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 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.

 

94 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.

  7. Jason M February 26, 2017 at 4:08 pm #

    Does the advice to avoid DRIPs also apply to mutual funds like the TD series?

  8. Canadian Couch Potato February 26, 2017 at 9:51 pm #

    @Jason: No, because mutual funds do not require manual ACB tracking the way ETFs do.

  9. Jeffery Ha February 27, 2017 at 11:11 pm #

    Hi Dan,

    Can you expand on what you mean by do not require manual ACB tracking?

    I invest in the TD E Series and my drip buys additional shares at the closing price of when they make distributions. I’ve been tracking it though at what price it was bought at and number of shares bought.

  10. Canadian Couch Potato February 28, 2017 at 8:08 am #

    @Jeffery: Mutual funds update their ACB automatically at the fund level, so you can usually be confident that the book value you see in your account is accurate. You do not normally have to track anything yourself. That is not always the case with ETFs, especially those that distribute return of capital or reinvested capital gains.

  11. Ed February 28, 2017 at 11:00 pm #

    Hi Dan,

    Thanks for this great and informative article! Just a quick question, is it a good idea to open a Tangerine Investment Funds non-registered account? Is there anything I need to be aware of if I sell any shares in the future regarding to capital gains and income taxes?

  12. Canadian Couch Potato March 1, 2017 at 9:43 am #

    @Ed: Tangerine is not a great choice for non-registered accounts, as the bond component of the funds is quite tax-inefficient. Otherwise, the treatment of capital gains and losses is very straightforward: if you sell shares for more than you paid, you’ll need to report that gain on your tax return.

  13. Eli March 4, 2017 at 12:55 pm #

    Can the tangerine ACB tracking be trusted ? I noticed last year that my printed tax slip from tangerine mutual funds included a value for ACB, but that the same form’s details on CRA ‘s My Account (i.e. Submitted to them electronically by Tangerine ) did not include the ACB.

  14. Mick higgins March 5, 2017 at 2:55 pm #

    HI Dan, if I stay away from preferred shares then I’m looking for a bond etf to hold in taxable account. I just read your post from November 2014 regarding holding Zdb or HBB in just such accounts. Does your opinion still hold that these are relatively tax-efficient when held in taxable accounts? Has your opinion changed in the last few years?
    Also, thanks for this website. It has been a constant source of good advice for couch potatoes.

  15. Canadian Couch Potato March 5, 2017 at 4:34 pm #

    @Mick: Yes, both would still be appropriate in a taxable account. Note that HBB carries the additional risks inherent in any swap-based ETF.

  16. Travis Judd March 9, 2017 at 6:26 pm #

    Hello Dan, I am 26 years old and just started my career working for the New Brunswick provincial government. I assume that I will be at my lowest tax bracket and will have an increase in salary over the life of my career. I am going to open a TD e-series account thanks to all your awesome advise and guidance. My question:

    Which TD e-series account should I open up first, RRSP or TFSA?

    Thank you so much again for everything and I can’t wait to hear back from you soon!

  17. Canadian Couch Potato March 9, 2017 at 8:24 pm #

    @Travis: Thanks for the comment. In general, if you’re young and in a low tax bracket, a TFSA is likely to make more sense for now. If you’re working for the government, you will likely be making pension contributions anyway, which will use up much of your RRSP contribution room. And a TFSA is much more flexible if you ever need to dip into the account for a down payment, education, etc.

  18. Zach March 14, 2017 at 1:10 am #

    Does the CRA treat a corporate non-registered account separate from a personal one when calculating the ACB?

  19. Andrew March 14, 2017 at 3:41 am #

    I have opened a non-registered (taxable) self-directed account and I have been doing a bit of research on the taxes which has lead me here once again. I have already maxed out my RRSP and TFSA accounts with the ETF strategies you and Justin have offered, and now I’m hoping for a bit of help here with using ETFs in the taxable account. After reading this post and listening to the related podcast, and your previouos ones, I’m looking to keep it very simple. I was actually curious if there is one global ETF I could use? I like the idea of the one fund strategy you discussed with Lars Kroijer, and with the potential troubles/issues with taxes I would like to keep it as simple as possible. Or should I go with a similar route as one suggested by Justin and go with two funds like VCN and VXC to get an ovearall reach? My RRSP and TFSA accounts are both an even mix of 3 ETFs: Canadian, US and International.

