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For individuals who have the luxury of being able to save for the future in both registered and non-registered accounts, it might be more tax advantageous to try and keep investments that provide capital gains and/or dividends outside of RRSPs.Getty Images/iStockphoto

The retirement benefits of being able to maximize contributions to registered retirement savings plans (RRSPs) are beyond reproach. They have a proven track record as excellent savings vehicles for Canadians.

But for individuals who have the luxury of being able to save for the future in both registered and non-registered accounts, it might be more tax advantageous to try and keep investments that provide capital gains and/or dividends outside of RRSPs.

"Because no current tax is payable on investment income earned within the RRSP while it continues to be sheltered, you want to put your most expensive investment income in the registered plan, and that is interest income, all of which is subject to tax," says Jason Kingston, a principal with DSK LLP in Kitchener, Ont.

Dan Beyaert, a portfolio manager with IPC Securities Corp. in Calgary, adds, "Another benefit of that is that your fixed-income investments – bonds and GICs that you might put in an RRSP – also tend to be your lower-returning assets. Everything we have to pull out of the RRSP is 100 per cent taxable. So if we put more of those lower returning assets in there, we're also lowering that future tax liability."

In contrast to interest income, only 50 per cent, or one half of a capital gain, is normally subject to tax. For example, if an investor sold a financial instrument that attracted capital gains for $10,000 more than the purchase price, only $5,000 of that gain would be subject to tax at the taxpayer's marginal tax rate. But if that instrument were held inside, say an RRSP where it could be temporarily tax-sheltered, any gain subsequently realized would be treated as regular interest income.

"If you have property such as individual stocks or mutual funds that have increased in value, when you sell them then you would have a capital gain," explains Lim Lum, a chartered professional accountant in Pickering, Ont.

Sales investments such as real estate, exchange-traded funds (ETFs) and real estate investment trusts (REITs) that have increased in value would also qualify as capital gains, he notes.

"A lot of investors have exposure to stocks indirectly. They don't own the stock directly, but own it through, say, a mutual fund or ETF," adds Mr. Beyaert.

There are exceptions to the capital gains rule. Capital gains inside of a tax-free savings account (TFSA) are exempt from tax. There are no tax consequences when funds are withdrawn from a TFSA. A taxpayer's principal residence is also exempt from capital gains tax when that property is sold for a gain, says Mr. Lum.

"Although registered plans such as TFSAs and RRSPs are shielded from capital gains tax, investors should be aware that capital losses in these accounts will not be recognized for tax purposes," he adds.

There are also instances when the gains achieved from buying and selling a property will be deemed by Canada Revenue Agency to be regular income and not a capital gain.

"You've got to be careful. If you're running a business that involves buying and selling properties the government could challenge that and say 'This is no longer a capital gain activity. You're running a proper business here, and rather than including 50 per cent of the gain on this income earning, include all of it,' " warns Mr. Beyaert.

A property that would typically qualify for a capital gain upon sale would be a second property owned that is not a principal residence, such as a cottage, family cabin or a rental property, he adds.

Dividend income also receives special tax treatment. Holders of stock, such as Canadian bank stocks, are typically the main recipients of regular recurring dividends. Some mutual funds and ETFs also provide dividend yields, says Mr. Kingston.

"Dividends are a little more complicated than capital gains. The corporate entity pays the first level of tax, and then the corporation pays the dividend out to the individual. That individual effectively pays a lower rate of tax on the dividend because the tax is trying to integrate what the corporation paid and what the individual paid," he explains.

"For example, in Ontario if you're in the highest tax bracket, you pay 53.53 per cent combined federal and provincial tax on interest income. You would pay 39.34 per cent on eligible dividend income. With only 50 per cent of the gain being taxed, you would pay 26.76 per cent on capital gains," Mr. Kingston says.

In Canada, there are three types of dividends – Canadian eligible dividends, Canadian ineligible dividends, and foreign dividends, each of which are treated differently for tax purposes.

Eligible Canadian dividends are taxed at the lowest rate of the three because they were established to stimulate passive investment in Canadian publicly listed entities. An example of ineligible Canadian dividends would be when an entrepreneur of a private company elects to receive dividends instead of salary from their own business.

"All investment income is not treated equally," says Mr. Beyaert. "Here in Alberta, for example, if you earn between about $46,000 and $92,000, you're taxed at 30.5 per cent on regular income. Capital gains, you cut that in half. Eligible dividends are only taxed at 7.56 per cent, so they're taxed at a very low rate. However, you have to pay the tax on them every year. You don't have that deferral that capital gains have," he says.

"Ineligible dividends are taxed quite a bit higher, at 20.77 per cent in that income bracket," he adds.

Therefore, concentrating on investing capital gains and dividend-generating equities in non-registered accounts provides tax benefits, says Mr. Beyaert.

"It is very much wise to tilt your portfolio [so] that more of your equities are on the non-registered side, as opposed to the RRSP where more of your fixed income investments should be. Also equities tend to produce much higher rates of return than fixed income investments over time. So not only are we getting all of those tax benefits, the majority of growth in the portfolio is taxed at a lower rate," Mr. Beyaert explains.

Foreign dividends get no preferential tax treatment. They are treated as regular income and taxed at 100 per cent for tax purposes.

The calculation of which investments to put in registered and non-registered accounts also depends on the tax bracket people are currently in and expect to be in at retirement.

For example, "when you make [RRSP] withdrawals at retirement, [if] you are in the highest tax rate, the taxes in Ontario could be 53.53 per cent of your withdrawals based on 2017 rates," says Mr. Lum.

Experts stress that each person's tax situation is different and professional advisors are often necessary to help them sort out the optimal tax and investment strategy to suit their portfolio.