Disadvantages of RRSP

Chapter 5 page 10

- If funds are withdrawn from an RRSP, then the plan holder pays income tax on the proceeds as regular income.

- One can not take advantage of the dividend tax credit (discussed later in the chapter) on eligible shares that are part of an RRSP.

- The full amount of capital gains realized within RRSP are taxable. Capital gains that are not part of an RRSP are subject to income tax on only 50% of the gain.

- If the plan holder dies, then all payments out of the RRSP to the plans holder's state are subject to tax as income of the deceased, unless they go to a spouse or, under certain circumstances, a dependant.

- The assets of an RRSP cannot be used as collateral for a loan.

- Only "qualified" investments can be held within an RRSP. Investments such as gold bullion, diamonds and works of art would be disallowed as RRSP investments by the Canada Revenue Agency. Eligible investments include:

. Canada Savings Bonds
. Canadian stocks, bonds and qualified funds shares or units
. Foreign securities my also be acceptable investments

Virtually all mutual funds are "qualified" as RRSP investments. As such, the have satisfied the Canada Revenue Agency requirements that the securities making up the investment portfolio are suitable.

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