RRSPs versus Non-Registered Accounts

by Tax Guy - Burlington Accountant on February 7, 2011 Print This Post Print This Post

With the preferred tax treatment of capital gains and dividends, one question that I am often asked is whether it is better to invest inside a tax deferred savings vehicle such as an RRSP or in a non-registered account.  However, the treatment of capital gains should not be your only consideration when deciding whether to invest inside or outside an RRSP.

Registered Retirement Savings Plans

RRSPs are a tax deferred savings plan.  Funds placed into an RRSP account are deducted from your current income and thus are not subject to tax until withdrawn, normally at retirement.  Any investment income earned while the funds remain in the RRSP is not taxed.  However, any withdrawals from the account are included with normal income and subject to the full rate of tax in the year of withdrawal.

The benefit of the RRSP is that you can rebalance your account by selling some securities and buying others without triggering capital gains.  The tax saved on rebalancing can then be fully reinvested.  On the other hand, if funds were held in a non-registered account and sold, there would be a tax bill due on any gains that would eat away at your investment returns over time.  Similarly, this potential for an accrued tax liability may discourage some investors from selling off overweighed securities when it may be warranted.

In addition, RRSPs allow you to receive interest and dividends without immediate tax consequences.

Non-Registered Accounts

If you were to invest your money into equities (common or preferred shares) and subsequently sold the shares at a gain, only 50% of the gain would be included in income for tax purposes.  Thus investment in equities is more tax efficient if held outside an RRSP or other tax deferred account.

Other Considerations

The assumption of an RRSP is that you will be in a lower tax bracket when the funds are ultimately withdrawn.  If however, you expect to be in a higher tax bracket at retirement, taking a deduction now may not make sense.  Other considerations:

  • If you have a mortgage and the interest rate you pay on the mortgage is consistently higher than the rate of return on your RRSP, you are better to pay down your mortgage instead of contributing to an RRSP. Once you have paid off your mortgage then you can then divert the funds you had used for your mortgage payments to a RRSP.
  • If your mortgage rate is less than your investment return in your RRSP, then contribute to your RRSP and use your tax return to pay down your mortgage.

For most Canadians however, it is better to contribute to an RRSP.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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Traciatim February 8, 2011 at 12:52 pm

“For most Canadians however, it is better to contribute to an RRSP.”

Are you sure about that? The median family income of all couple families was $75,880 in 2008, so probably somewhere near 80K in 2010. Split that 58%/42% for the couple and you have individual incomes at 46K and 34K. At this income level wouldn’t it be better to have no mortgage and no income from investments so you get the full CPP/OAS/GIS? So wouldn’t most people be far better to use the TFSA and then mortgage once you max that. If you are in the top tax bracket then do the same but RRSP first, mortgage with refund and extra savings, and then TFSA after that?

Tax Guy February 9, 2011 at 8:20 am

Of course it makes more sense to retire without a mortgage. A retiree would then not require the extra income to pay the mortgage.

Someone earning $34k to $46k per year would be in the 24% and 31% marginal brackets (Ontario) respectively. The contribution to the RRSP should generate some immediate tax savings that could be used as a lump-sum mortgage payment.

The tables you are referring to are median for couples. The average total income for a Canadian family was $89,700 whereas the average for a married elderly couple was $60,400. This suggests that retired married couples can expect their retirement income to be somewhere around 70% of their pre-retirement income. If we use your same split (58/42), then the higher income earners income will go from $52,000 to $35,000 shifting them from the 31% tax bracket to the 20% bracket.

Everyone’s personal financial situation is different, but I still contend that for most (average) Canadians, an RRSP makes perfect sense. However, those on the low end of the income ranges may see no benefit and the TFSA might be a better option.

John February 10, 2011 at 9:33 am

I would like to ask if you had a self-directed RRSP account, are capital gains within that account tax free?

Tax Guy February 10, 2011 at 4:46 pm

All investment income and capital gains are not subject to income tax in Canada. Losses are also not claimable within an RRSP, RRIF or TFSA.

Anthony February 10, 2011 at 9:37 am

Can you invest the money in your RRSP account in equity/security markets? is non-registered accounts a tax deferred account? Thank you sir.

Tax Guy February 10, 2011 at 4:47 pm

Yes and no.

The RRSP and RRIF are tax deferred accounts. Investment income is not taxed in the account. only withdrawals are taxed.

Non-registered accounts are fully taxable.

George February 11, 2011 at 12:54 am

If I have saving in a registered and non-registered RRSP accounts and I require cash for a new business opportunity, which account makes more sense to draw from?

Thank you in advance

Tax Guy February 11, 2011 at 4:41 pm

Not to be too picky, buy there is no such thing as a non-registered RRSP. There are tax-deferred accounts such as RRSP’s, tax-free accounts (TFSA), and non-registered accounts (taxable accounts).

The withdrawals from an RRSP is included in your personal income and taxed at your marginal rate. Withdrawals from non-registered accounts may trigger capital gains or losses, of which only the net capital gains are taxable (and only at ½ the regular tax rate).

Prima facie, it would seem that the non-registered investments or TFSA is a better option. However, if you business is a corporation, you may be able to hold your businesses, shares in the RRSP. This would allow the business to access the cash in the RRSP (you sell existing RRP investments and buy shares of your new corporation…The new corporation then has cash).

eric February 5, 2012 at 2:21 pm

On our income tax forms,RRSP contributions go on Schedule 7 and are deducted from total imcome.
My question is,how do contributions to a non-registered investment account figure in when doing tax returns?If I contribute less to an RRSP and more to a non-registered investment account,will I get hit by paying more taxes now versus being deferred by RRSP contributions?

Tax Guy February 5, 2012 at 2:42 pm

Income on the investments are taxable and are reported as income is realized.

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