Mar 20, 2020
Margin Account VS Cash Account
Hey guys, today we're talking about the difference between a margin account and a cash account and I mean who doesn't like margins and who doesn't like cash? Am I right? I'm Rob Tétrault from robtetrault.com, Head of the Tétrault Wealth Advisory Group here at Canaccord Genuity Wealth Management.
Types Of Accounts
Ok, a cash account and the margin account. First of all, these are non-registered accounts, this is different than obviously a registered account. What is a registered account? That would be an RRSP, a RIF, a LIRA. I should probably define those acronyms. A RRSP Registered Retirement Savings Plan. The RIF is the Registered Income Fund.
The LIRA is the Locked-In Retirement Account. These are all pension type accounts where you've invested over time, year by year and you will be drawing down on this in retirement. Your LIF is also one. And then you also have the TFSA, which is the Tax Free Savings Account. Those are all traditionally defined as registered accounts. There are typically tax consequences involved with either drawing down on them or contributing to them, etc.
The cash and the margin account. These are non-registered accounts. So the main difference for you, first of all, is there's no tax benefit whatsoever to contribute to that account. There's also no tax consequences when you're pulling the money out of the account. Now that doesn't mean that when you're pulling money out of the account, you're not going to have to sell an asset class, which would generate a potential capital gain.
Taxable Consequences
The key difference is taxable accounts, so the margin in the cash account or taxable accounts, meaning that the income that is being generated in those accounts is taxable income. If you're getting interest income that's taxed at the highest tax bracket, it gets added to your T4 income. If you're getting dividend income from a Canadian eligible dividend, you get a dividend tax credit. If you're getting a capital gain, well then you're paying tax on half of the amount of the capital gain. And finally, if you're getting return on capital, you're not being taxed in the year it's received. You're deferring that capital for the future. Those are generally the four types of taxable consequences that you receive in your two accounts.
Cash Accounts
Now, what is the actual difference between a margin and a cash account? in a cash account, the key factor is that you must at all times have enough cash in the account to meet the requirements of the stocks and securities you are purchasing. In other words, you cannot borrow any amount of money to purchase securities in your cash account.
If you have $100,000 in your cash account, you can purchase $100,000 of securities, not a dollar more. So there is no lending that's going on. And if ever you were to accidentally buy more than a hundred thousand dollars, stocks will settle a few days after you buy them. Stocks or bonds will settle a few days after you actually purchase them in the market. And you would immediately be asked to either deposit more money depending on the institution, or they would actually sell those assets.