# Individual non-registered (margin) account - taxes: how & when?



## PensiveOwl (Mar 13, 2014)

Hello,

I have a question in regards to an individual non-registered account.

Let's assume my TFSA & RRSP accounts are maxed out.

Now I open an individual margin account. 
For example at Questrade - they offer an individual margin account (you don't have to trade on "margin" if you don't want to).

For instance I invest $5000 CAD. 
1.) I buy 1 Canadian stock (paying no dividends) with money I have (using no margin). 
Assuming that the stock does well during the year, at the end of the year I'll have shares worth of $7000.
Now I DO NOT TAKE any money out of that account. I let the money sit there. What are the tax implication?

2.) At the end of the year I sell some shares of the stock in 1.), let's say shares worth $3000 and reinvest the money and buy another stock. Still I haven't taken out any money from that account. Everything happens "within" the account. 
Again how will be my taxes calculated/reported?

Thanks,


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## liquidfinance (Jan 28, 2011)

You buy 

500 * ABC Company @ $10 share =$5000

At the end of the year ABC Trades at $14 giving you a portfolio value of $7000

You sell 215 shares @ $14 to raise the money to finance your new purchase. 

On these 215 share you have a capital gain of $860 which must be reported. 

These examples ignore trading fees. 

It doesn't matter if the money stays within the un-registered account. Any sale will realise a capital gain or loss.


http://www.milliondollarjourney.com/how-investing-taxes-work-part-1.htm


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## pwm (Jan 19, 2012)

In case # 1 there are no tax implications. You only incur a cap gain or loss when you sell a security, so in case #2 you will have to report a capital gain on schedule 3. A cap gain consists of your proceeds minus your cost base for that security. Whether you take any cash from the account is irrelevant. For every stock you sell, you have to account for it's gain or loss.


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## OnlyMyOpinion (Sep 1, 2013)

liquidfinance - "It doesn't matter if the money stays within the un-registered account. Any sale will realise a capital gain or loss."
Also, the fact that it is a margin account doesn't affect it's tax status, although if you do end up trading on margin and incur interest charges those would be tax deductable. 
And, If you do earn interest income or dividend income in the account you'll report those each year.


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## PensiveOwl (Mar 13, 2014)

Alright, now I got it, so unless I don't sell -> nothing happens (nothing to be declared to CRA).
But any selling/movement has to be reported for tax purposes (gains, losses, fees).. And it doesn't matter if I take any cash out of that account.
Thank you for your detailed replies.

P.S. - How much tax would I have to pay on that capital gain of $860 (as described in the example above)? Is it 50%?


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## OnlyMyOpinion (Sep 1, 2013)

So if you make $860 on the sale of the shares, 50% of this capital gain is taxable ($430). If your marginal tax rate happens to be 25%, then you'd pay $107.50 in taxes (25% of the $430). You'd be left with $752.50. Good deal eh!


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## liquidfinance (Jan 28, 2011)

OnlyMyOpinion said:


> liquidfinance - "It doesn't matter if the money stays within the un-registered account. Any sale will realise a capital gain or loss."
> Also, the fact that it is a margin account doesn't affect it's tax status, although if you do end up trading on margin and incur interest charges those would be tax deductable.
> And, If you do earn interest income or dividend income in the account you'll report those each year.


My mistake. Writing a quick response when on break at work.


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## PensiveOwl (Mar 13, 2014)

That's good to hear, it would be definitely a good deal!

Now what about REIT investments that pay dividends? 
How are the dividends treated in terms of capital gains?

Thanks,


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## liquidfinance (Jan 28, 2011)

REITS are generally a bad investment inside a margin account as the dividends (distributions) are mostley classed as other income and are fully taxed at your marginal rate. They may also contain return of capital which makes for additional book keeping.


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## Eclectic12 (Oct 20, 2010)

Hmmm ... it seems everyone is focussed on what happens for a sale.

The first question is whether the stock is paying anything? 
If yes, then what is the tax treatment of what is being paid. 

For example, if it's BCE stock paying an eligible dividend - then for each year's worth of dividends, there will be dividend income to report and the tax owing will be reduced by the dividend tax credit.
If the stock is an US stock paying dividends, then a higher tax rate is paid as the foreign dividends are taxed more heavily and do not qualify for the dividend tax credit.
http://www.milliondollarjourney.com/how-investing-taxes-work-part-2-dividends-and-interest.htm


If it's a MF, ETF or REIT and pays cash - then likely it's a mix of income, where each type is reported/taxed differently. Note that most articles are incomplete as the portion paid that is return of capital (RoC) will reduce the adjusted cost base (ACB) until the ACB falls to a negative number. At that point, the RoC portion is reported as a capital gain on that tax year's return.


Bear in mind that *nothing has been sold* but there is income to report yearly on one's tax return and taxes to pay.


Then too - if the investment is an ETF that pays RoC, one wants to do the ACB calculations correctly or one will be paying more capital gains taxes than one owes.
http://www.taxtips.ca/personaltax/investing/taxtreatment/etfs.htm


Since it sounds like the margin account will be in a taxable account - I'd suggest checking out the "How Investment Taxes Work" sticky in the CMF taxes section or borrow an investing/taxes book (they usually have at least a chapter devoted to investment record keeping/taxes) from the library to make sure you understand what is needed.


Speaking from experience, it's a pain in the butt to try to figure it out years after the fact, when the info is no longer readily available.


