(Note: the following applies to Canadian audiences only).

I hate to count my chickens before they've hatched, but I've been doing some thinking lately on what account I want to keep my proceeds in: RRSP or non-RRSP.

I've come up with some numbers which I think you may find quite intriguing.

You know how everyone says to keep all of your capital gain-producing investments outside of your RRSP? (...since you pay only half the taxes on any gains). Well...I was a bit surprised when I ran some numbers as follows.

To keep things simple, let's assume that after the buy-out, you have $1 million sitting in your RRSP account.

I was thinking: "...why don't I cash this out now...I will pay the tax now on withdrawal, but then the net proceeds will forever be sitting in a non-registered account (and pay only 50% of the tax rate on any future gains) from this point forwards?"

After working the numbers, here's what I came up with:

Assumes: tax rate of 40% on regular income (i.e. what your RRSP withdrawals would be taxed)

Also, let's assume that, eventually, you will make 8x your money. (This would be akin to doubling your money 3 times in a row).

With the RRSP, it doesn't matter "how" you make 8x your money...regardless if it's a double 3-times in a row, or simple an 8-bagger once, you will end up with the same value in your RRSP: $8million. Now...when you go to cash-out, the government takes 40%, so you are left with 60% of $8 million, being $4.8 million free and clear.

Where it gets interesting is when you, instead, cash-out the RRSP when it has $1 million in it. You will see below that this is never a good strategy (under my assumptions), and actually gets worse the more times you "roll-over" your gains.

So...once you cash-out the $1 million from your RRSP, you will have $600K after-tax to put into your non-registered account.

If we have "1 iteration" (...in other words, your next investment goes up by a factor of 8), you will be left with: $600K x 8 = $4.8 million, less 20% capital gains tax of (50% of 40% tax rate of a gain of $4.2 million) $840K, or $3.96 million. This is $840,000 less (or 17.5%) than the "keep it in the RRSP" scenario. This make sense, since you are only left with 60% of your investment under either scenario, but you also had to pay capital gains tax (once) here.

If we have "2 iterations" in your non-registered account (i.e. you first have a double, followed by a quadruple, or a quadruple followed by a double), it gets worse. Assuming you first double your money, you would have $1.08 million after tax to then invest for a quadruple. This would then become $4.32 million, but, after paying taxes (of $648K) on this gain as well, your net proceeds would be $3.672 million. This is $1.128 million less (23.5%) than the "keep it in the RRSP" scenario.

Finally, if we assume 3 doubles in a row in the non-registered account, I have calculated your net proceeds (after the 3rd double) to be $3.4992 million. This is a whopping $1.3008 million less (27.1%) than under the "keep it in the RRSP" scenario.

WOW! ...so much for "...keep your capital-gains investment outside of your RRSP!"

When you think about it, it makes sense: under either scenario, you have to pay the 40% RRSP withdrawal tax. What's different is that under the non-RRSP scenario, you must also pay capital gains tax as well! Even if this is at a smaller rate, you have to keep paying it. And the more times you "roll-over" your earlier gains, the more times you will pay it. At least under the RRSP, you only pay the 40% tax "once"...you can at least use "full" dollars to roll-forward (...and not "withered-down" dollars that were subject to a 20% capital gains tax [once, twice, or even more...] outside of your RRSP).

Conceptually, the more times you "roll-over" your earlier gains, the better-off you'll be by keeping your funds in your RRSP.

Obviously, it goes without saying that everyone's situation will be different than is described here, but I wanted to share my "back of the napkin" calculations with you. I was quite surprised by the results, once I actually ran the numbers.

Ice