I believe you are right. You can end up paying more tax on your SRS account compared to making the investments directly. The thing about SRS, as you said, gains are not distinguished between gains on the revenue and capital accounts. All SRS withdrawals upon retirement will be taxed at 50% of amount withdrawn. In contrast, capital gains on investments are not taxable.

The SRS scheme favours individuals who are about to reach retirement. Say, 55 years where the person can benefit from the immediate tax savings while not having to pay much tax upon retirement as his capital gains over the 7 year period, when he can make withdrawals at 62 would not be as significant. I believe it is a less attractive saving scheme if you are still in your 30s as the opportunity costs of placing your money in the SRS might outweigh the benefits. Early withdrawals will result in increased tax liabilities and penalty fee of 5%.