  20. Canadian Couch Potato March 14, 2017 at 8:32 am #

    @Andrew: I continue to suggest using separate ETFs for Canada and foreign equities. But keep in mind you can set up your portfolio with only Canadian equities in the taxable account and just compensate by holding less of them in the RRSP. As long as your overall asset mix is on target you do not have to keep the same holdings in all of your accounts.

    http://canadiancouchpotato.com/2012/03/12/ask-the-spud-investing-with-multiple-accounts/

  21. Carly March 14, 2017 at 11:08 am #

    Hello Dan,

    My questions is about where to hold what. Almost all the articles I read suggested hold bonds in registered account because it’s more tax efficient. But generally speaking, for the long term, the total return on stocks will be much higher than bonds, so one should hold stocks in registered account and bonds in no-registered account, this way the return on stocks will be tax deferred or tax free.

    Please help me understand why I am wrong.

  22. Canadian Couch Potato March 14, 2017 at 12:30 pm #

    @Carly: You’re not wrong, it’s just that it’s more complicated than “this goes here, that goes there.” The details matter a lot. This article helps introduce the major concepts:
    http://www.moneysense.ca/invest/asset-ocation-everything-in-its-place/

  23. Wreckingball April 6, 2017 at 5:45 pm #

    Hi Dan, another great article.

    You seem to harbour a bit of skepticism about the accuracy of brokers tracking of ACB for ETFs. I have a taxable account, with BMO, in which I have several ETFs (including a couple of the covered call types) along with a diversified group of individual stocks. As a result of your comments re: tracking ACB, I spent a productive afternoon recently checking the current ACB of these ETFS using the T3 statements for the past few years. In every case I determined that the current BMO calculated ACB exactly matched my computed value.

    Based on my finding would you think it reasonable for me to just rely on their annual ACB adjustments or would you recommend checking them each year?

  24. Canadian Couch Potato April 6, 2017 at 7:47 pm #

    @Wreckingball: Some brokerages do seem to be doing a better job of tracking the ACB for ETFs by adjusting for return of capital and reinvested capital gains. RBC does it properly, and BMO might as well, I am not sure. I know some others do not. In any case, you would not be able to check this from looking at your T-slips, because T-slips do not tell you whether the capital gains were paid in cash or reinvested:
    http://canadiancouchpotato.com/2016/12/13/making-sense-of-capital-gains-distributions/

  25. Charlie April 29, 2017 at 12:40 pm #

    Dan thanks for another great read. What would your recommendations be for US funds that we don’t want to convert to CDN for investments in a joint non-registered account? We currently follow the Couch Potato model. Thanks for any insight you can provide. Charlie

  26. Canadian Couch Potato April 29, 2017 at 12:53 pm #

    @Charlie: In general I’d recommend converting the USD using Norbert’s gambit. There really is little benefit to keeping the funds in USD unless you plan to spend it, and if that’s the case, then it’s not a long-term investment. It is easy enough to buy US-listed ETFs, but in taxable account it cokes with the bookkeeping issues described in the post.

  27. Kevin April 29, 2017 at 1:15 pm #

    @Dan: Thanks for the blog posts, I have been reading them over the years and have used your model portfolios in my TFSA and RRSP.

    Is there any implication of using your TD e-Series Funds in your model portfolio for a taxable account?

    More specifically for the Canadian Bond (TDB909); is there a better choice like ZDB for ZAG? or it works same way?

    Thank you in advance.

  28. Canadian Couch Potato April 29, 2017 at 1:29 pm #

    @Kevin: Unfortunately there is no tax-efficient bond index mutual fund. Usually the best way to handle this is to structure your portfolio so the bonds are in your RRSP. Another option is to use GICs for most of your fixed income.

