Put Your Assets in Their Place

Couch Potato investors hear a lot about asset allocation, but asset location is also an important consideration. Asset location refers to the type of account you use to hold the stocks, bonds, cash and real estate in your portfolio. It’s important because the growth and income from your investments are treated in different ways by the taxman:

Interest from bond funds and bond ETFs (as well as individual bonds, GICs and money market funds) are taxed at your marginal tax rate, just like employment income.

Dividends from Canadian stocks are eligible for a generous dividend tax credit from the federal government. For the 2009 tax year, eligible dividends are first grossed up (increased) by 45% and declared as income; the investor then receives a tax credit of 19% on the grossed-up amount. Some provinces offer an additional dividend tax credit.

Foreign dividends are taxed at your marginal rate. In addition, if you hold US-listed ETFs, the Internal Revenue Service will take a 15% withholding tax on all dividends unless the funds are held in an RRSP.

Capital gains are profits earned from selling a security for more than you paid for it. You report 50% of your capital gains as income and pay tax on that amount. Mutual funds and ETFs must also pass along their capital gains to unitholders, although index funds are usually more tax-efficient.

Here’s a table highlighting the dramatic differences in how each type of investment income is taxed, assuming a marginal rate of 22%:

Canadian Capital
Interest Dividend Gain
Amount received $1,000 $1,000 $1,000
Taxable income $1,000 $1,450 $500
Federal tax (at 22%) $220 $319 $110
Dividend tax credit (19%) -$275.50
Total federal tax owing $220 $43.50 $110


The tax rates above apply to securities held in non-registered investment accounts. Registered accounts offer several opportunities to defer or avoid paying tax on investment growth and income:

  • If your retirement savings are in an RRSP or RRIF, you pay no tax on interest, dividends or capital gains until you withdraw the funds. At that time, you pay tax on the entire withdrawal at your marginal rate. (You can’t claim the dividend tax credit or enjoy the lower tax on capital gains.)
  • With a Registered Education Savings Plan (RESP), you pay no tax until you withdraw the funds. At that time, all the growth is reported as income in your child’s hands. You pay no tax on the amount you put into the account, since contributions were made with after-tax dollars.
  • In a Tax-Free Savings Account (TFSA), all the growth is tax-free, and no tax is payable when the funds are withdrawn.

So, what’s a Couch Potato to do with all this information? If you’re able to hold all your investments in an RRSP or other tax-deferred accounts, you don’t need to worry much about this at all. However, if you also hold ETFs or index funds in a taxable account, review your asset location to make sure you’re not paying more tax than you need to:

Canadian equities deliver their returns from lightly taxed dividends and capital gains. So if you need to hold some of your investments in a taxable account, start with Canadian stocks.

REITs pay generous distributions, but these are not considered dividends. The bulk of the payouts are classified as income and taxed at your full marginal rate. (The rest is usually return of capital.) REITs are therefore best held in a tax-sheltered account.

Income trusts, like REITs, pay most of their distributions as income. However, beginning in 2011, when trusts must convert to corporations, their distributions will start being classified as dividends and will therefore be eligible for the tax credit. For now, hold them in a tax-sheltered account if you can.

Bonds (as well as GICs and money market funds) are best held in a tax-sheltered account, since their interest is fully taxable at your marginal rate.

Preferred shares are sometimes considered fixed-income investments, but they pay dividends, not interest. For income-oriented investors who have no more RRSP or TFSA room, Canadian preferred shares may be a good choice in a taxable account because they’re taxed more favourably than bonds.

Canadian-listed ETFs that hold international stocks include the popular iShares XSP and XIN. Although these are traded on the TSX, their underlying holdings are foreign stocks, so the dividends are not eligible for the tax credit. These ETFs are best held in a tax-sheltered account. However, as Canadian Capitalist has pointed out, XSP and XIN (which simply hold US-listed ETFs in a Canadian wrapper) are still subject to the US withholding tax even if they’re held in an RRSP.

