Self-Directed RRSP Account
A Self-Directed RRSP account provides the greatest number of investment options for your retirement savings. Unlike a Regular RRSP account, a Self-Directed account enables you to invest your retirement savings in any of the qualifying investments set out in the Canada Revenue Agency’s (CRA) guidelines including the following:
- mutual funds
- segregated mutual funds
- publicly traded shares (common and preferred shares)
- shares of a small business corporation
- shares of a Mortgage Investment Corporation
- shares of eligible corporation
- Guaranteed Investment Certificates (GICs)
- bonds, debentures, notes mortgages guaranteed by the Federal, Provincial, Municipal or Crown corporation
- bonds debentures, notes issued by a corporation whose shares are listed on an organized stock exchange in Canada
- debt obligations of corporations whose shares are listed and trade on an organized stock exchange outside of Canada
- debt obligations of a publicly listed corporation other than mortgage investment corporations
- debt obligations issued by an authorized foreign bank and payable at a branch in Canada of the bank
- debt obligations of a Mutual Fund Trust the units of which trade on an organized stock exchange in Canada
- debt obligations issued by a government of a country other than Canada provided the obligation had, at the time of purchase, an investment grade credit rating from a recognized bond credit rating agency
- Installment Receipts
- cash deposits in any currency is a qualified investment, except where the money is held as a collectible for its collectible value and this value exceeds the stated face value as legal tender
- exchange-traded funds (ETFs)
- annuity contracts
- warrants, rights and options
- royalty units
- partnership units
- depository receipts
Note: According to the CRA, if a registered account acquires a non-qualifying investment, the fair market value of the non-qualifying investment will be added to the taxable income of the annuitant of the RRSP. This treatment does not apply to an investment that was a qualified investment at the time of purchase and subsequently became a non-qualified investment.
Self-Directed RRSP planning options
In addition to a greater selection of investment options, a Self-Directed RRSP account offers additional planning options such as the ones listed below:
- A Self-Directed account also offers greater flexibility when making contributions and withdrawals. For example, with a Self-Directed account you can make contributions and withdrawals in kind. This means that, in addition to cash, you can contribute and withdrawal property from the account.
Example: If you do not have sufficient cash to make your annual RRSP contribution, but you hold a qualified investment (such as a mutual fund, common shares or a bond in a non-registered account), a Self-Directed account enables you to contribute the shares to your RRSP instead of cash. Withdrawals from a Self-Directed RRSP can also be made in kind if the account does not have a sufficient cash balance.
- With a Self-Directed account you can also swap investments between a Self-Directed RRSP account with a non-registered investment account, provided that both accounts are registered to the same owner and the accounts involved are held at the same financial institution. This can be beneficial if, for example, your Self-Directed RRSP has a cash balance and your non-registered investment account holds investments but no cash, then you can have your RRSP account purchase a investment from the non-registered account at the investment’s fair market value. This swap effectively moves cash out of the RRSP account into the non-registered account and the RRSP account receives the investment from the non-registered account. If the swap is priced at the investment’s fair market value, there is no resulting income tax impact, as you are not withdrawing anything from the RRSP account.
- Swap Update: In the 2011 Budget, CRA updated the rules governing Swap transactions between registered and non-registered investment accounts. The new rules do not ban Swap transactions, but rather clarify the rules governing these types of transaction. (See RRSPs – Anti-Avoidance Rules). Swap transactions are still permitted under CRA’s rules, but some financial institutions have decided to stop offering clients this type of transaction reasoning they are protecting their clients from the new CRA rules.
Note: For RRSP Contributions and Swaps in kind there are important income tax considerations that should be understood. See the section RRSP Contributions for more detailed information.
- A Self-Directed RRSP provides a greater variety of investment options and greater control over your investment portfolio and investing success. Due to the increased flexibility offered by Self-Directed RRSP accounts, many individuals choose to hold their mortgages within their RRSP accounts thereby using their retirement savings to finance their home, as mortgages are considered to be qualified investments for Registered plans. This can be a complex purchase and you should first check with your financial institution to see if they will administer a mortgage within your RRSP account. They may accept your mortgage, but charge a set-up fee and an annual mortgage administration fee. An important consideration is that the mortgage held by an RRSP must be insured under the national Housing Act and the interest rate set at a commercial rate.
- Because Self-Directed accounts provide investment flexibility they can be a useful portfolio and income tax planning tool.
Example: If your total investment portfolio asset allocation, Registered, non-registered and corporate investment accounts, is to include investments that distribute interest income, then these investments are best held within your registered account. Because interest income attracts the highest level of income tax, by holding these investments in the registered account you can defer the tax until a future date when the funds are withdrawn. At the time the interest income is withdrawn from the registered account it will be taxed at the same level as it would if earned outside the registered account. In addition, by holding your interest earning investments in your registered account, you have greater room to hold investments within your taxable accounts that attract a lower level of income tax – dividend income, capital gains and losses.
Example: Let’s assume you have a total investment portfolio of $100,000 that is comprised of an RRSP account with $50,000 and a taxable investment account with $50,000. Let’s assume that your Investment Policy Statement (IPS) states that your asset allocation is to be 50% to interest earning GICs and bonds and 50% to dividend-paying stock market investments.
If you simply ignored all income tax considerations and you decide to hold the dividend-paying investments in your RRSP andyour interest paying investments in the taxable account, this will substantially increase your income tax payable and reduce your after-tax investment returns. By simply ignoring the income tax considerations,
- the dividends will accumulate inside your RRSP thereby losing the dividend tax credit
- the dividends will eventually be withdrawn from the RRSPand taxed at your highest marginal income tax rate
- all capital gains will lose their preferential income tax treatment when occurring inside the RRSP
- capital losses will not be eligible for use to reduce present and future capital gains income tax
- the interest income earned within the taxable account will be taxed at your highest marginal tax rate
The best solution would be to use the investment and income tax planning benefits of the registered account by holding the $50,000 of interest earning GICs and bonds within the RRSP, thereby sheltering them from income tax at the highest rate, until they are withdrawn from the account and hold the dividend-paying stock market investments in the taxable account thereby benefiting from the dividend income tax credit and the preferential income tax treatment of capital gains and losses.
Note: Self-Directed RRSP accounts can provide tremendous flexibility in the management and investment performance of your retirement savings.