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Capital gain in RRSP vs Non - reg
November 6, 2020
8:05 pm
Jon
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I am wondering will it actually be more beneficial to make an investment that can have massive capital gain outside of RRSP vs inside the RRSP. Consider cap gain tax is 50% of income tax level.

November 6, 2020
8:43 pm
Norman1
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The net tax on the capital gain inside an RRSP can be lower than outside of one. It depends on the amount of the gain and the spread between the tax rate when the RRSP contributions were deducted and the tax rate when the RRSP withdrawals were taxed.

See this previous example.

Another example shows negative net taxation with the RRSP.

November 6, 2020
11:17 pm
Loonie
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Jon said
I am wondering will it actually be more beneficial to make an investment that can have massive capital gain outside of RRSP vs inside the RRSP. Consider cap gain tax is 50% of income tax level.  

I'm not quite sure what you mean by the sentence I have emphasized, but there is no level of income at which the capital gains tax comes anywhere close to 50%. The highest rate for capital gains in Ontario for 2021 is 26.76%, which kicks in when taxable income exceeds $220,000 .

As I recall, Jon, you are only in your 20s. In 40-70 years, there is absolutely no telling what the tax structure will be, let alone the rates. My guess, and it's only a guess, is that by then your government will be substantially more desperate for your money, wherever you may be hoarding it. And so will you, as climate change will have made it much more expensive and difficult to secure the necessities of life.

If you are going to put money into RSPs, my suggestion is to review your situation annually and see if it would be advantageous to cash any of it in in that year and/or not to make a contribution.
But, then, I wouldn't do it. In my view, the government has too much control over these registered plans - how much, where you can put it, how it is taxed, calculation of tax benefit on contribution (could be changed from a deduction to a more limited tax credit like everything else, etc.), amount of mandatory withdrawals, taxation of the whole at marginal rate on remainder at death of last spouse, etc., and whatever else they choose to add to this list. They also have a big say over capital gains outside an RSP, but not as much, and you have the ability to deduct capital losses.

As I hear your question, it is more about whether RSPs are a good place to hold equities than it is about whether RSPs are a good idea in principle. To this, I would say you are better off to keep it outside the RSP. If you want an RSP, put fixed income in to it, but even that is questionable if the income dips below zero.

November 6, 2020
11:35 pm
Jon
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Lonnie, what I was saying is cap gain tax rate is half of income tax rate.

I was intend to ask a hypothetical situation, and not to me personally.

I am not optimistic about the future, but I can talk about it somewhere else.

Lonnie, I do agree bonds and REITs is the best tool to be place inside RRSP, as there are no tax credit or favorable tax rate for them when held in non - reg account.

November 7, 2020
4:56 am
Loonie
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OK. I have nothing further to add.
What do you think?

November 7, 2020
11:07 am
Norman1
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One needs to keep in mind that the taxes on the RRSP and RRIF withdrawals are not the net taxes.

As John Heinzl, David Chilton, and the Department of Finance pointed out, there is zero net taxes in cases where the tax rate when the RRSP contributions were deducted is the same as when the RRSP/RRIF withdrawals are taxed.

The RRSP isn't necessarily worse if one pays more on the withdrawals than one saved when the contributions were deducted. In an earlier case, contributions were deducted at 32½% and the withdrawals are taxed at 40%. It looks like the annuitant got screwed over by the RRSP. The person seems to be paying 40% taxes on the gains and another 40% - 32½% = 7½% on their contributions!

However, the net taxes end up to be zero on the original contributions and 16.05% on the gains. That 16.05% on the gains is about the tax rate of capital gains (½ x 32½%).

November 8, 2020
5:11 am
savemoresaveoften
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Just want to add there are a few articles out there that document the "pain of having a $1MM+ RRSP". Basically it is more complicated than just the tax today vs in the future, but also its impact on bumping up ur income in your retirement years, that affects ur OAS, GIC entitlement potentially.
The government gets its money no matter what, whether via income tax in the latter years, or the form or reduced senior support payment. This is why TFSA may be a better place if one can only afford to tuck away $6k a year only.

It's really a genius move by the government.

November 8, 2020
9:31 am
Norman1
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I treat the 50% GIS clawback and 15% OAS clawback as part of the taxes on the RRSP/RRIF withdrawals. Same with any federal surtaxes on federal income taxes.

For those who will be collecting GIS, RRSP's are toxic and should be avoided. That's because the 50% GIS clawback is like an extra 50% tax on the withdrawals.

I found cases where there is still some advantage getting 32½% from the RRSP deductions and later paying 40% on the withdrawals. But, I didn't run into any where one got 25% from the deductions and paid 25% + 50% = 75% on the withdrawals. If there are any such cases, my feeling is that the gains in the RRSP would have to be huge.

One also needs to follow any changes in capital gains taxation. I've seen the capital gains inclusion go from ½ to 2/3 to ¾ and then back to ½. Before 1972, capital gains inclusion was zero. That's right: There was no Canadian income taxes on capital gains before 1972!

As Loonie mentioned, one needs to decide what to do with RRSP's and then watch for tax changes as the years goes by. One can't make a decision at age 30 and assume the decision will still be the best in the following 35 years.

