Discover what to hold in your Canadian RRSP and what not to hold in it—including gold and gold stocks.

You can put money in a Canadian RRSP (Registered Retirement Savings Plan) tax shelter each year (up to a limit based on your income) and deduct it from your taxable income. You only pay income tax on your investment, and the income it earns, when you make withdrawals from your RRSP.

A properly structured investment portfolio can let you take advantage of the low tax rate on capital gains and dividend income outside of your RRSP while sheltering your higher-taxed interest income in your RRSP.

What to hold in a Canadian RRSP

Generally speaking, it’s best to hold interest-bearing investments inside an RRSP. That’s because, of the three forms of income (interest, dividends and capital gains), interest is the highest taxed. Dividend-paying investments, and those expected to yield capital gains, are best held outside. Some investors only invest RRSP funds in interest-paying securities, because they hate to see tax advantages go to waste. However, this makes less sense when interest rates are low, as they are today.

Stocks come with two key tax advantages. The dividend tax credit applies to dividends from Canadian companies, so they are worth around one-third more, after tax, than the same amount of income from interest. This advantage goes to waste in an RRSP.

For example, an investor in the 50% tax bracket would pay 50% tax on interest income. Dividend income, after factoring in the dividend tax credit, would be taxed at only around 30%. Capital gains would be taxed at just 25%.

So, if you hold dividend-paying stocks in your RRSP tax shelter, you defer taxes, but lose the dividend tax credit. When you withdraw money from your RRSP, you’ll pay taxes on those dividends at the same rate as regular income, regardless of how you earned the money. So it’s best to hold dividend-paying stocks outside your RRSP.

Capital-gains strategies for your Canadian RRSP

As Canadian capital gains tax is lower than the tax on interest and on dividend income, capital gains is a very tax-advantaged form of income. Here are three strategies for structuring investment portfolios to minimize the tax burden.

1. It is usually best to hold any common shares outside of an RRSP (as dividend income and capital gains taxes are taxed lower than interest income), and interest-paying investments in an RRSP.
2. More speculative investments are best held outside of an RRSP. If investors hold them in an RRSP and they drop, investors not only lose money, but they can’t use the capital losses to offset any taxable gains from other investments.
3. Regarding mutual funds outside an RRSP, the main consideration is that mutual funds make annual capital gains distributions even if investors continue to hold the fund units. Investors then pay Canadian capital gains tax on those realized capital gains. So you are best to hold mutual funds in an RRSP and common stocks outside. You won’t realize capital gains on common stocks until you sell.

How to hold gold and gold investments in your Canadian RRSP

1. High-quality gold mining stocks: Whether or not you invest in gold inside or outside your RRSP, we continue to recommend that you limit your gold investing to gold stocks, and avoid buying gold bullion, gold coins (unless you collect them as a hobby) or certificates representing an interest in bullion. That’s because commodity investments such as gold bullion do not generate income. Instead, they come with a continuing cash drain for management, insurance, storage and so on.
2. Hold bullion in your RRSP directly: The 2005 Canadian federal budget made investment-grade gold or silver bullion bars eligible to be held in an RRSP. Bullion bars are eligible for RRSP gold investing if they are produced by a metal refinery that is accredited by the London Bullion Market Association. Accredited metal refineries include the Royal Canadian Mint and Johnson Matthey. You can also buy bullion bars from the Bank of Nova Scotia.
3. Hold gold and silver coins in your RRSP: To be considered eligible for RRSP investment, gold coins must be at least 99.5% pure, and silver coins must be at least 99.9% pure. As well, only legal-tender coins produced by the Royal Canadian Mint are RRSP-eligible.

Do you have a Canadian RRSP? How have you been managing it? Share your experience with us in the comments.