Making Smarter Asset Location Decisions

Last week’s posts about tax loss selling prompted some interesting questions about asset location in the comments section. Holding your ETFs and index funds in the most tax-efficient accounts can have a big impact on your long-term returns. But although it’s often easy to set up a portfolio with proper asset location, it can be a challenge to maintain the right balance when you add new money.

Say you’re using the Global Couch Potato portfolio spread across three accounts. Your TFSA and RRSP are maxed out at $25,000 and $125,000, respectively, and you have another $75,000 in a non-registered account. Your optimal asset location might look like this:

Table 1

So far, so good. But now you’ve won second prize in a beauty contest and received a $25,000 windfall. Since you can’t add it to your tax-sheltered savings, you put the money in your non-registered account. Then you enter the new values into your rebalancing spreadsheet and discover your portfolio is now off its target:

Table 2

The naive way to rebalance your portfolio would be to make all the transactions in your non-registered account. You could simply use your new cash to buy $10,000 worth of bonds and $5,000 each of Canadian, US and international equities:

Table 3

Now your portfolio is in balance, but it’s not very tax-efficient because you’re holding bonds in a taxable account. A better solution would be to use the new $25,000 to top up your non-registered holdings in Canadian equities ($5,000) and US equities ($20,000). Then in your RRSP you should sell your $15,000 of US equities and buy more bonds ($10,000) and international equities ($5,000). Now the portfolio looks like this:

Table 4

All the tax-inefficient bonds are now safely in your RRSP, while the US stocks are in your non-registered account, where the foreign withholding taxes on dividends are recoverable and you can benefit from tax-loss harvesting. You’ve not only made your portfolio far more tax-efficient, but also easier to manage as you’re now dealing with just five holdings instead of eight.

You don’t need to worry much about these kinds of decisions when making small monthly contributions. But any time you make a large lump sum contribution it’s worth getting out the spreadsheet and finding the most elegant and tax-efficient way to divide your assets among all your accounts.

129 Responses to Making Smarter Asset Location Decisions

  1. Rob December 22, 2013 at 8:16 am #

    This makes a lot of sense, Willy… thanks for clarifying…

    However, I was a bit concerned by what I read from this very website in an article on RRSPs from 2010. It stated the following:

    “There is one group that doesn’t need RRSPs at all: government workers. Teachers, police officers and other civil servants have among the best pension plans available and won’t need help from RRSPs to retire comfortably. For instance, a couple who are both government workers can expect to enjoy a combined annual pension income of at least $50,000, which is roughly the kind of income that a million-dollar portfolio would generate.”

    As I mentioned previously, we are both teachers!

  2. Willy December 22, 2013 at 10:30 am #

    @Rob: Yes, that advice is rooted in the same concept. If you are in a position where you are likely to have a very substantial pension (either public sector or private – though the latter is largely disappearing), then it is likely that you will have a high taxable income in your retirement. Per the above, this lessens or eliminates the advantage of an RRSP, and usually makes a TFSA a better choice. Though, again, everyone’s situation is unique, so it’s worth thinking about yours specifically. The statement above does not mean that teachers should never contribute to an RRSP, only that you need to consider your other potential sources of retirement income. And certainly the statement above was not comprehending using the HBP as you are discussing. You might actually consider speaking with a tax accountant about some of this.

  3. Rob January 16, 2014 at 4:28 am #

    Hey folks, on a somewhat unrelated matter (don’t know where else to post this question!), when opening up an investment account (e.g. TD e-Series or Streetwise), can I purchase funds within an RRSP (say $5000) and contribute up to $5500 within my allowable TSFA throughout the year in intervals? So in other words, can these types of investment funds be bought and “basketed” within both types of registered accounts?


  4. Canadian Couch Potato January 16, 2014 at 9:06 am #

    @Rob: RRSPs and TFSAs are separate accounts. You can open one of each at the same institution and use the same investment funds, but they’re completely separate.

  5. Rob January 16, 2014 at 8:14 pm #

    Thanks… so it seems that you can build the fund while sheltering it from taxes. I was just confused as to whether more of the fund (say a TD Canadian Index Fund – e) could be purchased. Thanks for your help.

  6. R February 17, 2014 at 5:59 pm #

    Wow this is a great post. It makes my head hurt, definitely some math going on here. What type of advisor could I hire to do this to type of analysis for me? I don’t like the idea of portfolio managers because then I’m giving up control. I need some kind of portfolio advisor. My concern is the fee-only type are too expensive (as in the amount they’ll save me by tweaking for tax advantages etc will be less than the amount they charge)

  7. Stephen February 25, 2014 at 9:17 pm #

    So the above situation your TFSA has been maxed at 25,000.

    Let’s say my TFSA has a max of 31,000 (2009-2014).
    Let’s say I have :
    22,000 TFSA
    27,000 RRSP
    0 Non-registered account

    If I have 9,000 room in my TFSA (31,000-22,000).
    Is it more tax efficient to hold Canadian ETFs -with US holdings like VUN in the TFSA
    Or in the non-registered account ?

