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 one: here’s another great argument for using one-fund ETF portfolios. 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 do a merely 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. Your brokerage will probably do this accurately, but it’s worth double-checking to make sure their numbers are accurate.
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.
I have a company matching savings plan that I contribute 10% of my salary to. It’s a taxable account and the money is locked in until Jan 1st next calendar year. I plan to withdraw all the accumulated savings in Jan every year and reinvest in my RRSP (I do have lots of room) with couch potato portfolio.
Within the savings plan I have a few options available to invest in but since I am planning to withdraw money every year I am a bit confused where I should invest (for the duration of current year) and would it be considered short-term? should I just create a version of couch potato portfolio within the savings plan as well and than withdraw everything once a year and transfer to my RRSP? Any advice is greatly appreciated.
Funds available within the savings plan:
Fund Annualized Percentage
BLK Global Equity Index 0.29 %
PH&N Money Market 0.23 %
BLK Bond Index Fund 0.13 %
BLK S&P/TSX Comp Index 0.13%
@John: I can’t be specific with recommendations, but you should consider that if you invest in a balanced portfolio in the taxable account and then withdraw it every year you will be realizing capital gains/losses every year that you’ll have to track and report on your taxes. So whatever you do, try to keep it as simple as possible.
If one year’s worth of savings represents a small part of your overall net worth (e.g. 10% of your salary is $5,000 and you already have a portfolio over $100K), then just saving in the money market fund is probably easiest. There’s no meaningful opportunity cost to holding a bit of cash for one year before investing it in your RRSP.
I am a Canadian Expat living in Qatar. Will be leaving soon to settle back in Montreal.
I have been a non resident for the last 10 years so I am assuming that that my ability to contribute to my tsfa and rrsp will be none existent or very small.
I have around $250,000CDN to invest in a taxable account. I would like to invest the amount in a lump sum.
I was thinking of the following options:
40% zdb(more tax efficient than vsb in taxable account)
And maybe a couple of Canadian dividend paying stocks.
Re-balancing once a year with a time horizon of 20 years.
Would appreciate your comments.
So my RRSP and TFSA have no more room and I’d like to invest in TD e-series non-registered account. What series do I want to avoid and which ones work best from a taxation/balanced portfolio point of view?
Hi. I’m a bit confused about where to invest in non-registered accounts for international exposure. Your post says to avoid DRIPs, but Justin Bender’s model portfolio for taxable accounts recommends XEF, XUU and XEC. Don’t they all pay DRIPs? Are there other ETFs you would recommend that payout cash dividends, as you recommend in your article? Thanks!
@Lyn: Almost all traditional ETFs pay cash dividends. You need to specifically sign up for a dividend reinvestment plan (DRIP) with your brokerage. This will allow yo to receive the dividends in the form of new shares rather than cash. This is a good idea in registered plans such as RRSPs and TFSAs, but in a taxable account in can make recordkeeping easier if you just take the dividends in cash.
For ETFs, you suggest NOT using DRIP to simplify things. Is it okay to use DRIP for eSeries though? Would the ACB and book value of holdings be update properly in a TD DI account?
Hi, Thanks for all the info.
Can you come up with some sample portfolios for taxable accounts?
Such as for a non registered investment account and professional corporation accounts which are both taxable.
Just some couch potato strategies and sample portfolios to help invest in a tax efficient manner.
@throw0101a: Yes, DRIPs are much less problematic with mutual funds. You can usually trust the ACB calculations with the e-Series funds.
@TJ: The model ETF portfolios are suitable for taxable accounts with the exception of the bond component. Generally if you hold fixed income in a taxable account it is better to substitute some combination of GICs and a tax-efficient bond fund such as ZDB or BXF.
Thanks for everything you’re doing, it is so helpful for the beginner investor that I am. What would you think then of the brand new VEQT which hold no bonds, is equity only and seems to be a good one fund solution. Would you think it might be a wise choice in a taxable account ? Or would you stick with something like VCN and XAW ?