Dividends from US-listed ETFs are fully taxable in Canada and get dinged by the additional 15% withholding tax unless you hold the funds in an RRSP. Note that you still pay the withholding tax if the fund is held in an RESP or a TFSA. The good news is that you may be able to recover the withholding tax if you hold them outside an RRSP. A taxable account also allows you to buy and sell ETFs in US dollars and avoid currency exchange fees—most discount brokers do not allow you to hold US dollars in an RRSP. (Questrade and QTrade are the exceptions.)

Pulling all this together, here’s an example of how you might divvy up an ETF portfolio across different accounts with an eye toward keep taxes to a minimum:

RRSP
Vanguard Total Stock Market (VTI)
Vanguard Europe Pacific (VEA)
Vanguard Emerging Markets (VWO)
iShares Canadian Bond (XBB)

TFSA
iShares Canadian REIT Sector (XRE)
Cash (GICs or money market fund)

Taxable account (assuming no more RRSP or TFSA room)
iShares Canadian Composite (XIC)
Claymore S&P/TSX Preferred Share (CPD)

As you can see, tax planning is complicated, so if you have a large portfolio, consider seeking help from a financial or tax advisor.

100 Responses to Put Your Assets in Their Place

  1. Nathan January 16, 2013 at 4:15 pm #

    @Oldie:
    In my opinion (for what it’s worth!), preferred shares generally behave somewhere between bonds and equities. As a rough rule of thumb, I’d say consider them 2/3 bonds, 1/3 equities. Or if you want to be conservative, 50/50. Much more detail and analysis here if you’re interested: http://www.financialwebring.org/forum/viewtopic.php?f=29&t=115428

  2. Oldie January 16, 2013 at 5:14 pm #

    @Nathan: Thanks a lot for your comment — I guessed that’s how they behaved from previous comments, but I find your 2/3 – 1/3 (or conservatively 50-50) rule of thumb very helpful. Your link to Financial Webring was interesting, but the math went over my head for the time being. I did get the discussions conclusion, though, which is essentially what you said, above.

    What I hoped to glean from the Financial Webring discussion, was some indication that not only was the risk different from straight bond index or straight equities index, but also that the correlation was negative to either or even both, which would be a huge factor in my adopting Preferreds in my portfolio, but I didn’t detect any indication one way or another in the mathematical treatment, such as I was able to understand it, or the discussion. Do you have any insight as to the risk correlation?

    Incidentally, I can read your post in my e-mail and by clicking the link I got in my e-mail, but when I go directly to the canadiancouchpotato website “Put Your Assets in Their Place” page, and click to see all the comments, I still can’t find your comment.

  3. Nathan January 16, 2013 at 7:03 pm #

    @Oldie:
    I don’t believe you’ll find negative correlation in the movements of a preferreds index like CPD and a Canadian equity/bond mix. You will probably see a lot of uncorrelated (random) movement of the preferreds; based on the regressions I did for that forum post, it appears that (very roughly speaking), half of movement of the preferred index could be approximated by a 33/66 stock/bond mix, while the other half is random and unrelated. (Due to the unique and concentrated nature of the preferred market.) That’s a simplification, but is probably good enough for us couch potatoes. :)

    So I wouldn’t expect to get any free diversification in terms of negative correlation. The added random volatility of preferreds could be good or bad depending on the volatility of the rest of your portfolio, your rebalancing scheme, luck, etc., but personally I wouldn’t worry about it too much; I would just consider the alternatives to be putting a portion of the portfolio in preferreds vs splitting the same portion between stocks and bonds and try to estimate whether the after-tax returns of the preferreds are expected to be greater than the after-tax returns of the stock/bond mix.

    Hope that helps!

  4. Oldie January 16, 2013 at 9:15 pm #

    @Nathan: Just to be sure I understand what your saying, about half of the movement would be the same as though one had invested in a 1/3- 2/3 equities bond mix, so you are not getting any diversification protection on this half in return for the hassle and cost of purchasing and managing a new asset class in your mix. However, the other half is random and unrelated.

    Now, if this latter half was exactly negative to some asset class, that would be an advantage. However, I’m not sophisticated enough to evaluate the merits of a random movement — does this help in diversification? The other point I must keep in mind, I suppose, is that even if this weak diversification effect is present, it is only effectively coming from about half of the your asset, i.e. it is a further dilution of the benefit such as it is.