  8. Canadian Couch Potato February 26, 2014 at 12:51 am #

    @Stephen: A TFSA is always going to be better than a non-registered account. While you would be forfeiting the foreign withholding tax, this is very small compared to the income tax on the dividends and capital gains.

  9. Ryan June 21, 2014 at 1:13 am #

    Does it make any sense to diversify the funds in a registered account in order to mitigate the risk that a single fund in the registered account may under-perform and (somewhat) negate the tax savings, or am I better off straight-up prioritizing tax-inefficient funds?

  10. Dave August 16, 2014 at 2:19 pm #

    What would the ideal asset location be if I don’t need to use an unregistered account?

    My asset allocation is 25% bonds, 25% Canadian, 25% US and 25% International.

    I have 104K – 30k in TFSA and 74k in RRSP. I’m 33 and saving for retirement.

  11. Canadian Couch Potato August 16, 2014 at 8:19 pm #

    @Dave: If your portfolio is all in RRSPs and TFSAs and you’re using Canadian mutual funds or ETFs then asset location is really not a significant concern.

  12. Be'en August 21, 2014 at 10:38 pm #

    I thought holding US equities (ETFs) would be more optimal in an RRSP than International ones. If the reverse is true, than does HXS have any significant advantage over say VUN or VTI when held in the non-registered account?

    I am very poorly diversified outside of Canada and wish to remedy that this year while at the same time get the asset locations right! One of the readers has mentioned global REIT as a means of diversifying the REIT holdings. Which global REIT would you recommend?

    Thanks in advance, Dan.

  13. Canadian Couch Potato August 23, 2014 at 10:11 am #

    @Be’en: The withholding tax on international equities is generally lower than on US equities, but currently international equities have a significantly higher yield. So if you need to hold equities in a non-registered account, the order should be Canadian, US, and then international. That could change in the future.

    HXS could have some tax advantage in a non-registered account, since all of the growth is tax deferred and ultimately taxed as capital gains. Of course, there is the higher cost (there is a 0.30% swap fee on top of the 0.15% MER), some counterparty risk, and the risk that the government will disallow the structure in the future.

    As for global REITs, have a look at RWO from iShares and VNQ/VNQI from Vanguard. (With our clients we use the DFA Global Real Estate fund, but this is not available to retail investors.) Note that these funds are very tax inefficient and should be held in an RRSP if possible.

  14. Ben October 5, 2014 at 10:21 am #

    Hi Dan,

    If one is forced to hold some additional bonds in a non-registered account, would it be more efficient to hold XRB or VAB in a non-registered account?

    Love the blog!

  15. Canadian Couch Potato October 5, 2014 at 2:33 pm #

    @Ben; Thnaks for the comment. Any fund that holds premium bonds is poor choice in a taxable account: VAB is tax-inefficient enough, but XRB is particularly bad. Investors who need to hold fixed income in a taxable account should consider something like the BMO Discount Bond ETF (ZDB) or a ladder of GICs.

  16. Edward December 19, 2014 at 12:03 pm #

    With the sheer simplicity of the charts presented here, this article is an invaluable resource when the time comes to rebalance. (I have it both bookmarked and saved to disk.) Of course, I’ve had the information memorized for awhile now, but I still like looking at the “elegance” of it. Seemed to take almost two years of being a Couch Potato for my mind to fully grasp the idea of 4 asset classes spread across 3 accounts and yet *also* see it as only one large pool of money. My butt is still hanging in the breeze in a few places (a small abount of bond index sitting in the non-reg account and a small amount of US in the TFSA), however, the asset locations are getting better all the time. Cheers for this!

  17. Bill February 10, 2015 at 2:15 pm #

    When allocating a percentage between different accounts, can one hold the same ETF (ex. VAB for bonds) in both TFSA and RRSP? or would it be different bond funds – one for RRSP one for TFSA?

    In my situation I have VAB in TFSA but would like to hold the majority in an RRSP when my allocation grows beyond TFSA contribution limit. Holding a smaller percentage in TFSA and then buying a larger percentage in RRSP would be preferable to selling the TFSA holding – If it’s possible to have the same fund (percentage of) in both accounts.

  18. Canadian Couch Potato February 10, 2015 at 2:32 pm #

    @Bill: There’s no reason not to hold the same bond fund in both a TFSA and an RRSP.

  19. Ed February 21, 2015 at 1:09 pm #

    I’m curious why you have bonds in the TFSA and all the Cdn equities in the RRSP. If equities are expected to provide a greater return over the long haul, would it not makes sense to place them in the TFSA where the growth won’t be taxed and keep the more conservative bond investment in the RRSP?


  20. Canadian Couch Potato February 21, 2015 at 2:34 pm #

    @Ed: There are no Canadian equities in the RRSP: they are in the non-registered account. But that said, yes, you can certainly make a good argument for keeping low-growth bonds in the RRSP and high-growth equities in a TFSA. But in this example (and in many investors’ portfolios) that TFSA room gets filled up pretty quickly.