@Frederic: Thanks for the comment. I think if you plan to be 100% equities it’s hard to beat a one-fund solution. I’ll be writing about this new ETF as soon as the details are clearer.
My wife has a separate taxable investment account, and we also have a joint taxable investment account, to keep more income in her name at the lower tax bracket. However, we don’t want duplicate etf’s in the two accounts, to make record keeping easier.
Can you suggest low fee alternates etf’s for VCN, ZDB, XUU,XEF, XEC? So we may keep similar holdings in both taxable accounts without the headache of difficult record keeping.
Also, if we needed to, can I use ETF’S in the joint taxable account and td e-series funds in her separate taxable account, and that would also keep record keeping easier?
Thank you very much!
Your podcasts are very informative!
@TJ: The major ETF providers (Vanguard, iShares and BMO) have pretty similar offerings, with the exception of ZDB, which is unique. (BXF is a possible option, but it is short-term bonds only.)
VCN = XIC = ZCN
XUU = VUN
XEF = VIU
XEC = VEE
e-Series funds are great, but there is no emerging markets and no tax-efficient bond fund.
Depending on your asset allocation and the size of the accounts, you may also want to consider using “one-ETF portfolios” to keep your record keeping much easier. One could use Vanguard and the other could use the iShares equivalent.
If you buy ETFs in a non registered account and turn DRIP off, do you still need to track anything?
Also, I have $50K USD to invest in non reg account (and would like to keep in USD). What would be the best option? Would 3) still apply where US listed ETFs would be bad or not related because it’s already in US currency? Not sure if there’s a post about it already.
@Tammy: Even without a DRIP you still need to keep track of the ACB so you know what your gain/loss will be when you sell. Some brokerages do a better job of this than others, but in any case the ultimate responsibility rests with you:
Tracking US-listed ETFs adds a whole new layer of complexity:
I bought some VGRO for my Corporate account. I am with MD Financial and my advisor assures me that they keep track of ACBs and thus no worry about DRIPs in my taxable account.
When your team buys ETFs in taxable accounts, do you keep track of ACBs and DRIP ETFs in taxable accounts for your clients?
Or do you still tend to not DRIP ETFs in taxable accounts to minimize the complexity.
Because if you still think it’s not a great idea, I best contact them to stop my DRIP.
@Emily: Yes, our firm does indeed calculate the ACB for our clients, and most others should as well. I think you should be fine, though it might not be a bad idea to double-check things after the first few DRIPs to make sure.
Would you ever recommend putting ZDB on DRIP in a taxable account? Or is this something most advisors would not do.
Thank you for all the help you have given me and others with your blog!
@Emily: I don’t see why not. There’s nothing wrong with DRIPs in principle: it’s just that they can make recordkeeping a little more complicated.
TD e-series funds are now available with RBC DI. If I were to invest in these mutual funds with RBC in a taxable account, would I be able to rely on their ACB tracking if I only use these funds?
Thank you for all the help you provide.
@Carl: Yes, you should generally expect ACB tracking on mutual funds to be accurate.
Hi Dan – I’ve been a couch potato since 2008 and adore the simplicity and removal of emotions and behaviour bias. Thank you.
Before the switch to passive investing, I had some individual stocks in a non-registered account that suffered some capital losses that I am still carrying forward. I was planning to use a one-fund solution (VBAL or VGRO) for this non-registered account now. But to be more tax efficient, I am thinking of a GIC ladder or tax efficient bond (ZDB) for the fixed income portion and then all equities, like VEQT, XIU or XIC. My question: Which of these funds would be best for using up capital losses? I understand that VEQT is global equities (including Canada) whereas XIU/XIC are Canada only equities, so I would need to balance my geographical holdings in my TFSA. But beyond that, which of the one fund solutions are most tax efficient for non-registered accounts, especially if one has capital losses?
