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Which Investments Inside Registered Accounts?

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RRSPs RRIFs and TFSAs   ->   Stocks, Bonds etc. -> Investments inside vs outside the RRSP

Which Investments Should be Held Inside vs Outside Registered Accounts?

If you have investments both inside or outside of your RRSP, RRIF or TFSA,  investments with income taxed at the highest rates should be held inside the registered accounts.  Income earned in a registered account is not taxable while it remains in the account, including interest, dividends, and capital gains, so can grow tax free until the money is withdrawn.  There may be tax withheld from dividends received from some foreign investments, but not from dividends received from US corporations, except in a TFSA.

If you own any of the following investments, they should be held inside your registered account, because 100% of the income is taxed when they are held in non-registered accounts:

bullet cash
bullet t-bills
bullet GICs
bullet commercial paper
bullet bankers acceptances
bullet money market funds
bullet bonds
bullet high dividend-paying foreign stocks

The following investments are suitable for inside or outside of your registered accounts:

bullet foreign stocks paying low or no dividends
bullet low or non-dividend-paying exchange-traded funds (ETFs) holding stocks
bullet Canadian non-dividend paying stocks
bullet Canadian dividend-paying stocks

There is no withholding tax deducted from dividends received on shares of U.S. corporations held in an RRSP, RRIF, and other "retirement accounts" such as LIFs and LRIFs, as per the Tax Treaty between Canada and the U.S., Article XXI paragraph 2(a).  Sometimes, withholding tax (at varying rates, depending on the country) is deducted from dividends paid by foreign non-U.S. corporations, even when they are in a registered account.  These withholding taxes paid by the registered account are not recoverable.

If shares in U.S. or other foreign corporations are held in a non-registered account or a Tax-Free Savings Account (TFSA), Registered Disability Savings Plan (RDSP) or Registered Education Savings Plan (RESP), withholding tax will be deducted from dividends received.  These accounts are not considered "retirement accounts".  When the withholding tax is paid from a non-registered account, it can be partially or fully recovered via the foreign tax credit.  Withholding taxes paid by the TFSA, RDSP or RESP are not recoverable.

If you have investments outside of your registered accounts, your first choices should be

bullet Canadian dividend-paying stocks
bullet ETFs holding Canadian dividend-paying stocks
bullet stocks or ETFs where the majority of the return is in capital gains

Dividends from Canadian corporations and capital gains from any source attract the least tax.  There is a dividend tax credit which reduces tax on Canadian dividends, and only 50% of a capital gain is taxable.  The marginal tax rate for dividends eligible for the enhanced dividend tax credit is almost always lower than the marginal tax rate for capital gains.  For taxpayers in the lower tax brackets in many provinces, receiving eligible dividends will reduce their taxes payable.  For some higher income taxpayers in a few provinces, it may be more beneficial to receive capital gains than eligible dividends.  Every province and territory has different tax rates, and each person's situation differs.  Use our calculators to compare different scenarios, and see our tables of marginal tax rates to find your marginal tax rate on different types of investment income.

See the article on the tax treatment of different investments on the Personal Tax page.

Tax Tip:  Arrange your investments so that the ones which would attract the most tax are held inside your registered accounts.

Revised: September 19, 2017

 

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