadian dividend stocks? How would my portfolio have performed?

Unfortunately, a few of my stocks became defunct in the years after 2015, so it was not easy for Markus to back test this perfectly. That included the merger of Agrium and Potash – both of which I held in 2015. We added CDZ as a place holder for the defunct stocks, and to round out the total number to an even 20 (with 5% allocated to each).

We also assumed that this variant of Robb didn’t continue to own Canadian Oil Sands past Jan 1st, 2015 (combining that money with its acquirer, Suncor).

“It’s not perfectly scientific, but let’s say theoretically this is what Robb did. One would assume he may have been more active in selling some companies and adding new ones from time to time, but in this back test I have him equal-balancing the stocks at the beginning of each year and reinvesting all dividends,” said Markus.

In this, “stay the course with Canadian dividend stocks” scenario, the initial $100,000 would have grown to $176,880; a compound annual growth rate of just under 8%.

Indexing versus Dividend Stocks: The Comparison

The overall performance ended up being similar between the two strategies. Since we couldn’t perfectly simulate the dividend stock scenario, we agreed that it wouldn’t be fair to declare the ETF strategy an absolute winner.

“What’s remarkable, though, is how little effort the ETF strategy likely took on Robb’s part, versus researching, following, and rebalancing the dividend strategy,” said Markus, adding “the global vs Canada outperformance is quite obvious for the first six years, while the out-performance of Canadian value companies more recently closed the gap.”

Markus said that while the dividend strategy consistently churned out a high yield, an important metric to a lot of investors, this would have been of no value to Robb in his accumulation years and might just have added to the time he put into the portfolio.

The other variants of Robb in the multiverse did as well as we could have expected, in hindsight.

Robb’s Investing Decision #3: iShares’ CDZ

This variant of Robb still really liked Canadian dividend stocks, but also didn’t want to deal with managing a portfolio of 25+ stocks.

He chose the iShares’ S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ) which returned 6.02% annually.

This was obviously a smarter and easier solution to manage than the stock portfolio, however in both cases it can’t be guaranteed that Canadian dividend stocks will consistently perform as well as they did over this short time period.

Robb’s initial $100,000 investment grew to $155,730.

Robb’s Investing Decision #4: Global Dividend ETFs

Another variant of Robb similarly like dividends but recognized the value of being globally diversified.

He divided the money equally between three BMO dividend ETFs (Canadian, International, and U.S.).

This strategy underperformed, at a compound annual growth rate of 6.9%, due to weak international equity returns (close to 0% over the time period) and missing out on the biggest drivers of returns during that time: large cap U.S. growth stocks.

Robb’s initial $100,000 investment grew to $166,570.

Robb’s Investing Decision #5: Vanguard’s VXC

This variant of Robb went with the simplest solution available in 2015 and stuck with it.

With VEQT not yet available, and not wanting to bother rebalancing two individual ETFs, Robb put everything into Vanguard’s All World ex Canada ETF (VXC) and didn’t look back.

Canadian stocks underperformed during this time period, so this approach would have returned an impressive 9.0% compound annual growth rate between Jan 2015 and July 31, 2022.

Robb’s initial $100,000 investment grew to $191,750.

Robb’s Investing Decision #6: The S&P 500

The variant of Robb who put all his money into the S&P500 via Vanguard’s VFV, eschewing all Canadian and international equity investments, would have seen the best performance of all strategies in the investing multiverse of madness.

Robb’s initial $100,000 would have grown to more than $247,700; a whopping 12.7% compound annual growth rate.

“Obviously, we know in hindsight that the U.S. markets outperformed Canadian, international, and emerging market stocks by a wide margin over the time period, but it would have been impossible to predict this ahead of time,” said Markus.

Robb’s Investing Decision #7: Five-Factor Global Equities

In another universe of the multiverse Robb employed a diversified French-Fama factor-based approach.

Markus said that although the fund wouldn’t have been available to him as an individual investor (nor were similar multi-factor ETFs at the time), he used the Dimensional Fund Advisors (DFA) Global Equity Portfolio in the comparison.

This approach would have also underperformed, slightly, at 7.61% annually, as market returns over the past seven years were largely driven by the large cap growth stocks that are underweighted in such an approach (which tilts to small cap and value stocks).

Robb’s initial $100,000 grew to $174,400.

Robb’s Investing Decision #8: Gold

In the final universe, Robb is a gold bug and simply dumped all his money into the iShares Gold Bullion ETF (CGL). Gold bug Robb ended up with the worst outcome, at an annual growth rate of 4.18%.

This grew his original $100,000 portfolio from $100,000 to $136,400.

Comparing the Investing Multiverse Outcomes

It was clear that the variant of Robb who invested his entire $100,000 portfolio into the S&P 500 enjoyed the best outcome in the multiverse.

And the variant of Robb who fell down conspiracy theory rabbit holes and invested his $100,000 in gold had the worst outcome.

We also know, with the power of hindsight, that it was US stocks – large cap US growth stocks in particular, led by Apple, Amazon, Alphabet, etc. – that drove the majority of returns since 2015.

It’s important to understand why a particular strategy might have underperformed, or outperformed. If US stocks led the way, that means on balance an approach that was overweight to US stocks would have likely had a more positive outcome than an approach that was underweight US stocks.

Final Thoughts

It’s interesting to think about counterfactuals – how a scenario might have played out if you had made different choices. But you can easily make yourself sick with regret over missed opportunities.

We should strive to make the best decisions we can with the information we have available. But life is surprising, and so we shouldn’t be surprised when we get a different outcome than we were expecting.

In my case, the overwhelming evidence convinced me to abandon my individual stock picking and switch to index funds. My second, but equally important goal was to simplify my life and reduce the time spent on my investment portfolio. A one-fund solution that automatically rebalances requires exactly zero effort to manage.

The investing multiverse was a fun thought experiment on how my big investing decision could have led to a wide range of different outcomes.

My portfolio performed third-best out of these particular options.

Do I wish I had invested all my money into the S&P 500? Not really. I know that certain sectors, countries, and regions will have their ups and downs over time. US stocks may have a long period of underperformance, in which case I would regret not diversifying. 

Markus Muhs, CFP, CIM is based in Edmonton and works with families in Alberta, B.C. and Ontario, providing comprehensive financial planning and managing their wealth through a low-cost evidence-based approach.

The above is for general information only and does not constitute investment advice. Any opinions are those of the author/contributor and do not represent those of Canaccord Genuity Corp. All information included herein has been compiled from sources believed to be reliable as of the date of the article. Investing in equities, mutual funds and ETFs is not guaranteed, values change frequently, and past performance is not an indicator of future performance.

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.