Skip to content

Media Room

Feature Stories

Media Room

Is an RSP swap right for you?

Like many Canadians, you likely have most if not all of your retirement savings inside your Retirement Savings Plan (RSP). However, different types of investment returns are taxed differently. You could be missing an opportunity to improve your post-tax returns by holding the right investments inside and outside your RSP.

In other words, it might be time for an RSP “swap”.

There are two types of investments that should be considered for a swap. From a tax perspective, it can benefit you to keep investments that generate capital gains or dividends from Canadian corporations (“Capital A”) outside your RSP, and to keep fully taxable interest-generating investments (“Interest B”) inside it.

“This strategy is particularly beneficial to those who maximize their RSP contribution every year and who also regularly invest outside a retirement plan,” says Patricia Lovett-Reid, Senior Vice President, TD Waterhouse.

Let’s assume you currently hold mostly “Capital A” investments inside your RSP and mostly “Interest B” investments outside it. In other words, you are not making the most of tax efficiency – and you are not alone. This is what a great many Canadian investment portfolios look like.

Help is on the way. Current tax laws allow you to swap a “Capital A” investment with an “Interest B” investment, as long as three conditions are met. First, you need to have a self-directed RSP. Second, the “Capital A” asset and “Interest B” asset you plan to swap must be equal in value. And third, the “Interest B” that is headed for your registered plan has to be RSP-eligible. Under these conditions, the swap won’t count as an RSP contribution and won’t affect your RSP contribution room. And the asset moved from your RSP into the non-registered portfolio (“Capital A” in our example) won’t be taxed.

After the swap, “Interest B” will grow tax-free inside your RSP and “Capital A” will be subject to tax from the day of the transfer. If “Capital A” generates capital gains from that point on, half the gain must be included in income in the year that the investment is sold.

However, gains made by “Capital A” up to the date of transfer will remain in the registered plan and will not be subject to tax until the funds are withdrawn from the plan.

When you swap investments, fees should be minimal, as most transactions aren’t considered commissionable trades. Instead, the asset location is simply changed from registered to non-registered — or the other way around.

“There may still be tax consequences as a result of an asset swap, especially if the value of the asset being swapped into your RSP has grown considerably over its ‘book value’, which is the asset’s price when you purchased it,” continues Lovett-Reid. “That’s why I urge anyone thinking of doing a swap to talk to a financial advisor first .Then you can be sure that you will be making the best move possible.”