Opportunity Cost: The Second Price on Every Canadian Dollar

There is a price printed on every purchase and a second price that is never printed anywhere. The second one is what the money would have done had it gone somewhere else, and it is invisible by design: no statement reports it, no receipt shows it, and nobody is ever billed for it. That invisibility is the whole problem, because the decisions that shape a Canadian household over thirty years are almost never decided by the first price. They are decided by the second, and the second is the one nobody counted. This article makes it visible in the only places this firm is entitled to describe: the registered plans, the insurance contracts, and the protection built around them. The rules quoted are the administering authorities’ own, read the day this was written, and none of them is a projection of anything.

The price that is not on the invoice

Opportunity cost is a plain idea wearing an intimidating name. It is the value of the best thing not chosen. When money is committed to one use, every other use of that money is closed off, and the value of the closed-off option is a real cost even though nobody sends a bill for it.

Most household budgeting ignores it entirely, and not from carelessness. A budget is built from things that can be counted, and opportunity cost cannot be counted, only estimated. So it gets left out of the arithmetic and then quietly decides the outcome anyway.

It shows up in three shapes, and it helps to name them before going any further. There is the cost of using money now rather than later. There is the cost of a door that closes on a date, whether or not anybody walked through it. And there is the cost of a condition that changes while a decision is being postponed, which is the one nobody ever sees coming.

What follows takes each shape and puts it next to a rule a Canadian authority actually publishes, because an abstraction beside a rule is an argument and an abstraction by itself is a mood.

The room that waits, and the room that does not

Start with the friendliest case, because it is the one most people worry about and should not. Unused registered retirement savings plan deduction room is not lost at the end of the year. The Canada Revenue Agency describes the deduction limit as being built from a proportion of the previous year’s earned income together with the unused deduction room at the end of the preceding year, reduced by a pension adjustment where a workplace plan is involved. The room accumulates.

The tax free savings account works the same way. The Agency describes the room as the current calendar year’s dollar limit plus any unused room from previous years. A year without a contribution costs nothing in room.

So where is the cost? It is the years, not the room. A contribution made this year and a contribution made in eight years occupy the same room and do not spend the same amount of time sheltered. The room is patient. Time is not, and time is the only ingredient in this whole subject that cannot be bought later at any price.

Then there is room that genuinely expires, and the education savings grant is the clearest example in the Canadian system. Employment and Social Development Canada is explicit: the grant is paid on contributions to a registered education savings plan, unused grant room accumulates until the end of the year in which the child turns seventeen, and there are further conditions that must have been met in earlier years before a beneficiary can receive the grant in the years they turn sixteen and seventeen. A door on a calendar. The amount is published by the department and is deliberately not printed here, because a figure on a page like this one is right the day it is typed and silently wrong afterwards.

The withdrawal that costs twice

A withdrawal is where the second price stops being theoretical, and the two big registered accounts behave very differently.

Money taken out of a registered retirement savings plan is income in the year it comes out. The Canada Revenue Agency says the institution withholds tax on the withdrawal, at rates that step up as the amount withdrawn rises, and that the withholding is lower in Quebec because provincial tax is withheld separately there. The Agency also warns, in its own words, that the tax withheld may not always be enough to cover the tax owed at the taxpayer’s bracket, so more may be payable when the withdrawal is reported on the return for that year.

That is the visible price. The second price is the room. Deduction room used by a contribution and then emptied by a withdrawal does not return, outside the two statutory programmes the Agency operates for a home purchase and for education, which have their own repayment rules. The money can be earned again and the shelter cannot.

The tax free savings account is gentler and still not free, and the Agency is unusually blunt about it. Taking money out does not immediately create new contribution room; the amount withdrawn is added back as available room only on the first of January of the next calendar year. Its own guidance goes further and warns against re-contributing the same money in the same calendar year unless the room is definitely there, because an over-contribution, even one made in error, is taxable for every month the excess remains. The cost of a withdrawal in March, then, is not tax. It is a shelter that sits idle until January and a penalty waiting for anybody who forgets why.

