Capital gains earned inside a Registered Retirement Savings Plan are not taxed while the money stays in the account, but the RRSP capital gains tax picture flips at withdrawal: every dollar you pull out is taxed as ordinary income at your full marginal rate, whether that dollar started as a contribution, a dividend, or a capital gain. You can buy and sell freely inside the plan, take profits, and reinvest them without owing anything to the Canada Revenue Agency in the meantime. What you give up in exchange is the preferential 50% inclusion rate that applies to capital gains outside the plan.
How Capital Gains Are Sheltered Inside the Plan
Section 146 of the Income Tax Act creates a tax-deferred bubble around everything inside your RRSP.1Canada Revenue Agency. IC72-22R10 Registered Retirement Savings Plans Interest, dividends, and capital gains all accumulate without triggering any tax. Sell a stock for a $10,000 profit inside your RRSP and no tax is due. Reinvest that profit and earn another $5,000 on top, still nothing. The CRA treats the RRSP as a single container and only cares about what leaves it.
In a non-registered account, selling investments generates T3 or T5 slips and a potential tax bill every year. Inside the RRSP, none of those slips are produced. Your financial institution tracks the trades internally, but the CRA doesn’t see them. That’s what tax-deferred compounding means in practice: gains earn more gains without the government skimming a portion each year. Over a long career of saving, the difference can add up to tens of thousands of dollars.
The Capital Gains Inclusion Rate Doesn’t Apply
Outside an RRSP, capital gains get preferential tax treatment. Only 50% of your gains, up to $250,000 in annual gains for individuals, are included in taxable income.2Canada Revenue Agency. Capital Gains 2025 The federal government deferred a proposed increase in the inclusion rate to two-thirds on gains above that threshold, with the new effective date set to January 1, 2026.3Department of Finance Canada. Government of Canada Announces Deferral in Implementation of Change to Capital Gains Inclusion Rate
None of that matters while your money is inside an RRSP. The inclusion rate is irrelevant because no gains are reported at all. The catch arrives at withdrawal, when the preferential treatment disappears entirely. A $50,000 capital gain realized in a non-registered account produces roughly $25,000 of taxable income. That same $50,000 pulled out of an RRSP is fully taxable, all $50,000 of it, on top of whatever else you earned that year.
How Withdrawals Are Taxed
When money leaves your RRSP, the CRA treats every dollar as ordinary income no matter how it was earned inside the plan.4Canada Revenue Agency. Making Withdrawals A $40,000 withdrawal gets added to your other income for the year and taxed at your marginal rate. There’s no separation between the portion that came from your contributions and the portion generated by capital gains, dividends, or interest. You report the full amount on line 12900 of your tax return.5Canada Revenue Agency. Withdrawing From Your Own RRSPs
This is the fundamental trade-off of the plan: you deducted contributions at today’s rate and pay tax on withdrawals at your future rate. If your income is lower in retirement than during your working years, you come out ahead. If your income stays the same or rises, an RRSP heavy in equities may not have been the optimal vehicle for those particular dollars, because the capital gains preference was traded away for the deduction.
Withholding at the Source
Your financial institution withholds tax the moment you take money out, before you see a dollar. The withholding rates for Canadian residents are:6Canada Revenue Agency. Tax Rates on Withdrawals
- Up to $5,000: 10% withheld (5% in Quebec)
- $5,001 to $15,000: 20% withheld (10% in Quebec)
- Over $15,000: 30% withheld (15% in Quebec)
These amounts are a prepayment, not a final bill. The actual tax you owe depends on your total income for the year. If you’re in a higher bracket, you’ll owe more when you file. If you’re in a lower bracket, you’ll get a refund. Your institution issues a T4RSP slip at year-end showing the gross withdrawal and the tax already remitted.7Canada Revenue Agency. T4RSP Statement of RRSP Income
If You’ve Left Canada
If you’ve become a non-resident, RRSP withdrawals are subject to a flat 25% Part XIII withholding tax instead of the graduated rates above.8Canada Revenue Agency. Rates for Part XIII Tax Tax treaties can reduce that rate. The Canada-US Tax Treaty, for example, can lower the withholding to 15% when withdrawals are structured as periodic payments from a RRIF rather than taken as lump sums. Non-residents generally don’t file a Canadian return for these amounts because the withholding is the final Canadian tax owed.