I love the podcast and I’m sad to hear that it is ending. But, I’m happy to know that the blog continues.
@Leighsa: Thanks for the kind words! While it’s true that a fund like VGRO or XGRO is not optimal for tax efficiency because it includes premium bonds, the tax drag is likely to be low, and it might be preferable to simply use a one-fund portfolio in both the TFSA and non-registered unless these accounts are very large:
As for the capital losses, remember these can only be used to offset capital gains, not dividend or interest income, and all equity (or balanced) ETFs should be expected to accrue gains over time. Nor is there any need to be in a hurry to “use up” the losses: they can be carried forward indefinitely. So I would not make this a factor in your decision about which ETFs to use in your taxable account.
Hello Dan and thanks for everything.
I just opened my non-registered account and was planning on buying VEQT every 2 weeks (keep and hold). Based on this article and the other one you did about ACB I’m wondering if it will be “too often”. Am I supposed to keep track of ACB after each transaction or only once a year?
thank you for your help
Would the TD E-Series Bond be okay to invest in a taxable account? TFSA and RRSP maxed with same 3 ETF allocation, would it make sense to keep only CDN and Bond E-Series in taxable account, and allocate accordingly over all 3 accounts, or is it fine to carry same allocation of the 4 TD E-Series funds in taxable account? Looking at E Series funds for simplicity, but want to approach in the right manner, thank you!
@EN3: Holding all four funds in all your accounts isn’t “optimal” but there’s nothing wrong with that if you find it easier to manage the portfolio. The TD Canadian Bond Index Fund is not very tax-efficient, but unless your holding is very large and you’re in the highest tax bracket, the impact probably won’t be dramatic.
My husband and I both have our TFSA maxed out and I also have a professional corporation. We have been investing using TD e-series for our TFSAs and our daughter’s RESP. We also have been using the e-series to invest money from the corporation because I was under the impression that was the best thing to do and my life would be easier because I would only have to balance my accounts every so often, but from what I have been reading on a few of your posts, that does not seem to be the best way to be investing the taxable corporate funds. We try to take out the least amount of money from the corporation as possible so I have a fair amount in the corporation to invest right now but I have been worried about continuing to invest using the e-series with taxable corporate funds and RRSPs for my husband. I have tried to read through some of the posts to get a better idea of what to do, but I feel like I’m starting in the middle of a book where I don’t know what happened at the beginning of the book so not everything that I’m reading in the middle book is making total sense to me. Im happy to do the reading on my own, but could you possible recommend what links in your blog I should start reviewing so that I can understand and make the best investment decisions? Could you also guide me re: corporate fund investing vs. RRSP/RESP investing vs. TFSA so I understand where e-series makes sense and where it doesn’t?
@stephanie: First, you are probably doing much better than you think. As people learn more about investing, they often feel pressure optimize every decision, and in doing so, they start to second-guess things they have already done well.
The e-Series funds are a great choice in any account type, especially RESPs and TFSAs. They are also a great choice in taxable accounts (personal and corporate), because as you note, they require less bookkeeping than ETFs. The only issue to be aware of is that the e-Series bond fund is not an ideal way to hold fixed income in a taxable account. This blog should help explain why:
A tax-efficient bond ETF such as ZDB is a theoretically better choice here, but even then, using the e-Series bond fund s not an enormous error that you need to worry about if it upsets the rest of your investment plan. Just a tweak you might consider making at some point in the future.
I have routinely reviewed you “Put Your Assets in Their Place” article, however, until now all of my investing has been tax sheltered in either an RRSP or TFSA accounts. I have recently opened an incorporated holding company for tax free dividend transfers. I will want to invest this money for many years for compound growth opportunities. I have had success in both following the e-series and EFT model portfolios in registered accounts. My question is, does Asset Location matter as much when held by an incorporated company because the corporation will pay corporate tax rates on earnings(capital gains, interest or dividends) and not my marginal tax rate? In retirement, I can then dividend out payments to myself and pay the dividend tax rates.
