# Capital Gains Tax upon sale within RRSP?



## Justin1980 (Feb 23, 2013)

Just a relatively quick question:

Selling stocks obviously triggers capitals gains tax...
Now, if stocks are held in an RRSP, and i buy some shares, and sell them later - but keep all those funds within the RRSP, are capital gains triggered immediately? Or upon the funds eventual removal from the RRSP?

Thank you in advance friends. 

Justin


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## Jungle (Feb 17, 2010)

Upon removal from RSP. Amount withdrawn is added to your regular income. Try to withdraw when in a lower tax rate, if you can.


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## Eclectic12 (Oct 20, 2010)

^^^

+1 .... to be clear, since the withdrawal amount is added to your regular income - the impact is that there is no difference between how the money was made (ex. interest, capital gains, dividends).

Think of the RRSP as tax deferral - as long as there isn't a withdrawal, there's no taxes due from either yearly amounts (ex. dividends or interest) or when selling a stock to shift to another investment (ex. capital gains).


Cheers


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## MoneyGal (Apr 24, 2009)

and to be extra super duper clear, in case this isn't obvious from the previous posts, there is in fact no "capital gains" (or capital gains tax) payable on funds withdrawn from an RRSP, even if the source of the gains *inside* the RRSP is capital gains. 

That is, all withdrawals from an RRSP are taxed as "ordinary income." You don't get to say, "these withdrawn dollars were grown through capital gains, therefore I am going to be subject to the capital gains tax regime (i.e., only half of the gain included in taxable income) upon withdrawal." 

Instead, the funds contributed to an RRSP are _removed from taxable income_ at contribution. 

Therefore, the funds withdrawn from an RRSP are _added to taxable income_ (i.e., "ordinary income") upon withdrawal.


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## My Own Advisor (Sep 24, 2012)

I always like to think of the RRSP as a tax-deferred acount for the reasons folks have mentioned above; inside the account, gains sheltered. Once you start withdrawing the funds, taxation as MG puts it as "ordinary income" begins.

I would like to see the name of the account changed: Tax Deferred Retirement Account (TDRA).


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## MoneyGal (Apr 24, 2009)

Interesting thought on the name change. What would you rather do, "save for retirement" or "defer tax on income"? 

I suspect the "defer tax" might actually gain more traction than "save money"


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## fraser (May 15, 2010)

This is EXACTLY why you need to think about an overall investment strategy. We have used RSP for income investments.

You will probably end up paying more tax if you realize significant capital gains inside the RSP. In Alberta, the top marginal rate is 39 percent. If you pull money out of an RSP, the capital gains portion is NOT separated and you pay tax on any gain at full whack, ie 39 percent. If you sold that same equity in your cash account you would only be taxed on half of the gain, ie the capital gain would be subject to an effective tax rate of 18.5 percent. This is a substantial delta.

This is something that your typical bank mutual fund salesperson will never mention to you. They are far too busy trying to convince you to move to one of their high end MER funds....plus many of them simply do not have a grasp on tax efficient investing and how to structure a portfolio that includes RSP and other vehicles. At least this was our experience.


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## My Own Advisor (Sep 24, 2012)

I have a blogpost planned about some account name changes MG, as part of financial literacy month (November), this is one of them.

Yes, the "defer tax" would likely have more traction or uptake with folks...just guessing of course. I don't think investors consider the tax implications about their choices, use of accounts, etc. nearly enough. Myself included. I'm trying to educate myself more and more over time. I'm far from perfect, but I'm willing to learn.


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## MoneyGal (Apr 24, 2009)

Well, it's all about what "nudge" you are providing for investors/ordinary Canadians. 

The current name is intended to communicate, "here is a vehicle that will help you save for retirement. As a bonus, it will also help you save on tax today." 

Renaming it to "tax-deferred savings account" would communicate, "Here is a vehicle that will help you save tax today. As a bonus, it will also give you a pile of cash you can use in retirement." 

You might want to listen to the panel on behavioural investing from the OSC's "Dialogue Day" that took place last week - http://www.osc.gov.on.ca/en/NewsEvents_osc-dialogue-2013_index.htm


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## Eclectic12 (Oct 20, 2010)

MoneyGal said:


> Interesting thought on the name change. What would you rather do, "save for retirement" or "defer tax on income"?
> 
> I suspect the "defer tax" might actually gain more traction than "save money"


Isn't most of the traction today from the marketing of "get a tax refund"? 
It glosses over the other two and has lead to some bypassing the TFSA as "there's no refund - so it's not the best choice for me" type thinking.


Cheers


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## MoneyGal (Apr 24, 2009)

Yes - but the bank marketing is designed to get people to take a specific action NOW and is not connected to the name of the account. 

I was thinking more longer-term, i.e. what is the overall appeal/benefit of an RRSP.


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## fraser (May 15, 2010)

The tax planning can even go further than just this. The bulk of the money in my RSP was depositied while we lived in BC...we avoided a tax rate of 52 percent. Same for a tax shelter that we bought..we avoided taxes at a marginal rate of 52 percent. 

Now that we are in Alberta, the tax paid when we withdraw funds is a much lower 39 percent. This represents a significant difference.


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## MoreMiles (Apr 20, 2011)

Does that work? So everyone will retire in Alberta to save on that tax differential.

Banff... here I come.


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## fraser (May 15, 2010)

Yes. Tax is based on province where you reside.

Being an Alberta resident saved us a good amount of money when I was exercising company stock options (essentially a very similar tax treatment as capital gains). You only see that tax differential at higher income levels because Alberta has a flat provincial income tax of 10 percent.


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## andrewf (Mar 1, 2010)

This is part of the reason why some suggest provinces rely more on consumption taxes like GST/HST and less on income taxes. Or at least, the provincial income tax rates could be pretty consistent.


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## MoneyGal (Apr 24, 2009)

BANFF = Be Aware, Nothing's For Free

(But I love Banff and have been there 2x so far this year - winter and summer)


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## My Own Advisor (Sep 24, 2012)

@MG,

You don't think Tax Deferred Retirement speaks to the longer-term and real benefit of the RRSP?


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