RRSP Market Value vs. Book Value: Understanding the Difference

RRSPs and Market Value

An RRSP is a Registered Retirement Savings Plan, a new type of retirement plan established by the Canadian government to help citizens save more easily. While there are certain simple eligibility requirements, the RRSP investment account is very flexible. The money placed in it, along with any interest added, is tax free. This makes the account an ideal place for people to store and manage certain types of investments.

Market Value and Book Value

The market value and book value of an RRSP refers to the value of the stocks that are held within it. Book value is what the stocks were worth officially, when first placed in the RRSP. Market value, on the other hand, is what someone is willing to pay for the stocks based on current market conditions, and may be higher or lower than the book value.

Canadian Content Holdings

Canadian content holdings are a type of stock investment that you are allowed to pursue within an RRSP. Plans that have Canadian content holdings earn dividends as the stock increases in value, but the price of the stock remains at book as it was chosen when first placed into account. Canadian content holdings are subject to manipulation while in accounts, which is why their market value is so important to RRSP holders. The book value of the Canadian content holdings dictates how much foreign stock can be invested in using the account.

Crystallizing RRSPs

Crystallizing an RRSP refers to the process of raising the book value of the present Canadian content holdings by selling them and exchanging them for new stocks. This only works if the market value is higher than the book value of the stocks. If it is, the stocks can be sold at market value, and the entire profit can be reinvested in new CCHs. The old market value becomes the new book value, and the new stocks are free to continue increasing in value.

Foreign Investment

Many people crystallize their RRSPs to maximize their ability to invest in foreign markets, such as the United States. The amount of foreign investment for an RRSP is capped based on the book value of present Canadian content holdings. A higher book price means that more foreign stock can be purchased, which is why people trade in their current book value for a higher current market value.

Loans

Market and book value also becomes important when an RRSP is used as some type of collateral for a loan. The loan is based on the book value of the RRSP, not the market value, so using the account this way is generally unadvisable. It is better to at least crystallize the account before using it to obtain a loan.