Every year, r/PersonalFinanceCanada sees the same question: "I've maxed my TFSA and RRSP. What do I do next?" The answer is a non-registered (taxable) account — but this isn't just "overflow investing." The tax treatment of different investment types in a non-registered account creates real planning opportunities that many Canadians miss.
The Three Types of Investment Income and How They're Taxed
| Income Type | Tax Rate (Approximate) | Key Feature |
|---|---|---|
| Capital gains | 50% inclusion rate × marginal rate (~10–27% effective federal+provincial) |
Only realized on sale; 50% of gain is taxable (as of 2024 budget, >$250K gains have 2/3 inclusion) |
| Eligible dividends | Grossed up, then dividend tax credit (~6–29% effective in Ontario) |
Canadian corporations — the gross-up and credit system makes them tax-advantaged |
| Interest income | Full marginal rate (33–53%+ in Ontario at high incomes) | GICs, bonds, savings accounts — taxed like employment income |
| Foreign dividends | Full marginal rate + withholding tax | No dividend tax credit; US dividends withheld at 15% in non-registered accounts |
The practical implication: interest income is the least tax-efficient investment return in a non-registered account. Capital gains are the most efficient (deferred until realization, 50% inclusion). Eligible Canadian dividends are in between — they get a tax credit that effectively reduces the rate.
Asset Location: What to Hold Where
Asset location means deliberately placing investments in the account type that minimizes tax on that investment's specific return. This is one of the most underused optimization strategies for Canadians who have all three account types (TFSA, RRSP, non-registered).
Best in Non-Registered: Canadian Equity ETFs (Capital Gains + Eligible Dividends)
✓ Tax-efficient in non-registered
Canadian equity ETFs (like XIC, VCN, ZCN) generate returns mainly as capital gains + eligible dividends. Capital gains are deferred until you sell, and eligible dividends get the dividend tax credit. These are genuinely better in non-registered than interest-bearing investments.
You also get the dividend tax credit on Canadian dividends in a non-registered account — which you don't get inside a TFSA or RRSP (where all withdrawals are either tax-free or treated as ordinary income regardless of the underlying return).
Avoid in Non-Registered: GICs, Bond ETFs, High-Interest Savings
✗ Tax-inefficient — hold in RRSP or TFSA instead
Interest income is taxed at your full marginal rate. A 5% GIC in a non-registered account at a 45% marginal rate leaves you with 2.75% after tax — worse than inflation in many environments. Hold GICs, bond ETFs (like XBB, ZAG), and high-interest savings in RRSP or TFSA where no tax applies at all.
Consider RRSP for: US/International Equity ETFs
✓ Holds better in RRSP
US equity ETFs (VFV, XSP, etc.) held in a non-registered account have two tax issues: US withholding tax on dividends (15% withheld, partially recoverable via foreign tax credit but cumbersome) and foreign dividends don't get the Canadian dividend tax credit. In an RRSP, the Canada-US tax treaty waives the US withholding on dividends completely. In a TFSA, you still pay the withholding and can't recover it.
The tax efficiency order for US equities: RRSP > Non-registered (partial FTC recovery) > TFSA (no FTC recovery at all).
The ACB Tracking Requirement
Adjusted Cost Base (ACB) is the tax cost of your investments — what you paid for them, adjusted for distributions that were reinvested (DRIP), return-of-capital distributions, and other events. When you sell an investment in a non-registered account, you must report the capital gain as: proceeds of sale − ACB − selling costs.
ACB tracking is your responsibility. CRA does not track it for you. If you bought the same ETF in multiple transactions at different prices, each purchase has its own cost, and when you sell, you calculate the weighted average cost per unit.
Tools for ACB tracking:
adjustedcostbase.ca — free Canadian tool built specifically for this purpose. You input transactions and it calculates your ACB automatically, including superficial loss rule adjustments.
Questrade and Wealthsimple Tax import transaction history and pre-populate some ACB data, but you should verify independently — financial institutions are not required to provide ACB data.
Excel spreadsheet: For simple portfolios with few transactions, a manual spreadsheet with the weighted average cost formula works fine.
The Superficial Loss Rule
You cannot claim a capital loss if you (or an affiliated person) buys the same — or identical — investment within 30 days before or after the sale. This is the superficial loss rule. It exists to prevent "wash sales" where you sell for a tax loss and immediately rebuy.
Practically: if you tax-loss harvest by selling XIC (iShares Canadian ETF) and buy VCN (Vanguard Canadian ETF) immediately, that's probably fine — different ETFs from different providers. If you sell XIC and buy XIC again within 30 days, the loss is denied. The denied loss is added to the ACB of the repurchased shares.
See the tax-loss harvesting guide and the superficial loss rule guide for more on this specific area.
The Practical Starting Point
For most Canadians who've maxed TFSA and RRSP and are starting a non-registered account:
- Hold Canadian equity ETFs (XIC, VCN, or equivalent) in non-registered — capital gains + eligible dividends are tax-efficient here.
- Keep bond ETFs and GICs inside RRSP or TFSA — never in non-registered if you can avoid it.
- Hold US/international equity ETFs in RRSP if you have room — or non-registered as second preference (better than TFSA for US holdings).
- Set up ACB tracking from day one — adjustedcostbase.ca is free and takes 5 minutes per transaction to maintain.
- At tax time, your financial institution will issue a T5 (dividends and interest) and T3 (trust distributions including ETF distributions). You'll need to calculate and report capital gains yourself when you sell.
For the broader registered account picture and which account to prioritize when you can't max all three, the TFSA/RRSP/FHSA priority guide and the contribution calculator cover those tradeoffs.