I recently had an interesting meeting with a new client who wanted to sell all of their investments and cash in all their RRSPs, because they didn't quite understand what the tax implications were and how certain investments were actually taxed.

That's not their fault. Sure, they could have looked it up and researched it, but they’ve been with the same investment advisor for decades and they're just not getting the explanation or receiving the service that they should be getting. Understanding your investments - that should be a number one priority. Besides making money, obviously.

In this blog, I will explain the difference between a cash account (which is a regular investment account) and an RRSP account. 

Let's begin with the RRSP account. When you put money into an RRSP, that money then acts as a deduction on your income taxes, not dollar for dollar. It's a percentage based on what your marginal income tax rate is. For example, if you make $100,000 in a year and you put away $10,000 in RSPs, that would be the same as you making $90,000 a year and being taxed on $90,000 instead of $100,000. That doesn't mean you're saving $10,000 on taxes.

In this case, that person would save about $3,600 on taxes. However, when you take it is when you actually get taxed on it - you're only taxed on when you take it out.

What it does in the investment pot as it stirs doesn't matter. Whether it be interest, dividends, return on capital, capital gains, appreciation of the investments and shares, it doesn't matter. What happens inside that investment prior to you pulling out has absolutely no implication on your income taxes. It's an account that is designed to appreciate, and then you pull it out and take that as income later on because you've already had the tax savings from before.

Now, on the flip side of that is a cash account. A cash account is not a tax shelter- this is a place where you put your regular investments. You put your money into an investment account, and every year you're going to receive a report of your income in the form of a T5 slip, T3 slip, or something similar to that.

Many people have the impression that every dollar that they have in their cash investment account is going to be taxed when they pull it out. While that's true with the RRSP, it is not true with the cash investment account as there was no tax savings when the money was originally contributed. 

So, it's important to understand the difference between the two. If your advisors are not explaining this to you, it would be in your best interest to get new ones.