In addition, interest on money borrowed to invest will be fully tax deductible. Conversely, interest on money borrowed to fund RRSP contributions is non-deductible. Most people, however, have a diversified portfolio of investments, which includes mutual funds, bonds or GICs that generate interest or foreign income. These types of investments are well-suited to RRSPs and RRIFs because the income they generate will be completely free of tax until withdrawn. From a tax perspective, this is not necessarily a bad thing, despite the inability to access the low capital gains tax rate on eventual disposition.
Most investors buy and sell stocks in their portfolio on a regular basis.
If this is done outside an RRSP, the capital gains triggered will face immediate taxation, albeit at a low rate relative to regular income. If these same stocks were held in an RRSP, no tax would be immediately payable on the capital gains, meaning 100 per cent of the proceeds can be reinvested. Mutual funds also have tax consequences, even if they are not sold. Any income or capital gains the mutual fund itself has generated is generally distributed to the mutual fund holder in the form of additional units. These distributions are taxable when paid despite the fact the unit-holder has not received the cash.