DIY Finances left the following comment in response to an earlier debate on RRSPs that elicited a lot of comments:
I saw you mention that you hold your dividend paying stocks in your RRSP. Not that there is anything wrong with that, but dividends are tax-advantaged income. By that I mean you pay less tax on it than if it was another form of income such as interest.
By holding those stocks in your RRSP, you have taken away the tax advantage of dividends as all the income in your RRSP will be taxed at your marginal rate when you collapse the RRSP.
Foreign (including U.S.) dividend-paying equities are not eligible for the dividend tax credit, so the RRSP is a good place to put these investments. I have very little exposure to bonds and if I had bonds, a RRSP will be the logical place to hold them.
I would argue that a RRSP is a good place to put Canadian dividend-paying equities for high-income earners. Let’s say that a person earns more than $72,756, which in Ontario would attract a marginal tax of 27.5% on dividend income and 21.70% on capital gains. Of course, if the dividends or capital gains income were within a RRSP, it is tax sheltered.
Let’s assume that our high-income earner plans to retire and start making withdrawals from their RRSP and have no other income. In Ontario, withdrawals of $36,000 will be taxed at an average of roughly 15%. That’s not bad! A RRSP allows taxes to be deferred from a high-earning period to a low-earning period and in the meantime, it has also provided tax-sheltered growth.
That’s exactly my strategy. I hold dividend-paying equities (both foreign and domestic) inside our RRSPs and I keep low- or no-dividend equities in a taxable portfolio. However, note that low-income earners may be better off not saving in a RRSP as the marginal rate on dividends for incomes of up to $34,000 is only 3%.