    If only a trivial diversification benefit can be obtained, then the only other possible justification for inclusion of Preferreds as an asset class is if the tax benefits result in a higher net after-tax return.

    Have I understood this correctly, then, in a nutshell?

  5. Potential Sunbird January 27, 2013 at 3:32 pm #

    I am about to set up a USD denominated ETF investing about 15k a year for 10 years or so. The plan, since it is fully taxable is to use this as a nest egg when we go south for the winter as a way of gradually accumulating USD . Would VTI be the most suitable or is there a more efficient ETF which pays fewer dividends which are paid annually rather than hoping to gain a potentially higher capital gain long term payoff? I really enjoy your clear writing.

  6. Canadian Couch Potato January 27, 2013 at 6:10 pm #

    @Sunbird: An interesting question. In theory, you could use an ETF that tracks small-cap growth stocks, which pay very little in dividends (Vanguard’s VBK, for example, yields 0.34%), so almost all of the growth would come in the form of capital gains, which are taxed at a much lower rate than foreign dividends.

    I discuss a similar idea in the following post about Canadian dividends, and the case is even more compelling for US holdings:
    http://canadiancouchpotato.com/2012/01/23/dividends-not-as-tax-friendly-as-you-may-think/

    That said, you have to consider the risk. Small-cap growth stocks are likely to be much more volatile than blue-chip dividend payers. Risk considerations should come before tax considerations.

  7. Nathan January 27, 2013 at 6:17 pm #

    As well as the added risk, small-cap growth stocks have historically underperformed by a significant margin: http://www.cbsnews.com/8301-505123_162-57537424/avoid-the-black-hole-of-investing/

    Small-cap or small-cap value might make sense though. But honestly, unless you want to really dig in and understand the details of tilted portfolios, I’d stick to VTI. The taxes you pay on its 2%ish distributions aren’t going to break the bank.

  8. karim April 10, 2013 at 3:00 pm #

    Is there a difference between an RRSP and TFSA when it comes to holding International ETF such as VEA. I don’t think the withholding tax can be recovered in either account and froman income tax perspective, it would be the same.

  9. Canadian Couch Potato April 10, 2013 at 3:47 pm #

    @Karim: The international withholding tax applies equally to Canadian-domiciled funds held in RRSPs or TFSAs. But with VEA, there are two levels of withholding tax: one US and one international. You are exempt from the US portion if you hold VEA in an RRSP. You pay both leveles of tax if you hold it in a TFSA.

  10. John April 11, 2013 at 12:29 am #

    If you are able to fill up your tax free accounts (rrsp, tfsa etc) and have some money left over to invest, then to offer to be as tax efficient as possible you should spread a single set of index investments over all accounts. Eg putting US and international equity in rrsps and bonds in tfsas while canadian equity can sit in a taxable account.

    But as tax free accounts have limits that you have maxed out adding new savings becomes difficult. Further it’s harder to track the overall performance of your portfolio, unless your brokerage is very clever.

    Do you have any advice on how to handle this situation? Perhaps one set of index investments, necessarily add new money to a taxable account and optimize at the start of the year when rrsp and tfsa limits renew as you rebalance?

    Thanks in advance,

    John.

  11. Canadian Couch Potato April 11, 2013 at 8:34 am #

    @John: There’s no simple answer to your question. Managing multiple registered and non-registered accounts is complex, and is one of the services a good advisor can provide. I have offered some general suggestions in these posts:
    http://canadiancouchpotato.com/2012/03/12/ask-the-spud-investing-with-multiple-accounts/
    http://canadiancouchpotato.com/2012/03/15/a-spreadsheet-to-manage-multiple-accounts/

  12. Jeremy May 18, 2013 at 11:34 pm #

    Great post and great blog – been following for a while and always find it a helpful investing resource.