Cheers


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## Eclectic12 (Oct 20, 2010)

liquidfinance said:


> REITS are generally a bad investment inside a margin account as the dividends (distributions) are mostley classed as other income and are fully taxed at your marginal rate.


This is why it is important to investigate and be clear on what is needed - the REITs I bought recently are 97% RoC so there's almost nothing being taxed at the marginal rate in a taxable account (margin or otherwise).

Even should the ACB fall negative, the 97% is then reported as a capital gain which is taxed at a better rate than income.





liquidfinance said:


> ... They may also contain return of capital which makes for additional book keeping.


Agreed ... but having investigated and having a bookkeeping system that I can live with, in place - the end result of having to sit down once a year to do one transaction per REIT doesn't seem all that bad to me. YMMV, depending on what the investor decides to do and is willing to do.


Cheers


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## PensiveOwl (Mar 13, 2014)

Well, thanks for all replies.. 

As mentioned, considering the scenario of having TFSA & RRSP maxed out - what is the best to keep in your taxable (margin/unregistered) account then? 

I've read (somewhere) that Canadian dividend-paying stocks are eligible for the Canadian dividend tax credit. 
Now I'm reading that Canadian dividend REITs are a bad investment inside a margin account.. Aren't they in the same category as other Canadian dividend stocks? A bit confused here..


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## Eclectic12 (Oct 20, 2010)

As to what is best ... the question is what do you want to achieve?

For example, if you don't want a lot of bookkeeping and to have to report dividend income (or other types) for something that will be kept a long time, then look for a stock that does not pay anything. Then in the most simple case, it's one entry to record the costs when it is bought and one to report the capital gain when it is sold.


If you don't mind reporting eligible dividends each year (which are taxed for the investor at a better rate than non-eligible dividends), then a Canadian stock that pays only eligible dividends (ex. BMO, TRP) is a good choice. You will have to record the costs, report the dividend income each year on your tax return and when sold, report the capital gains.


The issue is where the investment pays a mix of income. REITs do this but so do some MFs and ETFs so before buying an investment for a taxable account, double check from the company web site or by calling the company what the tax treatment is.

As soon as there is a mix of income being paid, then evaluating if the investment is "good" or "bad" takes more work.

As I posted upthread, the REITs I bought recently only have about 10% of their payouts to report as income on my yearly tax return. The other 90% is RoC so that if I make no further purchases, for about three to four years - there is no taxes to report on this part as it is reducing the ACB. This is deferring taxes as it is increasing the capital gains for when I sell. As capital gains is the least taxed, I see this as a "good" investment for me.

I have some extra bookkeeping to keep track of the reduction of the ACB and should the ACB become negative, I will have additional capital gains to report yearly on my tax return but again, it is the least amount of tax to pay.

So for these particular REITs for what I want it for, it is better than a dividend paying stock in my taxable account.


If you look at a different REIT where 80% of the cash paid out is foreign income, then it will be bad compared to holding something else as 80% of the cash payments will be reported as income and taxed heavily.


As for categories - what the investment pays is what determines the category. This is why I dislike the media and others referring to REIT or ETF or MFs as paying "dividends". I prefer the term "cash distributions" because until the investor has checked, the term "dividend" can mislead people into thinking it is 100% dividends when it typically is a mix.

Don't forget as well that the investments that pay a mix also tend to have the mix change year by year.

If you check out the tax treatment of the RioCan REIT distributions at the link that follows, the "capital gains" portion has varied from 0.44% to 30.17% whereas the "Other Income" which is heavily taxed has varied between 31.24% through 61.77%. 

Interestingly, there is 2001 which as a column of "Actual Amount of Dividends". This suggests that between the years of 1998 through 2013, 2001 was the only year that a small portion of the cash paid was an eligible dividend.

http://investor.riocan.com/Investor-Relations/distribution-info/Income-Tax-Information/default.aspx


Cheers

*PS*

Bear in mind that the tax implications, IMO - take a back seat to whether one likes the investment. It is far better to pay higher taxes but be making money compared to paying lower taxes but watch the investment tank.


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## PensiveOwl (Mar 13, 2014)

Thanks, Eclectic12, for detailed description, that's a great answer!


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## Eclectic12 (Oct 20, 2010)

Or if you want a shorter summary ... YMMV depending on variables ... :rolleyes2:


Cheers

*PS*

In a taxable account, generally - income/foreign income/non-eligible dividends are taxed higher than eligible dividends which are taxed higher than capital gains/RoC.

There are exceptions like in Ontario, where one's income is less than $40,120 - eligible dividends will have a rebate of 1.89% in 2013 and 6.86% in 2014, which is better than then 10.03% paid on capital gains and much less than the 20.05% on income.

http://www.taxtips.ca/taxrates/on.htm


As I say (or think I said) ... don't be intimidated, learn what you can and in short time, you will be amazed at what becomes easy to understand and evaluate.


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## warp (Sep 4, 2010)

liquidfinance said:


> REITS are generally a bad investment inside a margin account as the dividends (distributions) are mostley classed as other income and are fully taxed at your marginal rate. They may also contain return of capital which makes for additional book keeping.


Sorry to say, but this is not true..and very poor advice, ( tax-wise at least).

Yes there are more book-keeping duites, and some of the distributions may be "other income", like interest, but tax-wise, reits are perfectly fine in a non-registered account.


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