Don't believe the garbage about RRSP's being bad for capital gains and dividends, like I used to, "because" capital gains are only ½ taxable outside the RRSP and one loses the dividend tax credits for the dividends inside an RRSP.

One of my simulations showed that capital gains were better inside an RRSP years ago. I was certain there was a mistake in my calculations but couldn't find it. Didn't have time to investigate it further at that time.

It wasn't until years later that I read John Heinzl's articles in the Globe & Mail and realized there was no error in my calculations! Capital gains and dividends are better in an RRSP when the tax rate is the same when the contributions are deducted as when the withdrawals are taxed. That's because the RRSP ends up being equivalent to a TFSA when the tax rates are the same.

November 8, 2020
2:27 pm
Rick
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If they had TFSA's when I was in my 20's, my RSP value would be zero today. Unlike RSP's, if I'm not mistaken, TFSA income does not affect your overall income when determining other entitlements in your golden years. Whether or not that changes by the time you need it is another story. All you can do is plan by the current rules and hope you don't get screwed over because the government dug us all in a hole so deep we can't get out of it.

November 8, 2020
2:59 pm
topgun
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Rick said
If they had TFSA's when I was in my 20's, my RSP value would be zero today. Unlike RSP's, if I'm not mistaken, TFSA income does not affect your overall income when determining other entitlements in your golden years. Whether or not that changes by the time you need it is another story. All you can do is plan by the current rules and hope you don't get screwed over because the government dug us all in a hole so deep we can't get out of it.  

I discussed this with a friend. We both agree TFSA should have been around years ago. We cannot change the rules. We have to live with the existing rules. We will be fine. Have fun.

Have a Great Day

November 9, 2020
1:12 am
RetirEd
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It is absolutely true that TFSA earnings or withdrawals do not affect OAS or GIS means testing. That's why they are MUCH better for low-income individuals. The contribution limits are low, though, so high-income persons not expecting GIS or OAS income should consider adding RRSP plans as well - if they can't find other tax shelters.

On the other hand, low-income folks rarely have money to stash in registered plans.

From a tax policy standpoint, there's little reason to justify forgoing all that tax revenue. On the other hand, it slightly lessens the pressure on real-estate and housing prices, which have an unjustified capital-gains tax exemption that is basically a bonus to mostly relatively wealthy Canadians. In BC, we have the Homeowner's grant, too, which just pushes up real-estate vales and housing prices, too! For decades, provincial governments indicated they want to phase them out, but the political cost is unbearable because people losing an unfair benefit get pretty het up about it.

So the TFSA slightly redresses the penalty in non-principal-residence tax advantage.

The capital-gains exemption on principal residence was intended to help people buy places to live, which only works now in small towns where there's no speculative housing market. In Canada's cities - where the largest (and increasing) proportion of our population lives - it's just another pressure to exploit those who can't afford to jump on the realty-go-round. Who benefits? Banks and other mortgage lenders, who happily lend ever-larger amounts to (and collect ever-larger interest on) people who expect to profit from big, tax-free capital gains.

When interest rates are near zero, as they are now, the feeding frenzy accelerates. And sooner or later, rates WILL go up.

Biggest losers? Those needing a place to live.
RetirEd

RetirEd

November 9, 2020
1:48 pm
savemoresaveoften
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Norman1 said
I treat the 50% GIS clawback and 15% OAS clawback as part of the taxes on the RRSP/RRIF withdrawals. Same with any federal surtaxes on federal income taxes.

For those who will be collecting GIS, RRSP's are toxic and should be avoided. That's because the 50% GIS clawback is like an extra 50% tax on the withdrawals.

I found cases where there is still some advantage getting 32½% from the RRSP deductions and later paying 40% on the withdrawals. But, I didn't run into any where one got 25% from the deductions and paid 25% + 50% = 75% on the withdrawals. If there are any such cases, my feeling is that the gains in the RRSP would have to be huge.

One also needs to follow any changes in capital gains taxation. I've seen the capital gains inclusion go from ½ to 2/3 to ¾ and then back to ½. Before 1972, capital gains inclusion was zero. That's right: There was no Canadian income taxes on capital gains before 1972!

As Loonie mentioned, one needs to decide what to do with RRSP's and then watch for tax changes as the years goes by. One can't make a decision at age 30 and assume the decision will still be the best in the following 35 years.

Don't believe the garbage about RRSP's being bad for capital gains and dividends, like I used to, "because" capital gains are only ½ taxable outside the RRSP and one loses the dividend tax credits for the dividends inside an RRSP.

One of my simulations showed that capital gains were better inside an RRSP years ago. I was certain there was a mistake in my calculations but couldn't find it. Didn't have time to investigate it further at that time.

It wasn't until years later that I read John Heinzl's articles in the Globe & Mail and realized there was no error in my calculations! Capital gains and dividends are better in an RRSP when the tax rate is the same when the contributions are deducted as when the withdrawals are taxed. That's because the RRSP ends up being equivalent to a TFSA when the tax rates are the same.  

Most including myself forgot the part that investing $1 outside RRSP is like investing $1.XX inside RRSP, where the XX is dependent on what your marginal tax rate for that $1 would have been when it was earned.

But if that $1 becomes $0 as the investment flops, then outside RRSP gives u the capital loss benefit potentially.

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