In this article, “Dividend tax breaks make blue-chips a wise buy” in the Toronto Star (linked from the Canadian Capitalist), Ellen Roseman says:
Buying blue-chip Canadian stocks can be a good strategy for do-it-yourself investors. I’m talking about the big banks, insurers, pipelines, telephone companies, gas and electrical utilities that pay dividends of 2 per cent to 4 per cent a year.
This is similar to what you earn on a high-interest savings account or fixed-term deposit. But if you hold these stocks outside of a registered plan, your income is worth more because of the tax breaks on dividends.
It almost sounds as if she is saying that, given the choice, you should hold dividend investments outside of a registered plan (RRSP) rather than inside. I think what she is saying is that if we just compare dividend stocks with interest-bearing investments such as term deposits and high-interest savings accounts, if they are both held outside of an RRSP, less tax will be paid on the dividends than on the interest from the other investments. However, dividend stocks should never be held outside an RRSP if one still has contribution room inside one’s RRSP. Putting dividend stocks inside an RRSP eliminates the taxes on the dividends. Instead, pre-income-tax dollars are invested inside the RRSP where it can grow tax free. The money is then taxed as income when the money is withdrawn later during retirement (presumably at a lower income tax rate). The double taxation of dividends/interest is avoided.
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