The down side is that to pay taxes yearly, half the annual income is used to pay the investment because tax funds would otherwise have been reinvested. Income from dividends or capital gains is taxed at a much lower rate allowing more money for reinvestment. In non-RRSP type investments it is preferred that the investment be structured to ensure most income comes from capital gains and dividends, with the least amount from interest. Borrowed funds for investment purposes are tax deductible. RSP RSP interest income is derived form dividends that can be reinvested.
Capital gains is derived from trading in the market and can also be reinvested.
When investments are cashed out they are taxed in the highest tax bracket. Taxes must be paid on all monies earned. Regardless if its dividend or capital gains income, if invested in an RSP, they are vulnerable to the highest tax rate. Further, it is not possible to write off interest expense on borrowed money. This fits into a special tax procedure therein all interest from rental income is written off.