    Having read similar articles a while back, and come to similar conclusions that it was best to prioritize holding tax-disadvantaged investments (i.e., bonds) in shelters like RRSPs and TFSAs, I recently ran some analysis to estimate the specific magnitude of the difference and was surprised by the results. I’ll spare the details, but my output suggests that in the long run I would be better off first prioritizing sheltering foreign equities, followed by Canadian equities, and prioritizing bonds last of all.

    I believe I’ve finally wrapped my head around this by recognizing the role of a difference in expected long run returns (e.g., return of ~8% for equities, ~4% for bonds). So even though for a given dollar of INCOME, bonds benefit more than equities from sheltering, the fact that a given dollar of equity INVESTMENT is expected to produce more income over its lifespan (either in form of capital gains or dividends) than bond INVESTMENT tilts the equation in favor of sheltering equities.

    As I said, this seemed highly counter-intuitive at first, but now that I’ve wrestled with it, seems to make some sense. Curious to hear other’s reactions/thoughts. Anything I might be missing?

    Of course it’s always possible I just messed up my Excel…

  13. Canadian Couch Potato May 19, 2013 at 3:10 pm #

    @Jeremy: This analysis has been done by others also:
    http://thewealthsteward.com/2012/01/should-you-hold-bonds-in-taxable-accounts/

    It’s not wrong per se, but there are a lot of embedded assumptions that can’t be known in advance. It’s also important to appreciate that when bonds are bought at premium (and almost all of them are these days because interest rates have been trending down for so long) it makes a hige difference, since the bonds’ coupons will be higher than bonds purchased at par, even both have the same yield to maturity. You can make a much better argument for leaving GICs (always bought at par) in a taxable account and sheltering high-yield foreign equities:
    http://canadiancouchpotato.com/2013/03/06/why-gics-beat-bond-etfs-in-taxable-accounts/

  14. Dan July 21, 2013 at 10:30 am #

    This blog is fantastic. This post, and the Norbert’s gambit posts will save me a lot of money.

    I’m sure some of your readers are small business owners. Many of us intend to use our private Canadian corporations as a sort of retirement savings account. Basically, pay the relatively low corporate taxes today, store away the remaining money in the corp, let it grow, and then pay personal tax on dividends you will pay yourself upon retirement.

    My understanding is that a Canadian corp. would be a good place to store investments that generate dividends. Dividends between Canadian corps are not taxable… is that correct?

    Supposing someone has a TFSA, RRSP, and corporation, what would you recommend in that situation?

    In general, do you think that saving money in a corporation is a good idea? My only concern about it is, what if, say, a new government fiddles around with corporate taxation 30 years from now and my dividends I intend to pay myself are more heavily taxed?

  15. Nathan July 21, 2013 at 12:55 pm #

    Dan,

    It’s only between related CCPCs that dividends are not taxable. (IE:from an operating company to a holdco, when you own both. Investment dividends are taxable, and without the credits received personally. However, you can essentially pass investment income through from the company to you, to end up in roughly the same place as if the investments were held personally. The advantage then is not lower taxes on investment income, but rather on the initial business income that goes into the investments. In most scenarios this would only be valuable if you have already maxed out RRSP and TFSA, or if you’re drawing dividends instead of salary and so don’t have RRSP room.

    Depending on the nature of your business, its income, and your personal situation, it may be wise to set up a separate holdco for the investments, possibly through a family trust. IMO it is worthwhile to consult with a knowledgeable accountant to explore the various options. Nothing stops you from then doing much of the maintenance yourself, if that is your preference. (I’m no accountant, but I do have this sort of setup for my business income.)

    There’s a ton more info in this thread if you want to wade through it: http://www.financialwebring.org/forum/viewtopic.php?f=32&t=104316

  16. Jakob September 15, 2013 at 9:34 am #

    This is a very interesting post, and I had the same question about how to do proper rebalancing across accounts that was posed in an earlier comment. I also read some of the other articles on here, and the recent post at http://canadiancouchpotato.com/2013/09/03/deep-thoughts-on-diversification/ convinced me that easy rebalancing is maybe just as important as tax efficiency.