@Ray: This is a complicated question. Investment income in a corporation is taxed at the highest rate, though there is still some benefit to favouring Canadian equites in corporate accounts: the dividends can be passed through to you as “eligible” (tax-favoured) rather than “ineligible” dividends. So in terms of asset location, it probably makes sense to consider which asset classes should be held in the corp versus the RRSP or TFSA, assuming all of these accounts are for the same purpose (i.e. your retirement income). But beyond that, it’s hard to say anything too specific without knowing your situation. Once you add corporations to the mix, DIY investing becomes pretty challenging. An accountant is pretty much essential, and a good planner can help, too.
I buy VEQT in my taxable account. I set it to DRIP in Questrade.
I figure it only distributes once a year so even if Questrade did not keep track of my ACBs perfectly, it would be easy to do myself with a yearly distribution.
Does that sound reasonable or am I missing something big here.
@Cam: Yes, VEQT is unusual among ETFs in that it makes annual distributions, and this certainly keeps the bookkeeping to a minimum.
For the equity portion of my investments, is it more tax efficient to hold only Canadian TD e-series in my non-registered accounts and keep the US and INTL e-series in my registered accounts, while keeping equal allocations between Canadian/US/Intl across all my accounts. i.e. will I pay less tax on the Canadian e-Series than I will on the US and intl e-series?
@Heather: Canadian dividends are taxed more favorably than foreign dividends, so Canadian equities are generally considered the most tax-efficient asset class in a non-registered account. However, these days the yield on the broad Canadian market is about double that of the S&P 500, so while US dividends are taxed at a higher rate, there is less income to be taxed in the first place. International stocks also have a relatively high yield (compared with the US), and these dividends are fully taxable.
So in general, if you’re going to hold different equity asset classes in different accounts, it does make sense to favour Canadian and US stocks in non-registered account and keep the international stocks in registered accounts.
I have a corporate taxable account to invest the business money. Is there any problem using a 1 fund solution like xeqt and will this be very hard to track the acb on. I do have an accountant for tax time so I assume this shouldn’t be tough for them? Or is it better for me to go with td e series?
@Cody: Tracking one ETF should be very easy, especially if you have an accountant doing your corporate taxes.
I am going to start investing in a non-registered/taxable account soon since my TFSA and RRSP are already full. I am hesitating between XEQT and TD e-series. My plan is to keep them for like 20-25 years until I retire. So here are my questions:
1) Since i know nothing about ACB tracking, will it be difficult with XEQT? I mean does it count as a US-listed ETF since is a all-in-1 ETF. Or is it just as easy as just keep track of all my purchases and that’s it (assuming it is non-DRIP).
2) If I opt for the TD e-series, do i buy all 3 (CDN, US, INTL) or buy only the CDN? or CDN and US TD-eseries? (note in my TFSA i have both XEQT and TD-eseries – CDN, US, INTL and CDN Bond).
@Stephanie: I don’t think tracking the ACB on a single ETF will be overly difficult. Just keep good records of your transactions and you can sort it it out when it comes time to sell your holding in the future. No, it is not a US-listed ETF, even though it holds foreign equities. All of the ACB calculations will be in CAD. If you want to make your life simpler, you might even want to use VEQT, which only pays a single year-end distribution. (XEQT pays quarterly.)
If you opt for the e-Series funds instead, and you’re trying to match XEQT/VEQT as possible, then you would need to hold all three: Canadian, US and international equities.
Hi, I was wondering if using a roboadvisor service like Questwealth could be a a way of making tracking ACB easier. Would the records be reliable like eseries funds? Their portfolios hold a lot of different ETFs, some of which are US listed, so it certainly would be challenging to keep your own records if that was required.
