Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

How do Non-Registered Accounts differ from RRSPs and TFSAs?

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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 a non-registered account is, 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 Continue Reading…

The waiting is the hardest part, and the most profitable times for investors

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By Dale Roberts

Special to Financial Independence Hub

Investors are starting to notice that their portfolios have been treading water for a couple of years. Over the last two years, a global balanced growth portfolio would essentially be flat. Of course, move out to 3-year, 5-year and 10-year time horizons and we have very solid to generous returns.

At times investors have to wait. We build and springload the portfolio waiting for the next aggressive move higher. In fact, these holding periods can be beneficial: we are loading up on stocks at stagnating or lower prices. We’re able to buy more shares. The waiting is the hardest part for investors. But it is essential that we understand the benefits to sticking to our investment plan.

In January of 2021 I wondered aloud in a MoneySense post if the markets might not like what they see when we get to the other side of the pandemic. That’s an interesting post that looks back at the year 2020, the year the world changed with the first modern day pandemic. That suspicion is ‘kinda’ playing out as the markets stall and try to figure things out.

That’s not to suggest that my hunch was an investable idea. We have to stay invested.

Stick to your plan when the market gets stuck

Patience is the most important practice when it comes to wealth building. When done correctly, building life-changing wealth happens in slow motion and it is VERY boring.

Boring is good.

Waiting can be boring. But maybe it can look and feel more ‘exciting’ if we know what usually happens after the wait. Stock markets work like evolution. There are long periods of stagnation and status quo and then rapid moves and change.

Instead of boring, maybe it should feel like a kid waiting for Christmas. The good stuff is on its way.

Here’s an example of a waiting period, from 1999. The chart is from iShares, for the TSX 60 (XIU/TSX). The returns include dividend reinvestment.

And here’s the stock market ‘explosion’ after the wait.

That’s more than a double from the beginning of the waiting period.

And here’s the wait from 2007, moving through the financial crisis. Ya, that’s a 7-year wait. Talk about the 7-year itch, many investors filed for divorce from the markets.

It was a costly divorce.

Markets went on a very nice run for several years. Continue Reading…

Timeless Financial Tip #9: Beware Conflicted Financial Advice

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Lowrie Financial: Canva Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub

There’s only so much you and I can do about life’s many surprises. Some things just happen, beyond our control. Fortunately, to make the most of your hard-earned wealth, there is one huge and timeless best practice you can control: You can (and should) avoid seeking unbiased financial advice from biased sales staff.

How do you separate solid investment advice from self-interested promotions in disguise? Here’s a handy shortcut: Are the investments coming from your friendly neighborhood banker? If so, please read the fine print — twice — before buying in. Due to inherently conflicting compensation incentives, most banks’ investment offerings are optimized to feed their profit margin, at your expense.

Compensation Incentives Matter … a Lot

I’ve been covering the conflicted compensation beat for years, like in On Big Banks, Conflicting Compensation and Bad Behaviour, and my message has remained the same, for all the same reasons:

Compensation drives behaviour.

It’s human nature.  It’s true for Canadian bankers and their investment offerings. It’s also true in the U.S. and around the globe.

For example, a 2017 Consumer Federation of America report, “Financial Advisor or Investment Salesperson?” reflects on this very conflict:

“After all, people expect salespeople to look out for their own interests and maximize profits, but advisors are expected to meet a higher standard. … Investors who unknowingly rely on biased salespeople as if they were trusted advisors can suffer real financial harm as a result.”

Let’s imagine I’m a banker, on a bank’s payroll. Pick a bank, any bank. Assume I’m at any level, from teller to VP. Here’s how my compensation package is likely structured:

  1. I can expect to earn more if I promote my employer’s proprietary Widget X products over any comparable, but generic Gadget Y offerings. Sure, Widget X will cost my customers more. But by helping me and my bank thrive, aren’t we both better off?
  2. I and my team may even score special perks if we exceed our Widget X sales quotas. There may be contests, celebrations, or at least positive performance reviews.
  3. In fact, if I don’t sell enough Widget X’s (or if I sell too many Gadget Ys), my performance reviews may suffer. I could lose my job, or at least not rise in the ranks.

Under these sales-oriented conditions, guess which investment product I’m going to recommend as often as I can? As a bank employee, I may well care about my customers. But the bottom line is that they don’t determine how much or little I am paid for my efforts. When my bank’s profits rise or fall, so does my career.

“Our Way or the Highway” Investments

In theory, banks have plenty of flexibility to structure their investment lineup however they please. They could promote the same low-cost, globally diversified, evidence-based mutual funds and ETFs that independent, fee-based, evidence-based financial advisors typically deploy.

Instead, most banks tend to heavily promote their own, proprietary investment products: built, managed, and priced in-house.

In its title alone, a 2023 The Globe and Mail report speaks volumes about this approach: “Pervasive sales culture at Canadian banks designed to push customers into high-fee products.” Its authors observe:

“The commission earned from selling the bank’s products may be five times higher than on a GIC, for example. In this way, the system incentivizes the sale of funds with higher fees, even when a GIC might be a better fit for the client.”

