) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.: Before tax-free savings accounts came along, I invested in stock index funds in my registered retirement savings plan. Now, I realize that these investments do not benefit from favourable tax treatment available for dividends and capital gains in a non-registered account.
Let’s look at an example that compares the returns of two investors, Harry and Sally. Harry chooses to invest in a non-registered account to get the supposed tax savings on dividends and capital gains. Sally follows the conventional wisdom to invest in her RRSP. We’ll assume both investors start with $10,000 before tax and have a constant marginal tax rate of 40 per cent on regular income and 20 per cent for both dividends and capital gains.
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 . When it’s time to cash in her shares and withdraw the money, Sally will pay income tax of about $12,667 , leaving her with $19,000 after tax . That’s $2,600 more than Harry.