TFSA vs Cash Account vs Margin Account: Which One Should You Actually Be Using?

Opening a brokerage account in Canada means choosing between three things with unhelpful names. The wrong choice costs you tax, and in one case it can cost you more than you deposited.

Opening a brokerage account in Canada presents you with a menu that assumes you already know the answer. TFSA. RRSP. FHSA. Cash. Margin. RESP.

This article covers the three that get confused most often — and the one that can genuinely hurt you.

The short version

The TFSA: fill this first

A Tax-Free Savings Account is registered with the federal government, and the name undersells it badly. It is not a savings account. It is a container that can hold stocks, ETFs, bonds, GICs and mutual funds — and everything that happens inside it is tax-free.

Growth: not taxed. Dividends from Canadian companies: not taxed. Withdrawals: not taxed, at any time, for any reason. Withdrawals do not affect income-tested benefits.

The constraint is contribution room, which accumulates annually from the year you turned 18 (or 2009, whichever is later). Unused room carries forward indefinitely. You can find your exact number in CRA My Account — do this before contributing, because the alternative is expensive.

The two mistakes that cost real money:

Overcontributing. The CRA charges 1% per month on the highest excess amount, for every month it stays there. This is not a one-time fee.

Re-contributing a withdrawal in the same year. Withdraw $20,000 in June, and that room comes back — on January 1 of the next year. Put it back in September and you have made a $20,000 overcontribution. This is the single most common TFSA error in Canada.

The one real limitation: you cannot claim losses. A holding that falls 70% inside a TFSA gives you nothing at tax time. The same loss in a cash account could offset gains elsewhere. That is a genuine argument for keeping high-risk speculative positions outside the TFSA — the opposite of most people's instinct.

The cash account: where money goes after registered room runs out

A cash account — properly, a non-registered account — is a plain brokerage account. No limits, no restrictions, no shelter.

You buy with money you deposited. You cannot borrow. And you pay tax as you go.

How it is taxed in Canada:

Capital gains — only when you sell. Only 50% of the gain is included in taxable income, taxed at your marginal rate. Buy at $10,000, sell at $18,000: the $8,000 gain has $4,000 added to your income. At a 40% marginal rate, roughly $1,600 in tax. Unrealised gains are not taxed — you can hold for thirty years and owe nothing until you sell.

Canadian eligible dividends get the gross-up and dividend tax credit treatment, which makes them tax-efficient — in some provinces, at low income levels, the effective rate approaches zero.

Interest and foreign dividends are the worst treated: fully taxable at your marginal rate, with no preferential treatment.

The advantages people overlook: you can claim capital losses against capital gains (including carrying them back three years or forward indefinitely), and you can use tax-loss harvesting. Neither is possible in a TFSA. The cash account is not just a leftover container — it has tools the TFSA does not.

The margin account: read this part carefully

A margin account is a cash account with one addition: the broker lends you money against your holdings so you can buy more.

Same tax treatment as a cash account. Completely different risk profile.

Why leverage is different from ordinary risk. With $10,000 of your own money, a 50% decline leaves you with $5,000. Unpleasant, survivable, and reversible if you hold.

With $10,000 of yours and $10,000 borrowed, you hold $20,000. A 50% decline leaves $10,000 — all of which you owe the broker. Your equity is zero, and you still owe interest.

A further decline puts you below zero. You now owe money you never had.

The margin call is the mechanism that hurts most. If your equity falls below the broker's required maintenance level, they demand a deposit. If you cannot meet it fast enough, the broker sells your positions — their choice of holdings, their timing, at whatever prices exist.

That forced selling happens during market declines, by definition. Which means leverage systematically converts a temporary paper loss — the kind that recovers if you simply hold — into a permanent realised one. It removes your ability to wait, which is the single largest structural advantage an individual investor has.

Legitimate reasons to open one: faster settlement on trade proceeds, the ability to short sell, and access to certain options strategies. Some investors open a margin account and never borrow a dollar. That is fine.

Bad reasons: conviction that a position will go up, wanting bigger gains, or because the broker offered it during onboarding.

The order to fill them

1. TFSA, to the limit. Tax-free growth is the best deal available to a Canadian investor, and it beats nearly everything else on this list.

2. RRSP, if your marginal tax rate is high now and likely lower in retirement. If your income is modest, TFSA generally wins on flexibility.

3. FHSA, if you are saving for a first home. It combines an RRSP-style deduction with TFSA-style tax-free withdrawal for a qualifying purchase.

4. Cash account, for anything beyond registered room. With the useful property that losses become deductible.

Margin is not step five. It is not a container for savings. It is a decision to borrow, and it belongs in a separate conversation about whether leverage suits your situation — for most individual investors, it does not.

One more thing, if you hold US stocks

Which account you use also changes what the IRS takes.

US dividends paid into a TFSA lose 15% to US withholding tax, permanently and unrecoverably. The same dividends in an RRSP holding US-listed securities directly lose nothing. In a cash account the 15% is withheld but recoverable through the foreign tax credit.

If a meaningful part of your portfolio is US dividend payers, that is worth understanding before you decide where they live. We cover it in detail in The 15% Tax on US Dividends Nobody Tells Canadians About.

Frequently asked questions