I know I’m going to be in the minority here, but personally I don’t like RRSPs. The conversion of dividend taxes and capital gains taxes into incomes tax doesn’t sit well with me. Maybe if you have bonds or bond ETFs it might make sense, but I’m 100% equity.
The reason you're in the minority on this is because RRSPs are the mathematically sound choice for saving money on taxes. John Heinzl has written a few math-based articles about this in the Globe. Here's one of his rrsp "myth busting" articles:
http://www.theglobeandmail.com/globe-investor/investor-education/anti-rrsp-arguments-are-merely-financial-urban-legends/article30833688/
The article you cited is good in that it’s simple. It holds most of the variables that impact a portfolio constant and just looks at the impact of your money growing pre-tax inside an RRSP vs post-tax in a regular account. The drawback though is that there are many details that are ignored.
1. The article ignores the impacts of Foreign Withholding Taxes completely. They may seem small, but with compound growth it can really add up. For example, if you invest in a Canadian Listed US Equity ETF like VFV, and assume a 7% total growth with 5% from capital appreciation and 2% dividends, a 15% FWT corresponds to a 0.3% drag on your returns. If you hold this investment for 30 years without the FWT drag, your initial investment would be 7.61 times what it originally was, but with the drag you will experience in your RRSP, the investment will only by 7.00 times what it originally was. That’s an 8.8% better pre-tax return without the drag. If you hold the investment for longer than 30 years, that gap widens even further.
2. At lower incomes, with the dividend tax credit, your effective dividend tax rate could be close to 0%.
3. The article ignores the impacts of higher income in later years on OAS, GIC, home energy tax credits, and other benefits you could have by having a lower income.
4. Then there are the non-financial, but rather, the psychological effects. RRSP lead to what I call “inflated net worths”. People tend took at their assets (home, investments, etc.) and liabilities (mortgage, LOC, etc.) when calculating their net worth, but rarely do they include future tax liabilities of RRSPs. This may lead them to overestimate their wealth.
5. By not having an RRSP, but rather paying the tax earlier, you’re avoiding the risk (and potentially the benefits) of future tax rate changes.
6. But, the real killer of RRSPs is in estate planning. Since according to tax law, you have considered to have sold all your investments on the date of your death, if you die with a $1 million RRSP, and assuming you cannot transfer it to a spouse, you have considered to have withdrawn that money. Now in the year of your death, you are considered to have a $1 million income and taxed as such. This will lead most of your investment to be taxed at the highest tax rate in the country will lead to a very poor overall post tax returns. If you're in Ontario, the combined provincial and federal top marginal tax rate is 53.53% and this will apply for any income over $220,000. Since most of your income will be in this tax bracket, your average tax rate on your RRSP will be close to 53.53%. This is not even including the Ontario surtax which will be huge at this level of income.
There are many positives with RRSPs and it could be beneficial for a lot of people. Personally I don’t like it because of all of the above reasons. But claiming that RRSPs are always more tax efficient and more “mathematically sound” than regular taxable accounts is simply wrong.
TL;DR: The article is good, but simple. Tax planning for investments is a lot more complicated than the article leads you to believe.