*Edit* that's not meant to come across as rude. The reason I put the last line in large font was for emphasis; your misconception comes up frequently and needs straightening out. It's a slightly tricky piece of knowledge. But in both cases you are NOT taxed on the growth. In the RRSP you are just investing on the government's behalf, and giving them 100% of the growth on their (in my example) 20%. You keep 100% of the growth on your 80%, exactly the same as in the TFSA. Assuming a constant tax rate.
Sure, I understand what you're saying about investing in RRSPs vs TFSAs and I 100% agree that when tax rates are constant a topped up RRSP (using your refund to re-invest in RRSP) is equal tax-wise to a TFSA when both accounts are invested in stock ABC. However, my argument is slightly different. Hopefully this will help explain it better.
Let's say person A, a single childless working 30 y/o Ontario male, in a fictional inflation-free world earns $75,000 a year and is a moderate spender on a strict budget. He has just enough money to: 1) max out his RRSPs for a $13,500 yearly contribution, and 2) use the refund and a bit of extra cash to max the TFSA at $5,500 a year. He can only save a max of $19,000 including his tax refund and not a penny more. Person A has already maxed out his tax benefit in his contribution decision so now he needs to decide where to put the stocks and where to put the bonds.
Scenario A: He decides to allocate his bonds to the TFSA only and stocks to RRSP only. So every year he buys $5,500 in bonds and $13,500 in stocks. Bonds return inflation+3% over long time periods and stocks return inflation+6%. At 60 y/o, his account values are as follows:
TFSA: $275,000
RRSP: $1,114,000
To make things a little easier, at retirement he rebalances all accounts and maintains a 4% WR, he will earn gross $55,560 per year. Of that $11,000 is non-reportable TFSA income and $44,560 is in the form of RRSP/RRIF withdrawals. He will pay $7,280 in taxes at current rates for a
net income of $48,280.
Scenario B: He decides to allocate stocks to TFSA only, then buy $5,500 of bonds in RRSP with the remaining in stock. His RRSP allocation portion is about 60/40 to start and we will assume he keeps the portfolio the same as in Scenario A otherwise so he has the exact same ending total networth. At 60 y/o, his account values are as follows:
TFSA: $466,000
RRSP: $923,000
At retirement he rebalances all accounts and maintains a 4% WR, again he will earn gross $55,560 per year. Now $18,640 is non-reportable TFSA income and $36,920 is in RRSP/RRIF withdrawals. He will now pay just $5,530 in taxes for a
net income of $50,030.
Although he completed the same tax return, paid identical tax, kept the same overall AA, and achieved the same overall investment performance in both scenarios during his working years, by shifting his higher growth assets to his TFSA he increased his TFSA value relative to his RRSP value by retirement. This decision gives him an extra $145 per month in spending cash.
It's not perfect, but I hope this better explains my reasoning. :)