Canada: RRSPs – Where Can You Invest Your Money?

Last Updated: April 7 2017
Article by Samantha Prasad

The RRSP deadline has come and gone. For those of us that rely on our trusted financial advisor, thoughts of our RRSP will be put on the back shelf until early 2018, when we are scrambling to make our last-minute contributions before the deadline. For those of you that like to be a bit more hands on with their money, deciding how to invest your RRSP money continues to be at the forefront all year long. But deciding which stocks and investments will give you the best bang for your buck with your selfdirected RRSP is not all that you should be focusing on. The number 1 guiding principle should always be to ensure that whichever investment you choose qualifies for RRSP purposes.

Make sure you qualify

Tax rules and regulations specify that if any of your investments are not on CanRev's qualified list, you could face a tax of 50 per cent of the fair market value of such investments at the time they were acquired or became non-qualified - even though they're held within your RRSP. Although this tax is refundable in certain circumstances, it is best to avoid these investments at the first instance. (By the way, similar requirements for qualified investments apply to RESPs and TSFAs.)

Of course, the government does not list each and every qualified investment - they're listed by category. Some types of investments are fairly straight forward – shares of corporations listed on qualifying stock exchanges, for example. For most stock-markettype investments, your broker should be able to tell you whether or not they qualify. But sometimes the rules aren't clear - and that's where you can get into hot water. Much as they would like you to believe otherwise, financial institutions and investment advisors can be wrong about RRSP-qualified investments. If you're investing in anything offbeat, and your financial institution/advisor says it's qualified for RRSPs, my advice is to get this confirmed in writing, just to be safe.

Note on Qualified Investments

The following are some details on qualified investments (although not meant to be exhaustive):

Money and Canadian bank, trust company, or credit union deposits, including GICs. According to CanRev, money denominated in any currency is a qualified investment in an RRSP; however, the value of "money" cannot exceed its stated value as legal tender. This is to prohibit investments in "collectibles" such as rare coins or gold "Maple Leafs".

Canadian government bonds, debentures or similar obligations. This includes bonds, debentures, notes, mortgages or similar obligations of the Government of Canada (or guaranteed by the Government of Canada); the government of a province (or an agent thereof); a municipality in Canada; most Crown corporations; an educational institution or hospital if repayment is made, guaranteed, or secured by a province.

Included are Canada Savings Bonds. Strip bonds or coupons are generally regarded as qualified investments, if the bond itself would qualify.

Precious metals. Investment-grade gold and silver bullion, coins, bars, and certificates on such investments are qualified investments for RRSP purposes. However, these investments must be acquired either from the producer of the investment or from a regulated financial institution.

Shares of companies listed on the Canadian National Stock Exchange; the Toronto Stock Exchange; the Montreal Exchange; and the TSX Venture Exchange (formerly known as The Canadian Venture Exchange, which was the merger of the Vancouver, Alberta and Winnipeg Stock Exchanges). This includes all types of listed preferred or common shares (for warrants and rights, see below). Although over-the-counter shares do not qualify under this category, they may be qualified investments if they meet other criteria.

Limited partnerships. Units in or debt of a limited partnership listed on one of the designated stock exchanges (see list above) are qualified investments.

Foreign shares, if listed on a designated foreign stock exchange which has been designated as such by the minister of finance. Besides major U.S. exchanges (including NASDAQ), a number of major European exchanges are designated, as well as some in the Far East. However, securities quoted on the NASDAQ Overthe-Counter Bulletin Board, and other over-the-counter hares are not considered to be qualified investments.

It appears that you can write an option on these qualifying shares, provided it is "covered". If a plan sells short, CanRev could (among other things) take the position that the RRSP is actively engaged in a business, resulting in certain tax penalties.

Warrants or rights giving the owner a right to acquire a qualified investment. This appears to include Canadian exchange-traded call options provided that the underlying investment is qualified, i.e., a call option for a Canadian-listed company. However, CanRev has indicated that a put option would not qualify. CanRev does not consider a convertible debenture to be a "warrant or right", although such a debenture may, of course, qualify under another category. However, as per amendments in 2005, the issuer of the warrant or right will be required, on an ongoing basis, to deal at arm's length with each person who is an annuitant, a beneficiary, an employer or a subscriber under the plan. Moreover, the underlying property has to be a share or unit of the issuer or a share, unit or debt of another person or partnership, or a warrant to acquire such property, which at the time of the issuance did not deal at arm's length with the issuer. Canadian REITs and income trusts which are structured as mutual fund trusts are qualified RRSP investments. While the main popularity of these trusts stems from higher apparent yields than conventional interest-bearing investments, the tax features can also be quite beneficial. Corporations pay tax on their income and then distribute profits as dividends, which are taxed again in the hands of shareholders (with the dividend tax credit available to non-RRSP investors in Canadian Companies). Income trusts and REITs, on the other hand, are designed so that income is reported and tax is paid by the investor, not the trust, so there is only a single level of tax. In most trusts, there is a significant element of tax shelter on cash distributions due to depreciation or similar deductions claimed by the trust. Effectively, the benefit of this shelter will eventually be "recaptured" when the investor sells the trust units, but usually as a capital gain.

If income trusts and REITS are held by an RRSP, these tax benefits will be lost. However, to the extent that distributions from the trust generate taxable income, there will be no current tax to the RRSP either. While loss of tax benefits may make personal ownership preferable, the degree of shelter relative to the taxable income will vary from fund to fund, and may decrease over time, e.g., as assets in the trust become fully depreciated, leaving more ongoing tax exposure. However, flipping such a fund into an RRSP may result in significant tax exposure on the transfer, especially since the cost base of the fund will decrease as shelter is used.

One innovation is the use of funds that effectively divides income trusts into high-tax components (designed for RRSPs) and low-tax units, designed for individual investment.

Stock market index units or options can be complex. A Canadian "iUnit" (e.g., iUnits S&P/TSX 60 Index Fund, known as an "i60") is a qualifying investment, since it is a "mutual fund trust".

Options – Calls and Puts. CanRev used to consider the writing of "naked call options" or the short sale of a call option as being speculative in nature, thus resulting in the taxation of the RRSP on its taxable income for the year. However, the amendments to the Income Tax Regs in the fall of 2005 made certain derivatives RRSP eligible. These include call options, and put options on stocks, currencies and indexes. Therefore, purchasing calls (instead of stocks), covered call writing and purchasing puts instead of selling stocks short are now allowed in RRSPs.

Mortgages. Generally, a qualifying mortgage must be from people who you deal with at "arm's length" - so you can't hold a mortgage from members of your immediate family or an in-law, for example. And if you and your neighbour give each other a mortgage - i.e., in a "crisscross" arrangement, this could also violate the "arm's length" requirement. The mortgage must not exceed the fair market value of the property (other than as a result of a decline in the market after the mortgage was given). Accordingly, there will be a couple of hurdles to make sure you don't trip over. Happily, there's a second alternative – the RRSP mortgage, which involves having your RRSP make you a loan secured by a mortgage on your home. This can be permissible if the mortgage loan from your RRSP is insured and you pay your RRSP interest at market rates in effect when the RRSP loan is made.

Corporate Debt. Debt obligations issued by a Canadian corporation or trust are qualified investments, assuming that certain conditions are met. The purpose behind the inclusion of corporate debt was to accommodate investments in debt obligations (more commonly known as asset-backed securities) that are backed by cash flows from pools of loans and other receivables.

Debt Obligations. Any debt obligation (e.g. bankers' acceptance, commercial paper, debt of a foreign government) that has an investment grade rating and that is part of a minimum $25 million issuance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Samantha Prasad
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.