Ask the Spud: Can I Make Taxable Investing Easier?

In Episode 4 of the Canadian Couch Potato podcast, I answered the following question from a listener named Jakob:

I’m currently investing with all my ETFs in RRSP and TFSA accounts. This year, however, I’ll finish paying off my mortgage, so I will have more surplus cash and will have to start using taxable accounts. I have been reading your blog posts about adjusted cost base, and they’re helpful, but it still sounds like a pain to track and calculate. I’d consider paying some extra fees for help with this. What options do I have?

Investing in a non-registered account involves a lot more hands-on work than RRSPs and TFSAs. While there’s no such thing as a maintenance-free taxable portfolio, you can certainly make your life easier with a few simple strategies:

1. Consider alternatives to ETFs. Make no mistake: ETFs are generally tax-efficient and they can be a great choice in non-registered accounts. But if you’re a novice index investor, consider other good products that require a lot less recordkeeping. Mutual funds, for example, track your adjusted cost base at the fund level, rather than relying on you or your brokerage to do all the work. In most cases, you won’t have to make any manual adjustments for return of capital or reinvested capital gains. So if you use the TD e-Series index funds in your taxable portfolio, you will find them easier than ETFs.

Another option, if you’re holding fixed income in your taxable account, is to use GICs instead of a bond ETF. There are some tax-efficient bond ETFs available, but again, you will have to do a little work to ensure the book values are accurate. Whereas with GICs there are never capital gains or losses: all you need to do is report the interest indicated on your T5 slip.

2. Keep your ETF holdings simple. I always prefer simplicity in investing, but it’s even more important in a taxable account. This is not the place to build a portfolio with nine or 10 ETFs, especially since these days you can get global diversification with just two or three. You can also reduce your recordkeeping (and probably increase your returns) by keeping your transactions to a minimum.

Just as important is the type of ETFs you select. It’s easy to get seduced by exotic ETFs that use exotic income-oriented strategies like writing covered calls or advertise other forms of “enhanced income,” but these are even less appealing in taxable accounts, because a lot of that income is return of capital, which means more adjustments to your cost base.

Plain-vanilla, broad-market index ETFs tend to pay little or no return of capital, and they often have fewer reinvested capital gains as well. All of which makes your bookkeeping more painless.

3. Don’t use US-listed ETFs. There are some clear advantages to using US-listed ETFs in RRSPs, including reduced foreign withholding taxes. But I don’t recommend them in taxable accounts if you’re looking to make life simpler.

In Canada, capital gains and losses must be reported in Canadian dollars. That means if you buy a US-listed ETF, you need to track its cost base in Canadian dollars, and that means knowing the exchange rate on the settlement date of every transaction.

Online brokerages often do an incomplete job of tracking ACB with Canadian ETFs, but with US-listed ETFs they’re useless. The onus is entirely on you to look up the historical exchange rates when doing your calculations. Do you really want to inflict this on yourself to save a few basis points in MER?

4. Don’t use DRIPs. With a dividend reinvestment plan, or DRIP, you can have your ETFs’ distributions paid in new shares instead of cash. These plans are hugely popular with DIY investors, and they can indeed be convenient in TFSAs and RRSPs, because they keep more of your money invested and they keep your cash balance nice and small. But I suggest avoiding DRIPs in taxable accounts. This is because every reinvested dividend increases your ACB, which means more transactions to record. And if you don’t make these adjustments you may pay more tax than you need to.

I suggest simply taking the dividends in cash and reinvesting them once or twice a year when you’re adding new money and have to make a trade or two anyway. Many investors think this undermines the power of compounding, but as Justin Bender has shown, it will probably have a much smaller effect than you think.

5. Don’t open more than one non-registered account. There are good reasons to consolidate your accounts at one brokerage, at least as far as possible. This is particularly good advice with non-registered accounts. Remember that CRA doesn’t care where you hold your investments, so if you own, for example, 1,000 shares of an ETF in Account A, and another 500 in Account B, you need to accurately track the cost base of all 1,500 shares across both those accounts. Even if each brokerage did this correctly for the shares it holds (and that’s a big if) there is no way the aggregate book value is going to be accurate.

