Saving taxes without changing your investments

Most of us would like to reduce the amount of tax that we pay.   One of the easiest ways to minimize tax is to ensure your investments are structured appropriately between your cash account and registered account. People that structure their investments appropriately are often able to save more of their hard earned dollars.   For those individuals who do not have their investments structured appropriately the solution may be as simple as a “Swap.”

Swaps are a technique used to change the structure of a person’s investments between accounts.  It involves exchanging certain investments from a registered account (RRSP/RRIF) for investments in a cash account.  Swaps can often be conducted for a nominal fee.

Fixed Income

Investments which generate interest income such as GICs, term deposits and bonds are often referred to as fixed income.  These types of investments are generally best held within a registered account, such as an RRSP or RRIF.  One of the reasons for this is that all withdrawals from an RRSP are taxed as regular income, similar to interest income, regardless of the type of income generated.  Fixed income within an RRSP provides more certainty for planning purposes.


Investments which generate dividend income and/or capital gains are best held in non-registered accounts (commonly referred to as cash or margin accounts), as opposed to a person’s RRSP or RRIF.  The main reason is to utilize the tax characteristics of dividend income and capital gains.  The tax rates on these two types of income are considerably more favourable than interest income.  Another benefit for owning equities in a cash account is that unrealized capital gains are not taxed until an individual realizes the gain (sells the investment).  Losses on equities held in a cash account may be applied against capital gains.  Growth in your cash account may also allow you to make further contributions to your RRSP at a later stage.

Investment Accounts

In order for an investor to consider a swap they must have both types of investment accounts (cash and registered) with the same investment dealer.  For those individuals who deal with multiple institutions, they may not be able to facilitate a swap.  The cost to complete a swap is usually negligible when compared to the potential tax savings.  Some people may be in a position to sell a few positions and repurchase them in the appropriate accounts.  Others may have mutual funds or other investments which have redemption fees if sold.  Other investments, such as Working Opportunity Funds, may generally not be sold until their maturity date.  Swaps may allow investors to minimize their transaction costs while improving their portfolio’s structure.

Illustration #1

Mr. Smith has an RRSP worth $250,000.  His RRSP contains both growth equities and preferred shares generating dividend income that total approximately $10,000 per year.  Outside the RRSP he has $100,000 earning 4% in a GIC.  Every year Mr. Smith has been reporting $4,000 in interest income on his tax return.  Currently in the 43 per cent tax bracket, he is paying $1,720 in taxes each year relating to this income.

Swap Solution

Mr. Smith could swap $100,000 cash into his RRSP in exchange for $100,000 in equities.  GICs within the RRSP would be able to compound on a tax-deferred basis.  In the cash account, the growth equities would not be taxed until Mr. Smith sold the investments.  When the investments are sold, the growth would only be taxed at one-half of the capital gain.  Dividends received from preferred and common shares would be taxed at a more favourable rate.  In the end, Mr. Smith will pay less in taxes by simply changing the structure.

Illustration #2

Mr. Field has several investments within his RRSP which are not growing at the rate in which he had originally hoped.  He has looked at the costs in which to sell these investments; some have a mandatory holding period while others have redemption fees if sold prior to maturity.  He has incurred some losses within his RRSP that he has not been able to take advantage of.  In addition, he is concerned that his RRSP is not growing at the rate that it needs to in order to reach his retirement objective.  Outside his RRSP he has $50,000 in term deposits which are soon to mature.  Every year he is paying tax on the interest income while seeing very little growth within his RRSP account.

Swap Solution

For a nominal fee Mr. Field may swap the proceeds from the term deposit into his RRSP and have future interest income tax sheltered.  The individual equities which are swapped into his cash account will have a book cost equal to the market value as of the date of the swap.  If Mr. Field should choose to redeem the funds after the swap, the redemption fees may result in generating a capital loss which can be utilized in the cash account.  For those investments that Mr. Field is not able to sell, he can simply hold onto them – if growth appears then it will be taxed as a capital gain.  If the positions do not grow then he will have no taxable income.  If the positions decline in market value, Mr. Field would be able to generate a capital loss that could be applied against future capital gains.

We caution investors to carefully consider the implications of mutual fund swaps later in the calendar year as they may have capital gain and other income distributions.  A swap can be an excellent way to structure investments in the most tax efficient manner.

This article is for information purposes only.  It is recommended that individuals consult with their own tax advisor before acting on any information contained in this article.