Suitable vs. Fiduciary Advice

At best, your bank’s compensation conundrums may leave you paying more than necessary for sound investments. Worst-case (and from what I’ve seen, more likely), you’ll end up overpaying for the “privilege” of holding investments that fail to fit your short and long-term personal financial goals.

That’s because your banker may be required to offer products that are broadly “suitable” for you, but as I’ve described before, like in What is the Cost of a Financial Advisor?, they don’t have to be the best choice for you.

There’s a big difference between suitable versus fiduciary advice. Your banker’s role as an “adviser” may sound comforting. But make no mistake. Regardless of their title or compensation, they are not in a fully fiduciary relationship with you; they don’t have to always place your highest, best interests ahead of their own. Continue Reading…

Artificial intelligence is evolving in different ways – how can you best profit?

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While Get Rich Quick publishers use AI for email advertising, investors combat their spam with AI-based anti-spam programs. Meanwhile, what’s the best way to profit from AI with less risk?

Image courtesy Pexels/ThisIsEngineering

AI continues to make gains, mostly in communications. (In contrast, early adopters are still waiting for a licensed, insurable, road-worthy self-driving car.) You also hear a lot about AI-related start-ups. Most seem aimed at improving existing devices and/or cutting business costs. Many have highly specific goals.

Meanwhile, AI will keep attracting investment interest.

Here’s how AI has changed one industry

As you’ve probably noticed, a boom is underway in the investment-newsletter publishing business, at least in its “GRQ” segment. (GRQ is an acronym for Get Rich Quick.)

GRQ publishers sell newsletters and related products to subscribers. Their expertise is in newsletter marketing, not investing. Many publish numerous newsletters that may offer conflicting advice. When one publication puts out a stream of bad recommendations that drive off too many customers, the publishers change the publication’s name and/or investment specialty. That way, they always have one or more fresh titles that still have customer appeal and can operate at a profit.

GRQ publishing has been around for many decades, if not centuries. But it really went into high gear in the early 2000s. That’s when email began to replace postal mail as the main carrier for newsletter advertising, and costs began to plummet.

In the days of postal mail advertising, it cost a publisher perhaps $1 per “name” to offer a newsletter subscription to prospective customers. Publishers had to create, print and mail elaborate mailing pieces. They had to rent prospect names from direct competitors, or from other publishers in the same or related fields.

Compared to the costs of paper/postal mailings a decade or two ago, today’s costs of email advertising are close to negligible. Now publishers spend heavily in other areas: direct marketing consultants, specialized writers of advertising copy for email marketing, and so on.

Some newsletter publishers seem to be using AI to help them create email ads in ever larger numbers, to send to investors who never asked for them: spam, in other words. Continue Reading…

16 Business Leaders share their best Real Estate Investment Advice

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Alena Darmel – Pexels

Aspiring homeowners and families looking to invest in property often seek expert advice. To provide a range of perspectives, we’ve gathered sixteen pieces of advice from CEOs, founders, and other industry professionals. From understanding the market rather than chasing it, to securing a property warranty, this article offers a wealth of insights for property investment.

 

 

  • Understand, Don’t Chase, the Market
  • Consider Property’s Rentability
  • Diversify Your Real Estate Investments
  • Seek Immediate Return on Investment
  • Research and Plan Your Investment
  • Leverage Home Inspection Power
  • Invest in a Fixer-Upper
  • Consider Total Cost of Ownership
  • Have a Clear Exit Strategy
  • Start Small in Property Investment
  • Diversify Your Real Estate Portfolio
  • Think Long-Term for Value Appreciation
  • Look into Emerging Neighborhoods
  • Define Your Investment Goals
  • Establish a Clear Budget
  • Secure a Property Warranty

Understand, don’t chase, the Market

If there’s one piece of advice I consistently circle back to, it’s this: don’t just chase the market, understand it. Now, that might sound a bit cliche, but let me unpack that for you with an example and a personal anecdote.

Many aspiring homeowners or investors get drawn into this frenzy of buying property anywhere there’s a buzz. You know, a new major employer coming into the area, a big infrastructure project announcement, or maybe where there’s a sudden spike in property values. But here’s the twist: not every “hot” market is suitable for every investor. — Shri Ganeshram, CEO and Founder, Awning.com

Consider Property’s Rentability

I’d suggest considering the “rentability” of the property. If your circumstances change and you need to move, having a property that’s attractive to renters can provide a steady income stream. 

Look for properties with features that are in high demand in the rental market, such as a good layout, modern amenities, and proximity to employment centers. I’ve seen clients turn unexpected relocations into opportunities by choosing properties that are easy to rent, thereby securing a secondary income source. — Alexander Capozzolo, CEO, SD House Guys

Diversify your Real Estate Investments

Different types of real estate investments, such as residential properties, commercial properties, or vacation rentals, can react differently to market fluctuations. By spreading your investments across various property types, I’ve seen how it can reduce the overall risk associated with real estate investing.

