The RRSP (Registered Retirement Savings Plan) is not my first choice of CRA (Canada Revenue Agency) registered plans to use in my investment strategy. However, it is a very useful tool. Unlike the TFSA (Tax-Free Savings Account), the RRSP is not a tax-free plan. Its purpose is tax deferral.
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The RRSP is all about tax deferral
When you contribute to the RRSP, you can deduct your contribution amount from the income you earned in that year. If you had some big gains from investments or a large bonus, you can use RRSP contributions to reduce your income to a lower tax bracket.
Contributing is a great way to immediately lower your tax bill in a given year. If your contributions are large enough, you might even be able to earn a cash tax refund.
Once you have made contributions, any investment inside the RRSP can compound tax-free. Capital gains, interest, or dividends will not be taxed inside the RRSP. However, you need to be careful with RRSP withdrawals. Any RRSP withdrawal will be treated like taxable income. You will need to pay tax on that withdrawal.
Think of the RRSP as a very long-term savings plan
The objective is that you hold your RRSP cash/ investments for most of your working life and only withdraw in retirement when your income and tax bracket should be lower.
I tend to look at my RRSP as a true long-term savings plan. Once my money is in the RRSP, it is in there for years and maybe decades. The investments I choose need to reflect that long-term mindset.
For my RRSP, I like to choose stocks in established companies with strong balance sheets, quality products/services, and smart managers. Generally, these are low to moderate risk investments with a steady record of compounding returns.
Colliers: A steady compounder over the decades
One such stock ideal for an RRSP is Colliers International Group (TSX: CIGI). Despite having delivered a +15% compounded annual total return over the past 20 years, this stock still trades below many Canadian investor’s radar.
Colliers is a global commercial real estate broker. This business segment can be volatile based on macroeconomic factors. However, it can be very profitable when markets are strong. What the stock market doesn’t fully recognize is that Colliers is now a large, diversified real estate and infrastructure services provider.
It offers property management, real estate financing, consulting, project management, engineering, and asset management services. In fact, today, over 70% of its income comes from recurring services. It has significantly de-risked its business over the past few years.
Today, Colliers trades at a big discount to asset management peers and engineering/consulting peers. As a result, the stock could deserve a valuation re-rate as it proves its new strategy.
The company has been a very smart acquirer in the past. With a wide mix of services, it has a strong merger and acquisition pipeline. I expect it to continue to smartly deploy capital into rewarding opportunities for shareholders.
Colliers has a founder-led management team, so incentives are aligned with shareholders. Its balance sheet is prudently managed. With a market cap of $9 billion, this company still has ample room to grow and expand in the years ahead. It’s a solid stock to hold for the next several years inside your RRSP.