@David: I imagine the answer will be different for each roboadvisor. Like online brokerages, they will differ in their practices. In my experience, I have never seen an online brokerage that tracked the ACB of US-listed securities in Canadian dollars, but maybe roboadvisors are better at this. I would suggest emailing them to ask about their process before signing up if you have non-registered accounts.
I have been following you for years now and your advice has made a big difference, I thank you for that! Recently, our family has inherited over $500k after taxes and we are looking to invest it in a non registered account for the long term. I am leaning towards investing the entire amount into VBAL with Questrade. We are in our late 40’s and have maxed out our registered accounts to date and I will also receive a pension, so this non registered account will likely remain untouched for a long time. At some point, I suppose we will want to change our risk level from VBAL to VCNS or VCIP which will involve capital gains. Does this make sense to you, or is there a better plan that we should consider?
@Len: Thanks for the comment. As you can appreciate, I can’t make specific recommendations for you.
I can say that your question is a common one: many people seem to be reluctant to invest in asset allocation ETFs because they expect their target asset mix to change many years in the future. This is understandable, but what is the alternative? If you were buy individual ETFs with a 60/40 mix today, you would still need to sell equities over time to bring the allocation down as your time horizon got shorter. So the problem is not unique to asset allocation ETFs. At some point, all investors need to accept that capital gains can only be deferred for so long: eventually you will need to realize them if you want to spend your portfolio.
What are your thoughts on using the bond portion of a non-registered portfolio (say, 30%) towards paying down a mortgage to keep things simple and only have a single all-equity fund (like VEQT) for the equities portion?
@Kay: Thanks for the question. I actually addressed this very question in a podcast. It’s in the “Ask the Spud” segment at the end, starting at 50:53:
I would agree it often makes sense to pay down your mortgage rather than invest in low-yielding fixed income investments in a taxable account, and probably even in a TFSA. Since both of these accounts are funded with after-tax dollars, it’s often better to take the guaranteed “return” that comes from paying off debt. For example, if your mortgage is at 3%, why hold bonds in a non-registered account that yield 1.5% before taxes?
However, depending on your income level it can often make sense to favour an RRSP over mortgage prepayments. And if you are contributing to an RRSP, then you still need to consider your risk tolerance when setting your asset allocation. Just because you have a mortgage does not mean you should make your RRSP 100% stocks.
I have been absorbed in your advice for some weeks now and I have to first say a huge thank you. What incredible free content, you have a great way of speaking and writing.
My wife has a corporate account and we have a holding company account that we move money to through tax free transfers. The decision here is how to invest that money in the most efficient way possible. I was going to invest in VGRO and a few other all in ones but after reading your advice maybe it is better to just stick to one (or maybe two) ETFs to keep book keeping to a minimum. Also with bonds the way they are it may be best to avoid them. Therefore I think we are going to go with an 80% allocation of our funds into VEQT and 20% into a GIC.
Can we be more tax efficient? We set up the holding company on the advice of our accountant but now I am reading conflicting advice and wondering if that was a mistake? We plan to live off of my salary and the money my wife makes in the corp will all be moved to the holding company and invested. I want to make sure we are doing the right thing? I know this is a killer broad question so feel free to tackle any part(s) of it you would like.
@Sam: Thanks for the comment! You may also find my book helpful: Reboot Your Portfolio.
I can’t speak to whether a corporate investing account is right for you, but if you do use one, then holding all of your equities in a single ETF such as VEQT is tax-efficient and also very easy to manage. So no problem there.
I’ll offer a couple of other thoughts. First, be careful of strategies like “with bonds the way they are it may be best to avoid them.” Bonds are a major asset class and shouldn’t be dismissed because of poor short-term performance. (Would you do the same with equities after a bad year or two?) GICs are a perfectly good choice as part of a fixed income portfolio, but they will pose a challenge if you ever plan to rebalance. You cannot sell a GIC to buy more stocks, the way you can with a bond ETF.
So if you are confident that a mix of 80% equities and 20% fixed income is right for you, consider using an asset allocation ETF with that mix.