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rrsp help desk

The question

I have stocks within my RRSP that pay dividends. Can I include the dividends that I receive as part of my RRSP contribution for the year? Or are they treated differently? Also, if I purchase U.S. stocks that pay dividends (within and outside of my RRSP), how are the dividends treated? Is it best to have them in my RRSP or out of my RRSP?

Diane Anderson

The answer

Hi Diane,

To answer your first question – dividend income from within an RRSP is not considered part of your RRSP contribution. In order to be considered an RRSP contribution, new cash or securities must be deposited into your account.

Your next question raises a very important topic about how to invest in an RRSP as opposed to a non-registered account.

The short answer to your question is that U.S. stocks that pay dividends are essentially taxed as regular income. This means that the dividend would be fully taxed. As a result, you would prefer to hold the U.S. dividend stock in your RRSP rather than in a taxable account.

To take the question further, the general rule would be that you want all investments that pay interest such as GICs or bonds or U.S. dividends to be held in a tax-sheltered account, if possible. The reason is that one dollar of income in this category would otherwise be fully taxed. Conversely, stocks that pay no dividends or that pay Canadian dividends should be held in a taxable non-registered account if you have meaningful taxable assets. The idea here is that if you have both registered accounts (RRSP or RRIF) and taxable accounts, then you should try to hold fully taxed investments in a tax-sheltered account; those investments that would be taxed at lower rates should be held in a taxable account.

Another strategy is that if you own a more speculative small-cap stock, you generally want to hold it in a taxable account, because there is a reasonable possibility that this investment will suffer a capital loss – meaning you would have sold the stock at a loss. That loss provides no tax benefit if it is held in a tax-sheltered account. However, if it is held in a taxable account, then the capital loss can be used against other taxable capital gains that you might have (this year or from the past three years), or carried forward indefinitely until you do have capital gains. While a large capital gain is sheltered in an RRSP or RRIF, the ability to use the capital loss and the fact that capital gains are taxed at a much lower rate would suggest that these types of stocks should be held in taxable accounts.

Globe Investor columnist Ted Rechtshaffen will choose one reader question each week and answer it online. Read last week's answer on spousal RRSPs here.

Mr. Rechtshaffen is the president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He has an MBA from the Schulich School of Business and is a certified financial planner.

For tips, stories, videos and live chats ahead of this year's RRSP contribution deadline, check the Globe Investor 2012 RRSP season section for daily updates.