It’s a myth that you’re better off holding stocks in a non-registered account to benefit from the favourable tax treatment of dividends and capital gains
The key thing to understand is that the dividend tax credit and 50-per-cent inclusion rate for capital gains don’t eliminate tax. They just reduce it relative to the tax rate on interest and other income.I can hear people objecting: “But you pay tax when you withdraw money from your RRSP!” That’s true. But what critics of RRSPs forget is that RRSP contributions are made with pre-tax dollars.
When Harry sells his shares, he’ll owe capital gains tax of $2,400 . He will have also paid $200 of tax on his dividends . That adds up $2,600 of tax on his investment earnings, leaving Harry with a net $16,400 after tax . If that number sounds familiar, it’s because Harry paid exactly $2,600 of tax on his capital gains and dividends in his non-registered account, whereas Sally paid no taxes on her investment earnings. As this example illustrates, far from saving tax, non-registered accounts increase your taxes relative to investing in an RRSP.
Currency conversions are your enemy as an investor. Banks typically take a profit of 1 to 2 per cent each time they buy or sell, so converting U.S. dollars into Canadian dollars, and then back again, would be a double whammy. The good news is that, depending on your broker, you may be able to avoid the hassle and expense of currency switching.
Note that the value of your U.S. dollar contribution, expressed in Canadian dollars, cannot exceed your TFSA contribution room. Overcontributions to TFSAs are subject to a penalty tax of 1 per cent per month on the excess amount.
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