    My point here was simply to show that asset location can be dynamic: it often makes sense to sell an asset class in one account and buy it back in another as a portfolio grows.

  21. Edward February 23, 2015 at 11:10 am #

    I see similar questions to @Ed’s in quite a few forums. Haha.. Maybe it’s time for an article on how with three accounts it’s impossible to completely dodge bond income AND re-invested dividends AND capital gains taxes? Gotta pay the piper occasionally–they pave our roads and stuff, people.

  22. Jason August 28, 2015 at 2:09 am #

    @CCP: Love your site and your twitter feed, a daily must read! My wife and I have been using the TD e-series couch potato portfolio for our RRSP accounts for some time now and we eventually opened up TFSAs with Questrade to run the ETF portfolio. After maxing out all our registered accounts we are now contribute to a taxable ETF account. Until we opened the taxable account it was easy enough just to rebalance each account as asset location did not matter. Now however, we feel it makes the most sense for us to have all investments in at one brokerage using one couch potato portfolio (i.e. Questrade & our ETF portfolio). Unfortunately, because TD e-series funds are limited to TD accounts we cannot simply have the funds transferred in-kind. Do you have any advice when it comes to transferring from the TD e-series portfolio to a full ETF portfolio in another brokerage? Is it best to do an in-cash transfer or maybe do something like switching all the e-series funds to TD investment mutual funds and have those transferred in-kind? I am just worried about being out of the market for the supposed 30+ days it takes to transfer and experience large swings in the market.

  23. Canadian Couch Potato August 28, 2015 at 10:15 am #

    @Jason: Why not switch the e-Series fund to whichever ETFs you were planning to buy at Questrade? I am assuming here that you have a TD Direct brokerage account, but of course this would not be possible with a regular TD Mutual Funds account. If you can’t buy the ETFs at TD then your strategy would be fine, but remember that you may face early redemption fees if you sell the mutual funds too quickly. Check with TD to confirm their minimum holding period: it is usually at least 30 days.

  24. Jason August 28, 2015 at 1:47 pm #

    @ccp: Thank you for your response! No all my TD accounts are just in a regular TD Mutual Funds account. I did not want to open a TD brokerage account just to close it after the move. Therefore, I’ll just switch the to the e-series funds, move them, wait out the early redemption period (30 days for most) and then move them to their EFT equivalents.

  25. Tristan May 21, 2016 at 8:00 am #

    @CCP: Say your portfolio is such that you have 100% bonds in your RRSP, some bonds and Canadian equities in your TFSA, and Canadian, US and international equities in your non-registered account. You win the third prize of $10,000 in a beauty contest, and your asset allocation is such that this needs to be all bonds. Do you buy a $10,000 GIC/ZDB/BXF for you non registered account, or sell $10,000 of Canadian equities in your TFSA and buy bonds and buy $10,000 of Canadian equities in your non registered account? I’m thinking that with interest rates so low, which is worse – loss of tax efficiency by holding fixed income in a non registered account, or loss of higher expected return from Canadian equities in a TFSA?

  26. Canadian Couch Potato May 21, 2016 at 10:28 am #

    @Tristan: It’s a good question and you can’t really know the correct answer except in hindsight. In general, we rarely hold fixed income in TFSAs now, for the reason you mention. For the long-term investor who does not expect to raid his or her TFSA, it is probably better to use that account to hold the assets with the higher expected growth. As you point out, when fixed income is yielding less than 2%, the tax liability is likely to be quite low.

  27. Tristan May 22, 2016 at 10:49 pm #

    @CCP: Thanks. So I guess the same reasoning would apply for US and International equities also? There would be the additional drag of the loss of the foreign dividend with holding tax in the TFSA, but the higher expected return of the equities would be more important.

  28. Heidi January 13, 2017 at 10:35 am #

    HI Dan,

    I have been enjoying your great podcasts! Especially the home bias discussion in your 3rd podcast, it was interesting to hear the views of another expert espeically one outside of Canada.

    Since the original article was posted before your latest model portfolio, I was trying to apply the same concept the VAB/VCN/VXC.
    I only had my RRSP original in QT and moved my Non Registered and TFSA to QT respectively, that is why I spreaded my RRSP acrossed all 3 ETFs.


    *Overall allocation before next rebalancing: VAB (37%) VCN (21%) VXC (42%)

    What would be a better allocation to make it more tax efficient?

    Thank you!

  29. Canadian Couch Potato January 13, 2017 at 1:17 pm #

    @Heidi: Glad you’re enjoying the podcast!

    It’s really hard to say to much about your asset allocation without knowing your whole situation. In general, you want to keep bonds in the RRSP as much as possible and hold more equities in the TFSA. You might also hold less VCN in the RRSP and more in the non-registered account. But you may be limited by contribution limits in the registered accounts.

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