  29. Andy May 1, 2017 at 12:02 pm #

    I am in the fortunate position of having some inheritance money to invest. My TFSA and RRSP have already been maxed out. I was treating them each as separate portfolios, so they each have a mix of Bonds, Canadian and International equities. I mostly hold VAB, VCN, VDY and VXC, with some Canadian stocks thrown in for fun (SHOP, TD and DOL).

    Even if I rebalance, I can’t have all Canadian funds in my taxable account or it will massively throw off my AA. Right now I’d be looking at having all bonds in my RRSP; VXC and VAB in my TFSA; and then a mix of VXC and VCN in my taxable account, as well as my individual stocks. Can you suggest any other way of doing it to help maximize tax savings (in Ontario)? I could also leave my stocks where they are, and then I’d need a bit more VXC in my taxable account to help balance it out. Thanks for the great site!

    Trying to make the most tax-efficient decision is definitely giving me paralysis by analysis.

  30. Canadian Couch Potato May 2, 2017 at 11:11 am #

    @Andy: The first thing I’d say is that there is no optimal asset location strategy, so don’t tie yourself in knots. If you have determined a target asset mix (stocks v. bonds) that always has to come first. That could mean you need to hold fixed income in a non-registered account, which is fine as long as you avoid the least tax-efficient products (i.e. most traditional bonds ETFs such as VAB).

  31. Andy May 3, 2017 at 12:55 pm #

    @Dan: Thank you! I just needed some reassurance that I need to pull the trigger. I’ll stick to VXC and VCN in my non-registered account, maybe some VDY for fun. I’ll keep the bonds far, far away 🙂

  32. Sam May 24, 2017 at 10:16 pm #

    Hi Dan,

    First of all thanks for all the great articles, blog posts and podcasts! I’m a strong believer in passive index investing and am pretty much ready to take the plunge and invest using the couch potato methodology.

    My question revolves around a professional CCPC which I established less than a year ago. I have and will continue to have retained earnings in the CCPC which is obviously taxable and given it will be passive income, taxed at a high rate to boot.

    I have very few investment at the moment and am sitting almost completely in cash. RRSP, TFSA are both maxed (yes, still cash) but it’s time to go for this.

    So, assuming I want to start investing using 3-4 index ETFs (or e-series funds perhaps), what’s the best way to structure and split it all. The issue revolves around your point 5 above – “avoid opening more than one non-registered account” Unfortunately, multiple non-registered accounts are a necessity given the CCPC.

    How do I decide which tax-efficient investments should go into the CCPC and which into my personal taxable account? I’m assuming it would make sense to avoid duplication of funds in different accounts to save on transaction costs (although I suppose using Td e-series could solve transaction costs in this case).

    Quite soon my CCPC retained earnings will exceed my RRSP and TFSA room and also my personal non-registered account. To complicate things further I have a fair amount of USD in both the CCPC and personal non-reg accounts.

    So, any thoughts on how to simplify this and avoid a giant headache when it’s time to rebalance? Lets assume at 40/60 bond/stock index ETF mix. Should Ignore my personal non-registered accounts and only use the CCPC? Use both together? Do I care about things like dividend flow-through and the CDA in a cough potato portfolio? I just want to get started!

    I feel like a full article could be helpful 😉

    Thanks!

  33. Canadian Couch Potato May 24, 2017 at 10:32 pm #

    @Sam: Thanks for your comment. Investing across multiple accounts, one of which is a corporation, is not straightforward and is likely to be very difficult for all but the most experienced investors. It’s way beyond the scope of a blog post or two. This is generally the point when I suggest investors think seriously about working with a professional.

    At the most basic level, it is usually most tax-efficient to hold Canadian equities in the corp, followed by tax-efficient fixed income (such as GICs or a discount bond ETF). You will probably not be able to avoid duplicating funds in the various accounts.

    RE: opening multiple non-registered accounts, if you have a personal non-registered account and a CCPC these are treated separately when calculating ACB, so the problem is not the same as if you had two personal non-registered accounts.