    I’m 30 and manage to max out my RRSP and TFSA with a few other savings in a non-registered account, and today I finally fleshed out a financial plan. None of the accounts are large enough to make super high returns, but all three are sizeable enough to split into ETFs of large enough positions to make sense (i.e. about $2000 or more each).

    For the RRSP and non-registered accounts, it seems that if I take my target allocation and apply it to each account separately, not only does it make things easier to manage but it also preserves the ability to rebalance without major headache. The hope being that the gains from better rebalancing outweigh the losses from suboptimal taxation, and I can focus on other stuff in life rather than breaking my head for a few dollars saved.

    The TFSA recommendation with REITs and GIC / money market is what I find especially interesting though. With real estate only being a relatively minor fraction of a Couch Potato portfolio, a TFSA is still large enough to hold the whole REIT portion of the portfolio (i.e. doesn’t have to be split across accounts). The relative ease of getting money in (max. contribution once a year) and out (anytime) makes it possible to use it as combined REIT & cash holding with any leftover cash serving as rebalancing tool as well as rainy-day emergency fund.

    But for the other ones, I’m definitely going to split it uniformly.

  17. Jakob September 15, 2013 at 9:37 am #

    Correction: “i.e. about $2000 or more each” <- by that I meant the positions, not the accounts. Splitting a $2000 account into $200 ETF positions (for a 10% allocation) doesn't really make sense of course.

  18. Jon October 13, 2013 at 7:35 pm #

    With respect to holding ETF’s such as VTI or VXUS, would it make sense to ignore the withholding tax, keep them in a TFSA, and hold bonds in the RRSP? Assuming that in 30 yrs or so, the stocks will grow more than the bonds, when withdrawing from the TFSA the money won’t be taxed unlike the RRSP?

  19. Nathan October 13, 2013 at 9:03 pm #

    @Jon
    The thing to realize us that funds in your rrsp are effectively worth less than in your tfsa, because you haven’t paid taxes on them yet. Say you expect to pay 20% taxes in retirement. In that case, $100 in your RRSP is worth the same as $80 in your TFSA. As long as you take that into account, it doesn’t matter whether the returns will be higher in one or the other. The expectation is the same.

    Here’s an example. Say you make $1000 and want to invest it. Your tax rate is 20%. So you’re left with $800 after tax. In situation 1, you invest the 800 in a TFSA. By the time you’ve retired it’s worth, say, twice as much, so you’re left with $1600, tax free. In situation 2, you put the money in an RRSP. But in the RRSP you can invest the full $1000, since you’ll get a tax deduction for the $200 tax you paid. You invest in the same thing, so again the money doubles, and you end up with $2000. You have to pay 20% tax when you withdraw that, so you’re left with $1600. Exactly the same. Regardless of the rate of return, it ends up the same, as long as your tax rate when you take it out is the same as when you put it in, and you invest the full amount in the RRSP, including the tax refund.

    Now, if you expect your tax rate to be lower in retirement (often the case), the RRSP actually has an advantage, so you’d actually be better off putting your higher earning investments in there vs a TFSA.

  20. Nathan October 13, 2013 at 9:04 pm #

    (Again, assuming you invest the full, before tax, amount in the RRSP.)

  21. Jon October 14, 2013 at 12:37 am #

    Thanks!

  22. Nathan October 14, 2013 at 2:19 am #

    No prob! Although I mucked up the last point a bit. (I blame the turkey.) Really it’s more like, if you expect your tax rate to be lower in retirement, the RRSP is going to be advantageous in general, since the percentage you get back from the initial tax rebate will be more than the percentage you pay when you take it out. (And vice-versa.) There’s still no real benefit to putting higher expected earnings investments in either one.

    Where I went wrong was I was thinking of always ‘discounting’ the value of the RRSP by the tax rate you pay now (say 20%). Really you should discount it by the amount you expect to pay in retirement. If you do that, it really won’t matter what you put where. (Of course, it’s tough to know what the situation will be in retirement, so today’s rate is almost certainly good enough to work things out.) So say you have $1000 before tax, your current tax rate is 20%, and your expected retirement rate is 10%. If you put the money in the TFSA, you’ll have $800 in there. If you put it in the RRSP, you’ll have a full $1000 in there, since with the RRSP tax credit you effectively don’t pay tax on that money. You ‘discount’ it by the 10% you expect to pay when you withdraw it in retirement, so you figure it’s ‘worth’ $900. So clearly it’s better to put that money in the RRSP than the TFSA, regardless of what type of investment it is. (Although the TFSA has other benefits, like being able to use it as an emergency fund without tax consequences.)

