Keep Your Stocks Outside your RRSPs And Your Bonds And GIC's inside your RRSPs

For business owners and actually for everyone else as well, a tax strategy that is not used very often is to keep your stocks outside your RRSP (if, unfortunately you have an RRSP; more on that later) and to keep your secure investments such as GICs and bonds inside your RRSP.

This is recommended because stocks are taxed at a lower rate than GICs or Bonds. A simple example will clarify this:

The scenarios as follows: An investor has $100,000 in total assets and, after sitting down with a Financial Planner, A suggestion is made to have 50% in Stocks and 50% in Bonds and GICs. 

 

SCENARIO 1

At the beginning of a calendar year, the client keeps $50,000 in GICs or bonds outside RRSP and $50,000 of stocks inside RRSP. The stock goes up by 10% and no dividend and the bonds or GICs earn 2% of interest which comes out to $1,000 of interest. The tax consequence will be:

For the non RRSP: $1000 interest income taxed at 45%= $450. No taxes to be paid for the growth of the stock because it is in an RRSP so the total tax bill is $450.

 

SCENARIO 2 

At the beginning of a calendar year, the client keeps $50,000 of stocks outside the RRSP and $50,000 in GICs or bonds inside RRSP. The stock goes up by 10% and no dividend and the bonds or GICs earn 2% of interest which comes out to $1,000 of interest. The tax consequence will be:

For the non RRSP: no tax to be paid because the stock's growth is not taxed since it was not sold. Even if it was sold the gains it made would be taxed at a much lower tax rate than interest from a GIC or bond. For the RRSP  there is no taxes to be paid since the income of $450 is not taxable inside an RRSP, so the total tax bill is $0.

No brainer right? 

Regarding my 'more on that later" comment that I made earlier concerning RRSPs  for business owners, I have ranted about the fact that business owners should not contribute to an RRSP. For more info on that get in touch and I'll be glad to explain.

extension Investing