Tax drag of non-registered account.
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Non-Registered
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Your breakdown
Updates live as you type| Path | Effective growth rate | Value after 25 years |
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Why a shelter beats a taxable account over time
Two investors buy the same fund and earn the same return. One holds it inside a TFSA, RRSP, or FHSA where nothing is taxed along the way. The other holds it in an ordinary brokerage account, where interest, dividends, and realized gains get taxed every year. That annual bite is called tax drag, and it quietly compounds against the taxable investor. This tool runs identical monthly contributions through both paths so you can see the gap in dollars rather than abstract percentages.
What the drag percentage represents
The drag figure is the slice of your annual return lost to tax inside the non registered account. It is not your marginal rate. A broad equity portfolio that mostly grows through unrealized capital gains and eligible Canadian dividends might shed only 0.5 to 1.0 percent a year, because half of capital gains are tax free under the 50 percent inclusion rate and the dividend tax credit softens the rest. A bond heavy or high turnover portfolio throwing off fully taxable interest can lose 1.5 percent or more. The default of 0.7 percent reflects a reasonably tax efficient equity holding. Push it higher for interest income, lower for buy and hold equities.
Twenty five years of $500 a month
Run $500 a month for 25 years at a 7 percent pre tax return. The registered account compounds at the full 7 percent. The non registered account effectively compounds at 6.3 percent once the 0.7 percent drag is removed each year.
You contributed the same $150,000 either way. Sheltering it from annual tax was worth roughly $42,552 in extra ending value, from a drag that looked almost trivial as a yearly percentage.
The order most Canadians should fill accounts
The comparison answers whether to shelter, but a real plan also needs an order. For most people it runs like this: capture any employer matched group RRSP first, because a 50 or 100 percent match dwarfs any tax argument. Then a first time buyer should fund the FHSA, which gives an RRSP style deduction and a TFSA style tax free withdrawal for a home. After that, weigh TFSA against RRSP on your bracket, since the RRSP shines when you expect a lower rate in retirement and the TFSA wins when you expect the same or higher. Non registered space comes last, once the registered room is genuinely full.
Who this helps and a common oversight
This is for the investor who has maxed a TFSA and is deciding whether the next dollar belongs in an RRSP or a taxable account, and for anyone curious how much fee like drag really costs. The oversight I flag most often: people assume a non registered account is fine because their broker shows no annual fee. The tax is the fee. It just arrives on a T3 or T5 slip every spring instead of as a line on a statement. One genuine advantage of the taxable account is worth keeping in view, though. It can harvest capital losses to offset gains and faces no contribution ceiling, so it remains the right home for money once your registered room runs out.
Is a non registered account ever the better choice?
Yes, in specific cases. Once your TFSA, RRSP, and FHSA room is exhausted, the taxable account is the only place left to invest, and it brings real flexibility. There are no withdrawal restrictions, you can claim capital losses against gains, and Canadian eligible dividends receive the dividend tax credit. For very low income years it can even be tax efficient because the bottom federal bracket plus the basic personal amount can shelter modest investment income.
Does the type of income change how badly drag hurts?
Significantly. Interest is fully taxable at your marginal rate, so it suffers the heaviest drag. Capital gains are taxed on only 50 percent of the gain and only when you sell, so a buy and hold equity position can defer tax for years. Eligible Canadian dividends get the dividend tax credit, which lowers their effective rate. Placing your highest taxed assets, typically bonds and foreign income, inside registered accounts and your most tax efficient assets in the taxable account is the core idea behind asset location.