    One other place this comes into play is in meeting your asset allocation. Since the investments in the RRSP are technically worth ‘less’ than in the TFSA, you should really take that into account when rebalancing. If you have $1000 of stocks in an RRSP and $1000 of bonds in a TFSA, your allocation isn’t 50/50; it’s more like 44/56 assuming a 20% tax rate in retirement.

    Of course, index investing is about simplicity, so… as much as it’s good to understand these things, I don’t honestly think it’s important to keep track of these little details. I don’t. Just cram as much into both as you can, and try to avoid unnecessary withholding taxes. :)

  23. Jon November 27, 2013 at 12:55 pm #

    Hello CCP,

    Do you have any comments on order of preference in RRSP, TFSA, and non tax sheltered accounts for some of the indexes in your Uber Tuber? I assume it’s prioritized based on amount paid out in dividends vs capital gains but I thought I’d ask.

  24. Canadian Couch Potato November 27, 2013 at 1:31 pm #

    @Jon: Yes, you have the right idea. The foreign equities with the highest dividends are best held in an RRSP. Global REITs are particularly tax-inefficient outside an RRSP. Canadian equities and foreign equities with lower yields can be held in the non-registered account. The bonds, of course, should be tax-sheltered.

  25. Jon November 27, 2013 at 1:58 pm #

    As the portfolio grows and my bonds take up an ever increasing percent of my tax sheltered space, is there an order of preference of funds to put in the non tax sheltered portion? (I understand the core indexes such as ZCN, VTI, and VXUS…what about VBR, EFV, CRQ and the like?)

  26. Canadian Couch Potato November 27, 2013 at 2:06 pm #

    @Jon: The same principles apply to value and small-cap funds that would apply to core funds. Canadian equities would typically come first in a non-registered account. After that, you’re generally looking for equity ETFs that pay the lowest dividends, since foreign dividends are fully taxable.

  27. Parin February 1, 2014 at 9:00 pm #

    I am looking for a Nasdaq 100 etf that is listed in Canada (to avoid USET). Besides ZQQ which is hedged, what other options are available to individual investors? Does Horizons have one?

  28. Canadian Couch Potato February 2, 2014 at 10:29 am #

    @Parin: There is no Canadian-listed NASDAQ 100 ETF that does not use currency hedging. There are are plenty of other options for US equities that track indexes much more diversified than the NASDAQ 100.

  29. b.abbott February 19, 2014 at 3:40 pm #

    TFSA and RRSP are only a benefit for gains not losses.
    Reits and bonds (etf’s ) have lost in the past year.
    Is there a better investment choice for these accounts
    or should we just be patient?

  30. Victor April 2, 2014 at 9:37 am #

    Dan,

    This blog on taxes is very helpful. Thank you.

    I understand that when I sell a stock, the capital gain is calculated by my broker (TDW) based on FIFO (first-in-first-out) accounting method. In a rising market, FIFO is less tax-efficient than LIFO (last-in-first-out). As an investor, do I have an option to choose between FIFO and LIFO?

    Thanks.
    Victor

  31. Canadian Couch Potato April 2, 2014 at 11:13 am #

    @Victor: When you sell a stock, the capital gain is determined based on your adjusted cost base for the entire holding. You don’t get to choose on a LIFO or FIFO basis.

  32. Freddie April 2, 2014 at 11:34 am #

    Victor,

    I have to agree…it’s the adjusted cost base for all your holdings not LIFO and FIFO which is only for inventory type of costing. Eg: You bought 100 shares at $10 and then 2 years later you sold 50 shares at $11 and then 2 years later you bought 60 shares at $12.

