Stocks, Bonds etc.  ->  Investing Tax Issues -> Investments in registered or non-registered accounts?

Which Investments Should be Held in an RRSP/RRIF, TFSA, or Non-Registered Account?

From a tax perspective, where is it best to hold investments which generate the following types of income?  In the following analysis, #1 is our first choice, #2 is our second choice, and #3 is our last choice.  If you have all accounts - non-registered, TFSA and RRSP/RRIF, it is best to keep the investments that attract the highest tax rates inside your TFSA or RRSP/RRIF, and those that attract the lowest rates (Canadian dividends and capital gains) in a non-registered account.

• Capital gains
  1. non-registered (tax on 50% of gain) or TFSA (no tax on gain)
  2. RRSP/RRIF (tax on 100% of gain when withdrawn)
• Interest
  1. RRSP/RRIF or TFSA
  2. non-registered
• Return of capital combined with Canadian eligible dividends
  1. non-registered
  2. TFSA or RRSP/RRIF
• Return of capital combined with interest or foreign dividends
  1. TFSA or RRSP/RRIF due to reduced record-keeping requirements
  2. non-registered
• Canadian eligible dividends
  1. non-registered, to take advantage of the dividend tax credit
  2. RRSP/RRIF or TFSA
• Canadian non-eligible dividends
  1. non-registered, to take advantage of the non-eligible dividend tax credit
  2. RRSP/RRIF or TFSA (when eligible for these accounts)
• Dividends from US corporations
  1. RRSP/RRIF because no dividend tax credit, and no withholding tax
  2. non-registered, because all or part of the 15% withholding tax can be recovered through the foreign tax credit
  3. TFSA - there will be withholding tax that cannot be recovered
• Other foreign dividends
  1. RRSP/RRIF, when the dividends are from a country that does not deduct withholding tax from dividends paid into the RRSP/RRIF
  2. non-registered, because all or part of the withholding tax can be recovered through the foreign tax credit
  3. TFSA - there will be withholding tax that cannot be recovered

From a tax perspective, where is it best to hold the following types of investments?

• Bonds - interest-paying and non-interest paying (strip bonds)
  1. RRSP/RRIF or TFSA, because then no special record-keeping is required, and not tax-efficient in a non-registered account
• Treasury bills (T-bills)
  1. RRSP/RRIF or TFSA - not tax efficient in a non-registered account
• Shares in corporations
  • Shares in Canadian corporations
    1. non-registered to get eligible dividend tax credit
    2. RRSP/RRIF or TFSA
  • Shares in US corporations
    1. RRSP/RRIF because no dividend tax credit, and no withholding tax on dividends in the RRSP
    2. non-registered, because all or part of the withholding tax can be recovered through the foreign tax credit
    3. TFSA - there will be 15% withholding tax on dividends, that cannot be recovered
  • Shares in other foreign corporations
    1. RRSP/RRIF, when the dividends are from a country that does not deduct withholding tax from dividends paid into the RRSP/RRIF
    2. non-registered, because all or part of the withholding tax can be recovered through the foreign tax credit
    3. TFSA - there will be withholding tax on dividends, that cannot be recovered
• Call options
  1. RRSP/RRIF or TFSA, because then no special record-keeping is required
  2. non-registered
• Put options
  1. only allowed in non-registered
• Income trusts, mutual funds and exchange-traded funds (ETFs)
  1. RRSP/RRIF or TFSA, if the distributions are mostly other income (usually interest or foreign dividends) from which no withholding tax is deducted.
  2. non-registered, if the distributions are (a) mostly Canadian eligible dividends, capital gains, or return of capital, or (b) from a foreign source from which withholding tax is deducted.  Remember that there may be additional record-keeping needed for these investments.
  3. TFSA, if the distributions are from a foreign source from which withholding tax is deducted.
• Flow-through shares
  1. non-registered account
• Term deposits, guaranteed income certificates
  1. RRSP/RRIF or TFSA

TaxTips.ca Resources

Foreign Tax Credit

Tax treatment of investments

Which investments should be held inside vs outside the RRSP?

Recommend stocks/ETFs

Historical Investment Returns on Stocks, Bonds, T-Bills

 

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