  34. Lily May 27, 2017 at 12:44 pm #

    Am a mid 20s professional about to max out my TFSA with a roboadvisor (in a growth ETF portfolio) and my RRSP with TD e series. I work during the day (with no breaks often) and so am often busy during market hours. I am considering switching to ETFs when my portfolio is much larger but as of right now, the convenience of TD e series outweighs the cost. Considering that the MER of Td e series is ~0.45 and the MER of the roboadvisor is aprox ~0.7, I’m leaning towards opening a personal DI account with TD and continuing with e series for my personal account. Are there any downsides to this with regards to calculating ACBs and with regards to long term planning (ie someone mentioned to me that they saw on the TD website that e-series may be discontinued.. but I can’t find that duplicated anywhere). Thanks!

  35. Canadian Couch Potato May 27, 2017 at 4:50 pm #

    @Lily: That thread about the e-Series funds being discontinued was misinformation. I called TD to confirm and they changed the information that had appeared on their “TD Helps” site.

  36. Susan July 13, 2017 at 4:20 pm #

    I am looking for the simplest possible way for my young adult daughter to start investing. She is a student who works in the summer only and it will be at least 2 years before she makes more than $20,000 per year. She is fortunate in that she received an inheritance that allowed her to max out her TFSA so now she is looking at investing in a non-registered account. She was thinking about the Tangerine Balanced Growth fund. I know you mentioned that the bonds in it are not tax-efficient but in her case, with her low income, would it be OK?

  37. Canadian Couch Potato July 14, 2017 at 12:02 am #

    @Susan: If your daughter is a very low earner and not paying much tax, then the tax-inefficiency of the Tangerine funds is not an important concern. Eventually if she moves into a higher tax bracket. Don’t forget she can add $5,500 to the TFSA every year, so unless she is savings much more than that, she should not have to worry about tax optimization in the non-registered account. Good luck!

  38. Mike July 14, 2017 at 6:38 pm #

    Hi Dan,
    What would you recommend to someone in a similar position, but where one spouse has plenty of RRSP room? Her salary is ~$50K and her retirement income will be ~$30K, so a low-moderate tax savings in regard to tax bracket differential. The question, in another way. is should you always max out your RRSP room before starting to use non-registered account?

  39. Canadian Couch Potato July 15, 2017 at 11:04 am #

    @Mike: It’s not always best to max out an RRSP before investing in a non-registered account, but if you are confident your tax rate will be lower in retirement then it is usually a good idea. Remember that an RRSP has behavioural benefits as well: it earmarks your savings for the long term and makes it much less likely you will touch that money before retirement.

  40. Nicolas Chenail September 6, 2017 at 9:13 pm #

    is VTI the only one exempt from the 15% US withholding taxes on dividends if it is held in an RRSP, or VUN as well?

  41. Nicolas Chenail September 6, 2017 at 9:17 pm #

    question #2: If i use VTI in my RRSP, do I need to use Norbert’s gambit? thanks a lot

  42. Canadian Couch Potato September 6, 2017 at 9:31 pm #

    @Nicholas: Only US-listed ETFs are exempt from the withholding tax in an RRSP:
    http://canadiancouchpotato.com/2016/07/11/foreign-withholding-taxes-revisited/

    If you use US-listed ETFs you don’t have to use Norbert’s gambit: you can accept your brokerage’s currency conversion costs. But this is not recommended, as it may wipe out the benefits of using US-listed finds (i.e. lower MERs and lower withholding taxes):
    http://canadiancouchpotato.com/2012/12/17/how-much-are-you-paying-for-us-dollars/

  43. Nicolas Chenail September 12, 2017 at 7:40 pm #

    Hello dan,

    concerning assets’ location, I know you said Canadian equities are the #1 choice for unregistered accounts because of tax efficiency, but is that true throughout Canada?

    Per exemple, I live in Quebec. Am I wrong thinking tax efficiency varies from province to province since we’re not taxed at the same rate? Are there specific provinces where it’s better to put US equities instead of Canadian ones?

    thanks in advance

    Nic

  44. Canadian Couch Potato September 12, 2017 at 8:36 pm #

    @Nic: Excellent question. My colleague Justin Bender recently did a blog on exactly this issue:
    http://www.canadianportfoliomanagerblog.com/asset-location-across-canada-some-rules-are-made-to-be-broken/

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