    ACB after first purchases = $10
    ACB after first sale = $10 (cap gain = $50)
    ACB after second purchase = ($10 x (100 – 50 shares) + 60 shares x $12) / 110 shares that you now own
    = $1,220 / 110 shares = $11.09 ACB per share.

    Also remember that any reinvested dividends or Return of Capital will also affect the ACB.

  33. Victor April 2, 2014 at 11:42 am #

    Thank you, Dan and Freddie. My mistake. The FIFO method used by TDW is for American tax purpose.

  34. newbie May 15, 2014 at 5:06 pm #

    Hi Dan,

    If we follow the Global Couch Potato portfolio, how would you assign RRSP + TFSA funds (no non-registered) to the different asset classes? i.e. would you distribute the RRSP + TFSA funds evenly among the asset classes, or would you put all the TFSA funds in the Canadian Bonds first, for example? Or does it make no difference?

    Thanks!

  35. Canadian Couch Potato May 16, 2014 at 8:21 pm #

    @newbie: If you’re only using a TFSA and an RRSP asset location is not really an important issue. It doesn’t make much difference where each fund is held. If you using index mutual funds you can simply hold all four funds in both accounts to make things easy. If you are using ETFs you may want to hold a couple of funds in each account in order ti minimize trading costs, but this will make it a challenge to rebalance.

  36. Neil June 23, 2014 at 10:43 pm #

    Hi,

    Great article! I`m currently trying to figure out what to do now that my TFSA and RRSP accounts are full.

    Can you please advise how holding Canadian equities in a non-registered account (most likely with Questrade) complicates the yearly tax return, in terms of information required on transactions, gains, losses, etc)

    Thanks,

  37. Sebastien June 25, 2014 at 10:50 pm #

    I made an Excel Workbook that follow the logic of a post on MoneySense.ca (http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions) to make the portfolio rebalance and asset (re)allocation very easy. It should be fine for most Couch Potato investors, but please check with your advisor to make sure it is right for your situation. I am not responsible for any loss that can happen by using this Workbook.

    Download link: https://drive.google.com/file/d/0B6x4qQK9cyjheDNXY29SeEtSS3M/edit?usp=sharing

    You will have to download the file (CTRL-S or File / Download) if you want to be able to make any changes.

    Feel free to report any issue or improvement by writing a new comment here.

  38. Sebastien June 26, 2014 at 2:41 pm #

    @newbie: I suggest you try my Excel Workbook to see how you could allocate your money between different asset classes and account type. Here is what I think is best:

    1. Maximum amount should be put in Fixed Income / RRSF account first, but with some rules to make sure we can be the most tax efficient with foreign equity.

    2. Remaining amount should be put in Fixed Income / TFSA account. In my opinion, you should always start filling your TFSA with Fixed Income as you may need some money someday and there is better chance you will not lose money on short term with Fixed Income than with equities.

    3. Maximum amount should go in your EAFE equity / RRSF account.

    4. Maximum amount should go in your US Equity / RRSF account.

    5. Maximum amount should go in your Canadian Equity / RRSF account.

    6. Maximum amount should go in your Canadian Equity / TFSA account.

    7. All the remaining money not classified should go in a non-registered account.

    Note: Make sure you never go over your TSFA or RRSP cotisation limits.

    As you can see if you use my Excel Workbook, I have some simple formulas to optimize tax efficiency. I found the best Fixed Income amount to split between TFSA and RRSF based of the amount of foreign equity. The rules are set to get the most tax return in your RRSF + tax exemption in both TFSA and RRSF.

    Why didn’t I suggest to put US equity and EAFE equity into a TFSA account? Because, after reading this post (http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/), I think we should not do that (read what is wrote under “What type of account?”). If I am wrong, please correct me so I can adjust my Excel Workbook.

    @Neil: If your TFSA and RRSF are full, I guess your next step is to invest in a non-registered account and keep your portefolio in balance. You can try my Excel Workbook to have an idea of how you could split your money between different asset classes and account types.

  39. Sebastien June 26, 2014 at 5:08 pm #

    While reading comments on “Making Smarter Asset Location Decisions” post, I found out that TFSA is always better than non-registered account. I adjusted my Excel Workbook accordingly.