I have seen this happen with investors who use an advisor to manage part of their portfolio while also doing a little freelancing on the side. It’s problematic if these two accounts include the same security: if either you or your advisor sells all or part of the holdings chances are high that you’ll report the gain or loss inaccurately.

If you can’t avoid having multiple taxable accounts, at least take care to avoid holding the same ETF in more than one.


56 Responses to Ask the Spud: Can I Make Taxable Investing Easier?

  1. Canadian Couch Potato February 7, 2017 at 9:16 pm #

    @Neil: Thanks for the comment. I’m afraid I don’t know whether Nest Wealth is doing this accurately. Might be worth a call or email to them.

  2. Mick higgins February 12, 2017 at 4:42 pm #

    Spud, re taxes and what to hold in a non- reg account. I have a very simple Couch Potato portfolio (40% bonds in RRSPS) and 60% stocks. I’ve maxed out my RRSPS and the equities are rising too much (a nice problem). But I’m now 35% bonds 60% stocks. I’d also like to reduce my risk to 45-55. So do I buy bonds in non-registered account and take the tax hit or try preferred shares? Or are there other options?

  3. melwin February 13, 2017 at 8:39 am #

    @CCP, I noticed tax distribution forms are missing from CDS website for Horizon’s swap-based ETFs (HBB, HXT, HXS) . Would that mean the ACBs for these funds haven’t changed over the years? If so, these products offer convenience of mutual funds at much lower fees? I’d love to hear your thoughts!

  4. Canadian Couch Potato February 13, 2017 at 9:37 am #

    @Melwin: Swap-based ETFs do not make distributions. So, yes, they would be easier when it comes to ACB tracking. I’m not sure that’s a good reason to use them, however. One does need to understand how they work and the potential risks they carry first.

  5. dodoi February 13, 2017 at 3:36 pm #

    Since my wife’s and my RRSP rooms are relatively small and the TFSA is maxed out we have been used Can and US cash account for awhile. Some advice that I would have for others:

    a) use separate accounts for yourself and your wife. It is easier at the tax time and when you retire.

    b) do not use mutual funds (I would include td e-series too), exotic etfs, specialty etfs, tax efficient etfs, nothing out of ordinary.

    A mutual fund/exotic(specialty) etf might not perform like you expect or it might not fit your portfolio anymore(please remember that your cash account might be for a long period of time 10, 20, 30 years). If you would like to sell it you might be in the situation to pay capital gain. It has happened to me with XIU or even worse with an US LVL etf fund. An US$ fund could be even worse. I bought LVL when the Canadian dollar was at parity and now even if I have a loss in US$ in CAN$ I have a capital gain. For now I am stuck with it.

    There is no guarantee for how long a tax efficient etf or a mutual fund (e.g. corporate class mutual funds) will keep its status.

    TD e-funds is specific only to TD. If you would like to transfer out your funds to another broker you will need to sell them (possible capital gain)

    c) harvest the capital loss: if you have a capital loss at the end of year sell that etf and buy an equivalent one. You need to be careful because if they share the same index you could be denied the capital loss. The capital loss will be useful later when you retire (less taxes).

    d) when you build the portfolio look at the big picture where each asset class fits the best. Do not treat RRSP, TFSA, LIRA, etc as a separate portfolio. You might find out that you need an US cash account like me. You may have to fill out a T1135, but the US tax (15%) deducted each year is a tax credit.

    Again you will need to look at the big picture at your portfolio. My wife and I could be in an interesting situation. Our CPP pensions will be small and since our RRSPs are relatively low if we retire early, melt down first the RRSPs, and move any Canadian dividend source to TFSA we will be eligible for some GIS. Also we could supplement our income with the dividends from TFSA and continue to contribute in kind to TFSA every year decreasing every year our eligible income for GIS.

  6. Canadian Couch Potato February 13, 2017 at 10:02 pm #

    @Mick: Well, I definitely would not add preferred shares: no need to stray from your original plan to hold only bonds and stocks. It’s very hard for me to say anything else without knowing any details.

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