I’ve witnessed that diversification can provide a more stable income stream. For instance, while one property might experience a vacancy, another may continue to generate rental income.

I’ve found that different markets may perform differently at various times. By advising clients to invest in properties in different geographic locations, I’ve seen them benefit from a broader range of market conditions. — Ritika Asrani, Owner and Head Broker, St Maarten Real Estate

Seek Immediate Return on Investment

One piece of real estate investment advice I’d give is to focus on buying property that can give you a return on investment (ROI) immediately. That’s because when interest rates are high, property prices decrease, making it harder to know what kind of appreciation you can expect in the future.

As a bonus tip, invest where there are median-priced homes to maximize your returns. For example, if you invest in a $300,000 house with an 8% versus a 4% interest rate, the mortgage difference would be just $615 per month. 

On the other hand, if you invest in a $1 million property with the same interest rates (8% versus 4%), the mortgage difference you’d pay would be over $2,000 per month.

Ultimately, to maximize your returns and minimize risk as an investor, buy properties that will give you cash flow from day one and limit your mortgage payments. — Ryan Chaw, Founder and Real Estate Investor, Newbie Real Estate Investing

Research and Plan your Investment

Thoroughly research the local real estate market dynamics. Understand not only current property values but also potential growth or decline in the area. In our global property management experience, we’ve seen the value in choosing properties located in areas with growing job opportunities, infrastructure development, and a strong community presence. 

Additionally, always factor in the long-term perspective: real estate typically appreciates over time, so patience and a well-planned strategy can yield returns. Consider your investment goals and financial capabilities carefully. Determine whether you seek rental income, capital appreciation, or both. Calculate a budget, including property purchase, maintenance, and potential vacancies. 

Finally, don’t underestimate the significance of a property management company, especially if investing in different locations or operating remotely. Their expertise can help navigate property investment complexities and ensure your investment thrives. — Johan Hajji, CEO and Founder, UpperKey

Leverage Home Inspection Power

One tip I’d offer is to leverage the power of “home inspection” before finalizing any deal. A thorough inspection can reveal potential issues like structural damage or outdated electrical systems, allowing you to either negotiate the price or avoid a money pit.

I‘ve had clients who saved thousands by using the findings of a home inspection to negotiate a lower purchase price, turning what could have been a costly mistake into a savvy investment. — Gagan Saini, CEO, JIT Home Buyers

Invest in a Fixer-Upper

My career in remodeling and carpentry started with a real estate investment. I bought a home in disrepair for very little money and began piecing it together, learning how to perform various construction tasks along the way. 

At first, I just got one room livable. Then, at night and on weekends, piece by piece, I finished the kitchen, then the bathroom, then the basement. If you enjoy problem-solving and working with your hands, you’ll enjoy a fixer-upper much more than a property that you paint and resell. — Rick Berres, Owner, Honey-Doers

Consider Total Cost of Ownership

One piece of advice would be to think long term and consider the “total cost of ownership,” not just the purchase price. This includes property taxes, maintenance, and potential homeowner association (HOA) fees. 

I recommend it to create a detailed budget that accounts for these ongoing costs to ensure the investment is sustainable in the long run. Clients who’ve taken this holistic approach have been better prepared for the financial responsibilities of property ownership, avoiding unexpected financial strain down the line. — Erik Wright, CEO, New Horizon Home Buyers

Have a Clear Exit Strategy

Have a solid exit plan from the get-go. It’s not just about buying a property; it’s about understanding how you’re going to profit from it. Are you looking for long-term rental income, or do you plan to flip the property for a quick return? 

Having a clear strategy helps you make informed decisions and ensures that your investment aligns with your financial goals. Real estate can be a fantastic wealth-building tool, but knowing your exit strategy keeps you on the right path to success. — Loren Howard, Founder, Prime Plus Mortgages

Start Small in Property Investment

Start small. For aspiring homeowners or families looking to invest in property, it is important to start small. While it may be tempting to jump into a larger, more expensive property as your first investment, starting with a smaller and more affordable property can be a smarter financial decision in the long run. 

By starting small, you will have less risk and financial burden, allowing you to learn and gain experience in the real estate market without being overwhelmed. Additionally, starting small will also give you a better understanding of your financial capabilities and help you make more informed decisions for future investments. 

Furthermore, starting with a smaller property can also provide potential for quicker returns on investment. With lower purchase prices and potentially lower maintenance costs, you may be able to see profits sooner than with a larger, more expensive property. — Keith Sant, CMO, Eazy House Sale

Diversify your Real Estate Portfolio

I would advise diversifying your portfolio if you’re searching for real estate investment tips. Think about making investments in a variety of real estate, including commercial, residential, and even holiday rentals. This diversification can create several income streams while reducing risk.  Continue Reading…