Your investments and taxation

Which investments should be in a tax deferral plan such as an RRSP? And which investments should be kept outside of an RRSP? To answer this, you have to know how your investment income is taxed. Income generated by your non-RRSP investments will be taxed differently if it is interest income, dividends or capital gains.

Fixed-income securities (such as term savings and bonds) bear regular interest income, while stock issues generate capital gains and in some cases, dividends. What is a capital gain? A capital gain is the profit realized when stock is sold. For example, if you purchase a stock for $10 and sell it for $20, your capital gain is $10.

Since interest income is more heavily taxed, it may not be appropriate to keep investments which generate interest-income outside of your RRSP. If you hold them in your RRSP however, your returns will be higher, since your income is in a tax deferral plan.

But, since capital gains and dividends are taxed at a lower rate, you may hold such income-bearing investments outside of your RRSP. Your income from these investments won't be greatly diminished.