Your Complete Guide to Index Investing with Dan Bortolotti

Ask the Spud: Can I Make Taxable Investing Easier?

2017-12-02T23:26:15+00:00January 26th, 2017|Categories: Ask the Spud, ETFs, Taxes|Tags: , |112 Comments

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.



  1. John January 11, 2018 at 3:19 am

    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%
    Company’s stock

  2. Canadian Couch Potato January 11, 2018 at 10:18 am

    @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.

  3. frank January 17, 2018 at 1:19 pm

    Hello CCP,

    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:

    Option 1
    30% vun
    25% viu
    5% vee
    40% zdb(more tax efficient than vsb in taxable account)

    And maybe a couple of Canadian dividend paying stocks.

    Option 2

    55% vxc
    5% vcn
    40% zdb

    Re-balancing once a year with a time horizon of 20 years.

    Would appreciate your comments.

    Thank you


  4. Bif February 24, 2018 at 1:48 pm

    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?

  5. Lyn October 19, 2018 at 10:10 am

    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!

  6. Canadian Couch Potato October 19, 2018 at 10:15 am

    @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.

  7. throw0101a January 27, 2019 at 7:58 pm

    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?

  8. TJ January 28, 2019 at 10:20 am

    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.

  9. Canadian Couch Potato January 28, 2019 at 10:37 am

    @throw0101a: Yes, DRIPs are much less problematic with mutual funds. You can usually trust the ACB calculations with the e-Series funds.

  10. Canadian Couch Potato January 28, 2019 at 10:39 am

    @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.

  11. Frederic February 5, 2019 at 7:52 pm

    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 ?

  12. Canadian Couch Potato February 5, 2019 at 8:22 pm

    @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.

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