    After step 6 in my previous comment, it should be:

    7. Maximum amount should go in your EAFE equity / TSFA account.

    8. Maximum amount should go in your US Equity / TSFA account.

    9. All the remaining money not classified should go in a non-registered account.

  40. dan lewinshtein July 16, 2014 at 8:30 pm #

    if you only had room for either a US-based small cap ETF (VB) or a hedged canadian-based europe ETF (ZEQ) or a US- based pacific ETF (VPL), which would you preferentially put in RRSP?
    thanks!

  41. Nathan July 16, 2014 at 8:50 pm #

    @dan, I’d go for VPL. Has the highest distribution yield of the three, so you’ll save the most there (assuming the others are going in a taxable account). ZEQ’s yield is only slightly lower, but with VPL you also have thae advantage of saving the US withholding tax, rather than having to wait to get it back with your tax return (as a foreign tax credit).

  42. Canadian Couch Potato July 17, 2014 at 7:00 am #

    @dan: It’s impossible to answer asset location questions without knowing the details of the whole portfolio. Overall Nathan’s comment is accurate: the one with the highest yield would tend to be the preferred one for the RRSP. However, note that the US withholding tax is 15% while the effective rate on an international equity ETF tends to be lower. Note also that hedged ETFs can be quite tax-inefficient because the currency forwards sometimes generate large capital gains, so they are often best held in a tax-sheltered account.

  43. Nathan July 17, 2014 at 1:29 pm #

    Interesting, didn’t know that about hedged ETFs. (Haven’t really looked at them too closely since I don’t personally use any.)

  44. Ross September 6, 2014 at 7:02 pm #

    Hey there,

    I am new to investing using the couch potato portfolio. I was wondering how you would divide your assets if you were using the TD e-series model portfolio? In other words, is it more effective to put the bond index in my RRSP and keep the Canadian equity index in my taxable non-registered account? What about the international and U.S. indexes?

  45. Canadian Couch Potato September 6, 2014 at 7:26 pm #

    @Ross: Have you maxed out your RRSP and your TFSA (as well as your spouses TFSA, if applicable)? If not, it is usually best to fill those up before you invest in taxable account at all. If you have a mortgage (and certainly if you have other debt) you can make a good argument that these should also be paid down before building a non-registered portfolio.

    With that out of the way, if you’re using the e-Series funds and you need to hold some assets in a taxable account, my suggestion for order of preference is Canadian equities first, then US equities, then international equities. The bond fund should not be held in a taxable account.

    http://canadiancouchpotato.com/2014/04/24/do-bonds-still-belong-in-an-rrsp/
    http://canadiancouchpotato.com/2013/03/06/why-gics-beat-bond-etfs-in-taxable-accounts/

  46. Que September 6, 2014 at 11:30 pm #

    @Dan: if you were paying a mortgage with an interest rate of 2.1%, would you still think you would want to pay off the mortgage before you invest in a taxable account?
    Thanks, Que

  47. Canadian Couch Potato September 7, 2014 at 9:31 am #

    @Que: I don’t think there’s a right or wrong answer to that question, since paying off debt and investing are both good choices. Personally, I like the idea of earning a risk-free, tax-free return by paying down the mortgage, but you can definitely make a mathematical argument that your ultimate return could be higher with the investment option when the rate on the mortgage is so low. If you’re in the position you can always do a little of both!

  48. Oldie September 7, 2014 at 12:46 pm #

    “Personally, I like the idea of earning a risk-free, tax-free return by paying down the mortgage”

    What’s not to like? Mortgage is debt, plain and simple. I think risk-free, tax free says it all. Unless the penalties on early pay-out are exceptionally punitive, it would be hard to justify not fully paying down the mortgage before putting any money into investments involving any risk. Every dollar of mortgage paydown would be the equivalent of a a dollar investment with a 2.1% tax-free (not tax deferred) guaranteed return. If, instead, you invest in anything that potentially offers a higher return than that for some risk, you have to remember you are taking that risk with borrowed money.

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