The cost of a condition that changed while nobody was deciding

The third shape is the one that never appears in a spreadsheet, because the thing that changed was not a price. It was a person.

Insurance is priced on the applicant, not on the market. The Autorite des marches financiers says it in one line in its own consumer guidance: an insurance contract carries a set of questions designed to determine insurability, and the younger and healthier the applicant is, the less the cover costs. Somebody with a history of health problems, the regulator adds, may have to answer more questions and may have to undergo a medical examination.

Read as an opportunity cost that is a startling sentence, because it describes an asset that cannot be repurchased. A household that postpones a decision about protection for three years has not deferred a cost. It has spent three years of the only thing that sets the price, and it has done so whether or not anything happened, and without receiving a statement.

The same logic runs through every guarantee in this field. A contractual guarantee is always priced on the conditions at the moment it is written. That is not a reason to hurry; hurry is how people buy things they do not understand. It is a reason to know that waiting has a price, and to make the decision to wait deliberately rather than by default.

The dollar that waits is not standing still

There is one more cost, and it applies to money that is doing nothing at all.

The Bank of Canada conducts monetary policy against an inflation-control target, and it publishes that target: the two per cent midpoint of a control range. The Bank explains why in terms that have nothing to do with markets: predictable inflation lets Canadians make spending and investment decisions with confidence, encourages longer-term investment, and contributes to job creation and productivity.

A household reading that should notice what it implies about a dollar left in a chequing account. The central bank is not aiming at zero. It is aiming at a low, steady, deliberate erosion, because a low and predictable erosion is more useful to an economy than an unpredictable one. The dollar that waits is therefore never neutral, and the cost of holding it does not appear on the statement either.

None of that is an argument for any product, and this page is not making one. It is an argument for counting, which is a different thing. Money held for a purpose that is coming soon is money doing its job. Money held for no reason anybody can name is paying the second price every month, quietly, in the one currency nobody thinks to measure.

What the second price looks like inside the contracts

Within the field this firm is certified to work in, opportunity cost takes four recognisable forms, and naming them is more useful than any general principle.

The first is the premium paid now against the same protection bought later, which is the insurability point above and needs no repeating. The second is liquidity: capital placed where reaching it takes time, or costs something, or gives up a guarantee, is capital that cannot answer a different question next year. That is a real cost and it is a separate subject, which the reading at the foot of this page takes up.

The third is the shape of a registered wrapper against the thing inside it. A plan is an envelope defined by the Income Tax Act and the contents decide almost everything: the same wrapper holding a term deposit and holding a segregated fund contract behaves differently in tax, in protection and in what happens on death. Choosing the wrapper and never revisiting the contents is a decision made once and paid for annually.

The fourth is coverage that belongs to somebody else. Group insurance is a contract between an employer and an insurer, and a household covered by it is covered on terms it did not negotiate and cannot keep. Treating that cover as the whole answer has an opportunity cost that arrives entirely at once, on the day the employment ends, at whatever age and in whatever health the person happens to be in then.

Counting the second price without pretending to calculate it

Nobody can compute an opportunity cost precisely, because it requires knowing what would have happened, and nobody knows that. So the practical version is not a calculation. It is a set of questions asked at the moment of a decision rather than afterwards.

What does saying yes here close off. What door has a date on it that nobody mentioned. What is being assumed about a condition, such as health or employment, that is not guaranteed to hold. And what is the cost of doing nothing, stated out loud, so that doing nothing is a choice rather than the absence of one.

Those four questions cost an afternoon and they are the whole of the technique. A household that asks them before a decision will not get every decision right. It will, however, stop making the one mistake that is almost universal, which is treating the price on the invoice as the price of the decision.

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The arithmetic behind the waiting is set out in compound interest in Canada and understanding interest. For the wrappers themselves, read the registered accounts and which account first. The liquidity question has its own page in the price of liquidity. Transparency and compensation sets out what this firm is paid and by whom.