Capital Losses Are Trapped Inside the Plan
The mirror image of tax-free gains is unusable losses. In a non-registered account, selling an investment at a loss produces a capital loss you can use to offset gains elsewhere on your return.9Canada Revenue Agency. Capital Losses The RRSP offers no such offset. Because the gains were never taxed, the CRA doesn’t recognize the losses either. A bad investment just reduces the value of your retirement savings, with no corresponding tax benefit.
This asymmetry is worth thinking about when deciding what to hold inside versus outside the plan. Highly volatile investments that could generate large losses may deserve a spot in a taxable account where at least the losses have tax value. Stable, income-generating investments that would otherwise be taxed at high rates often make better RRSP candidates. There’s no universal rule, but loading the plan entirely with speculative stocks means the downside stings more than it would outside.
US Dividends and Foreign Withholding
The United States normally withholds 30% of dividends paid to foreign investors.10Internal Revenue Service. Withholding on Specific Income For Canadians holding US stocks in an RRSP, the Canada-US Tax Treaty eliminates that withholding. Article XXI exempts income from dividends and interest earned by qualifying pension arrangements from tax in the other country.11Canada Revenue Agency. Exempt US Organizations Under Article XXI of the Canada United States Tax Convention The RRSP qualifies as such an arrangement, and Article XXIX specifically addresses Canadian RRSPs and allows deferral of US taxation on income accrued in the plan.12Internal Revenue Service. United States-Canada Income Tax Convention
In practice, US dividends flow into your RRSP without any US withholding. Your Canadian financial institution handles the treaty paperwork, though you may need to sign a W-8BEN form during account setup so the institution can certify the account’s treaty-eligible status to American custodians.
This protection is specific to US investments and the Canada-US treaty. Dividends from companies in other countries are generally still subject to withholding tax by the country of origin, and that tax is usually not recoverable inside an RRSP. If you hold a US-listed international ETF that owns European or Asian stocks, you can face two layers of foreign withholding: one by the country where the company is based, and another by the US on the way to Canada. Investors with significant non-US foreign holdings sometimes prefer to keep those particular positions in a non-registered account where foreign tax credits can at least offset the withholding.
Converting to a RRIF at Age 71
Your RRSP has an expiry date. Under section 146 of the Income Tax Act, the plan cannot mature later than December 31 of the year you turn 71.13Department of Justice Canada. Income Tax Act – Section 146 By that deadline, you must convert the RRSP to a Registered Retirement Income Fund, use it to buy an eligible annuity, or withdraw the full balance as a lump sum. Most people choose the RRIF because it preserves the tax-deferred status on the remaining balance while providing a stream of retirement income.
A RRIF works almost identically to an RRSP for sheltering purposes. Investments stay inside the plan, capital gains remain untaxed, and the same rule about withdrawals being ordinary income still applies. The difference is that you must withdraw a minimum percentage of the account’s value every year, starting the calendar year after the RRIF is established. Minimums begin at 5.28% at age 71, rise to 6.82% at 80, 8.51% at 85, and reach 20% at age 95 and older.14Canada Revenue Agency. Chart – Prescribed Factors You can elect to use a younger spouse’s age to calculate the minimums, which reduces required withdrawals and lets more of the account keep compounding.
Every dollar withdrawn from a RRIF is taxed exactly like an RRSP withdrawal: ordinary income, no capital gains preference.
What Happens When You Die
When an RRSP holder dies, the CRA generally treats the full fair market value of the plan as income received immediately before death. That entire amount gets reported on the deceased’s final tax return.15Canada Revenue Agency. Death of an RRSP Annuitant On a large RRSP, the resulting bill can be substantial because the full value stacks on top of any other income earned in the year of death, and the capital gains portion of that value is taxed as ordinary income like everything else.
The major exception applies when a surviving spouse or common-law partner is the sole beneficiary. If two conditions are met, no tax is owed on the RRSP at death: the spouse must be designated as the sole beneficiary (either in the RRSP contract or the will), and the RRSP assets must be transferred directly to the spouse’s own RRSP, RRIF, or eligible annuity by December 31 of the year following the year of death.15Canada Revenue Agency. Death of an RRSP Annuitant A spouse rolling the assets into their own RRSP must be 71 or younger. When both conditions are satisfied, the transfer is fully tax-deferred and the surviving spouse takes over the future tax obligation on withdrawals.
Naming a beneficiary directly on the RRSP contract, rather than relying on the will, also keeps the funds out of the estate. That avoids probate fees in provinces that charge them and speeds up the transfer. Without a designated beneficiary, the RRSP flows through the estate, triggers the full income inclusion on the final return, and may also attract provincial probate costs.