Long gone are the days when saving for retirement meant putting your RRSP money into interest-paying bank deposits and Canada Savings Bonds, or choosing from a menu of mainstream mutual funds. Today, as the financial product shelf expands, the options for self-directed RRSP investors are more diverse than ever.
Flexibility is undoubtedly good for investors. However, the growing number of RRSP-eligible products, combined with changing tax rules and inconsistent policies among financial institutions, make it challenging to know exactly what you may or may not hold in your plan. What's more, the extent to which you can take advantage of the more accommodating tax rules may ultimately depend on what your RRSP provider will allow.
Unfortunately, a definitive list of what qualifies for an RRSP is not all that easy to come by. Although Canada Revenue Agency's Interpretation Bulletin IT-320R3 lays out the Income Tax Act's definitions of qualified investments for RRSPs, RRIFs and RESPs, the discussion is highly technical. It's designed for use by CRA staff and by tax professionals. The document also does not address changes that have happened since its publication in 2002.
What it comes down to is that most widely held investments such as mutual funds, exchange-traded funds, segregated funds, cash deposits, guaranteed investment certificates and government bonds are allowed, as are stocks and bonds of corporations listed on the major Canadian stock exchanges and eligible foreign exchanges.
Whether an investment qualifies for an RRSP is generally tied to a 2008 change in regulations concerning eligible stock exchanges. Following through on an amendment announced in the 2007 federal budget, the federal Finance Department released new guidelines for three categories of stock exchanges: designated stock exchanges, recognized stock exchanges and stock exchanges.
A stock is RRSP-eligible only if it's listed on a designated stock exchange. To earn that status, a stock exchange -- foreign or Canadian -- must successfully meet our federal government's criteria for governance, regulations and transparency. Corporate bonds issued by companies listed on those exchanges also qualify to be held in the RRSPs of Canadians.
However, securities that trade on over-the-counter markets, even if those markets are overseen by a designated exchange, do not qualify for RRSPs. The list of 38 designated stock exchanges (see table) includes all former "prescribed" stock exchanges -- the term previously used to identify RRSP-qualifying stock markets.
|Permitted holdings for RRSPs and TFSAs are not identical
Investments that qualify to be held in your RRSP are generally also eligible for registered education savings plans (RESPs), registered retirement income funds (RRIFs) and the recently introduced registered disability savings plans, as well as for tax-free savings accounts (TFSAs).
There are, however, some important differences among these types of plans. For example, you may not hold your mortgage in your TFSA -- something that is allowed, with conditions, in your RRSP.
As well, the penalties for acquiring or holding prohibited investments may also differ. If you purchase an unqualified investment in your RRSP, for instance, you'll be charged a tax each month of 1% of its market value when it was acquired in the plan. Meanwhile, holding an unqualified investment in an RESP could lead the plan to lose its registered status and be revoked altogether.
In addition to listed securities, many more specialized investments are RRSP-eligible. They include shares of Canadian private companies (with restrictions), mortgage-backed securities and even your own mortgage, provided it's not in arrears and you meet certain other conditions.
One recently added specialty asset is gold and silver in the form of coins, bullions, wafers or certificates. Introduced in the 2005 federal budget, the amendment comes with strict conditions.
The rules for gold, for example, dictate that it must be 99.5% pure, be produced by an accredited refinery, and purchased directly from the refiner or producer or a government-regulated financial institution. As well, gold and silver coins must be produced by the Royal Canadian Mint and their market value is based on the metal content, not their worth as collectibles.
While most brokers may well accommodate investors who want to hold gold certificates, on a practical level it can be difficult to find a financial institution to facilitate holdings of investment-grade gold bars and bullions in RRSPs.
Also in 2005, Ottawa changed the rules regarding derivatives in RRSPs. Previously, RRSP investors could buy and sell call options only as long as the underlying security was RRSP-eligible. In addition, when selling call options the plan holder must have the underlying security in the RRSP.
Now, investors have the ability to also buy put options in their RRSPs, again on condition that the underlying security is itself a qualified investment. Put options give the holder the right to sell the underlying security at a specified price. Since short-selling is not allowed in RRSPs, purchasing puts can be an effective strategy if you anticipate and want to take advantage of a drop in a stock's price. Puts can also be bought as insurance against losses for stocks held in an RRSP.
However, despite being permitted by tax laws, the use of derivatives, including options, is restricted by most brokerage firms. It's standard for brokers to require a certain level of investment knowledge for derivatives trading, so you'll need the approval of your RRSP provider in order to employ any strategies involving options in your plan.
Another permitted strategy in RRSPs, which probably affects a great number of investors, is the ability to hold foreign currencies. According to the CRA, money denominated in any currency is a qualified investment in an RRSP. (Exceptions are collectibles and when the market value of the money is greater than its value as legal tender.) Furthermore, in March 2006, securities regulators in Canada amended its bylaws and regulations to assert that foreign cash balances are permitted in RRSPs.
In practice, however, most RRSP investors remain unable to hold foreign currencies, not even U.S. dollars. Citing the inability of their internal systems to maintain foreign currencies in registered accounts, nearly all brokerage firms routinely convert foreign-currency cash balances to Canadian dollars. This includes any proceeds from the sale of securities denominated in foreign currencies.
Designated stock exchanges