Which type of investments to keep inside RRSP?

Question

Keeping investments inside an RRSP lets them grow tax-free. That makes it more suitable for some investment types.

If a person was to buy a number of different types of investments but only has room to store some of them inside an RRSP. Which should be kept inside, and which make sense to keep outside an RRSP?

For example, a person has only enough room for $20,000 of RRSPs. They already have sufficient emergency funds in a savings account in their TFSA. That person plans to buy all of the following:

• $20,000 TD Canadian Index (Canadian stock market index fund)
• $20,000 TD US Index (U.S. stock market index fund)
• $20,000 TD Canadian Bond Index (Canadian bond index fund)
• $20,000 in a 5-year ING Direct GIC paying 2.5% interest

Which should be kept inside the RRSP and which could be left outside? And why?

Answer 1

• Keep foreign dividend stocks in your RRSP. Dividends on american stocks in a non-registered account will be liable for 15% withholding from the US govt, which will make your taxes more complicated.
• Keep interest paying investments in your RRSP since it's taxed like income.

Everything else can be held inside or outside your registered account depending on your investment or tax needs

Answer 2

Milliondollarjourney.com has a couple of articles on this topic. How Investing Taxes Work part 1 and part 2. The following is a summary of that article.

Capital gains and dividends are taxed at a preferred rate, while interest tax is taxed at your regular rate. Interest is taxed at your marginal rate, but capital gains are taxed at only 50% of your marginal rate. That means that it makes sense to place the interest bearing account inside the RRSP but keep stocks outside.

Additionally, you can claim your losses on your capital appreciating stocks against your gains if they are outside of your RRSP. Hopefully, your stocks will never go down but that's not very realistic.

Dividends from Canadian companies are eligible for a dividend tax credit, but not dividends from foreign companies. [I actually understood that dividends from U.S. companies are treated as a special case]

It's not clear to me from reading the article how much of this applies to mutual funds.

The summary is as follows:

• Capital gains are taxed at 50% of your marginal rate (efficient).
• Keep your capital appreciating stocks/mutual funds outside of your RRSP.
• If you trade often, sell your losers at the end of the year to reduce your profits for the year.
• Take heed of the superficial loss rule.
• Dividends received from Canadian public corporations are tax preferred, so you should consider keeping these dividends outside your RRSP.
• Interest income should be kept inside an RRSP b/c of its high taxation.