In a recent series of posts, reader Phil was looking for feedback on his plans to split portfolio components across different types of accounts available for Canadian investors. You can find one strategy for locating portfolio components in the table below:

  Bonds     TFSA / RRSP     Taxable  
  REITs   TFSA / RRSP Taxable
  US Dividend Stocks   RRSP TFSA Taxable
  Foreign Dividend Stocks   RRSP TFSA   Taxable  
  Canadian Dividend Stocks   RRSP / TFSA Taxable
  Non-Dividend Stocks   RRSP / TFSA Taxable

The rows are sorted based on how much regular income an asset class produces and how heavily that income is taxed. Since most of the return from bonds is in the form of interest, which is taxed at the investor’s marginal rate, investors may want to first consider the location of bonds. Stocks that do not pay a dividend, on the other hand, provide returns in the form of capital gains, of which only half is taxable and they may be considered last.

The columns are sorted based on how suitable an investment account is for that asset class. US dividend stocks, for instance, are best held in a RRSP. If they are held within a TFSA, a 15% withholding tax will be incurred but a taxable account is the worst location as foreign dividends are not eligible for the dividend tax credit.

Only when there is no more contribution room available in a RRSP or a TFSA, should a taxable account should be considered. Most investors would find that they have enough room in a RRSP and TFSA for all asset classes. A few who have paid off the mortgage and maxed out their RRSPs would likely find that they are running out of contribution room for Canadian dividend stocks and non-dividend payers. These will then spill over into a taxable account.

This article has 22 comments

  1. Great list but I think you should update it to add 2 more account types.

    I’ve come to the realization that our RESPs are part of our overall savings and it should not be handled separately because when it comes down to it if the RESP account falls short the money needed to pay for school the difference will come out of other long term accounts anyways. So why not take advantage of it to boost our potential total return. For tax characteristics it’s right up there with the TFSA & RRSP since not only is it tax deferred it is also taxed in the hands of your child who will probably be in a much lower tax bracket.

    We invest our children’s Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UTTB) payments in a separate In-Trust investment account because of a CRA ruling the distributions are taxed in the hands of the child. Meaning anything under about annually $9k per child is completely tax free like a TFSA. Just keep in mind the account starts small and grows over time and usage of the money is for the child, but that can include paying for school, shelter, food, clothing, vacations.

    With these 2 accounts here is my order:

    1) TFSA 2) In-Trust / RESP 3) RRSP 4) Taxable

    1) TFSA 2) In-Trust / RESP 3) RRSP 4) Taxable

    US Dividend Stocks:
    1) RRSP 2) TFSA 3) In-Trust / RESP 4) Taxable

    Foreign Dividend Stocks:
    1) RRSP 2) TFSA 3) In-Trust / RESP 4) Taxable

    Canadian Dividend Stocks:
    1) RRSP 2) TFSA 3) In-Trust / RESP 4) Taxable

    Non-Dividend Stocks:
    1) RRSP 2) TFSA 3) In-Trust / RESP 4) Taxable

  2. Wouldn’t you want to keep Non-Dividend Stocks in a Taxable account to take advantage of capital gains taxation rather than being taxed at the marginal rate when taken out of a RRSP?

  3. I forgot to add these account allocations are for long term buy and hold investing. If you are going to try your hand at a strategy like Dollar Value Averaging, Moving Average Market Timing, frequent rebalancing or plan old market timing it might be a good idea to bump these investments up the priority list so at least the portion you would be willing to sell can stay in a registered account to avoid frequent capital gains taxes which hurts compounding.

  4. CC: I think your chart is still slightly confusing.

    Jordan: The thing about RESP and In-Trust Accounts is your children might not be able to get student loans or bursaries. However, if you can harness the power of the capital markets, RESP and In-Trust Accounts will be able to pay for the most expensive universities that your children want to attend.

  5. Jordan, can you provide a link to the CRA ruling for CCTB and UCCB? It was my understanding that these payment are always considered to be to the Parents for having children, and not to the Child.

  6. badcaleb: I think Jamie Golombek argues the point well – in some cases it would make sense to keep cap gains in unregistered account. But for many (most?), the RRSP still has advanatge in the long-run due to the abiltiy to rebalance without triggering tax, and ability to invest RRSP deduction.

  7. >>Henry “..if you can harness the power of the capital markets..”

    Sounds kinda dangerous. Didn’t Ontario just decide not to harness the power of the atom?

  8. Canadian Capitalist

    @Jordan: I left out education savings intentionally because the time horizon and asset allocation of the account is very different from retirement savings. Also, our retirement savings is the primary goal and while we plan to contribute enough to RESPs to get the max. grant and manage it prudently, that’s all the kids are going to get. The rest they’ll have to make up with co-op terms, part-time work etc.

    @badcaleb: It depends. If there is going to be frequent turnover (which is likely with non-dividend paying growth stocks), a RRSP is still likely to be the best location because tax sheltering allows profits to compound over time.

    @Henry: Can you pl. elaborate on what’s confusing?

  9. The message here seems to be that in an ideal world you should hold all investments in a tax sheltered account. Of course, in an ideal world we would have unlimited contribution room in those tax sheltered accounts!

    Because I have a pension plan, and only earn a modest income, my RSP space is severely limited. I’d like to see opinions on the best place to hold different asset classes assuming that the tax deferred accounts have limited space.

    And here is a big question: Once the tax-deferred accounts are filled, should your asset allocation change? For example, should you increase Can equity to take advantage of the special tax treatment?

    @CC, one thing you might do to make the table a little more clear is to include a row at the top to show the meaning of the columns. For example, they could be scored “Best, neutral, worst” or something along those lines. Also, I wonder how useful it is to divide Foreign dividend stocks from non-dividend stocks. For example, all of my US holdings are in an index fund tracking the S&P 500, so I can’t really divide dividend and non-dividend payers into separate accounts.

  10. Buy any quality dividend stocks you can get your hands on ;-). Then place them in the best tax efficient account for you and dimply reinvest distributions until you need to start making withrawals..

    Back to work now 😉

  11. If you are worried about capital gains on the eventual payouts from your RRSP – buy an annuity rather than a RIFF. You can set up an annuity that pays you in return of capital which is not taxable. Make it joint with your partner. If you outlive the annuity so what. You got the full amount back (less management fees) tax free .
    No one has commented on the wonderful world of closed – end investment trusts available here in Canada.
    Many of their payouts are in the form of capital gains or return of capital. Many sell at a discount to book value.
    There are a couple of web sites that will provide you with listings .
    90% of my income is return of captial and not taxable. I have a capital loss pool to offset these payouts when they
    are eventually sold. I works for me.
    You would not hear this from any of the other contributors to this article – most are financial planners trying to justify their existence and fatten their wallets.
    ” Don’t be sheep . people hate sheep, people eat sheep.”

  12. Depending on your province and income, are there not cases where the after-tax value is actually higher due to the dividend tax credit? In such cases, would it not be preferable to hold such investments in a taxable account and save your TFSA and RRSP room for other securities.

  13. @CC

    The way I see it if you’ve got 10+ years it’s worth using, especially an in-trust account since realistically you could use it for anything, even a lump sum mortgage payd own just before the kids turn 18 and take over.

    Even if you only plan to make the minimum RESP contribution needed for the match that amount could still be part of the overall allocation which is much more tax efficient then having Bonds, REITs or foreign stocks spilling over into a taxable account.

    @ Jon D.

    CC wrote up an article about my tip here to keep your kid’s CCTB and UCCB in a separate account:

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  16. Ice cream on a stick

    Now, assuming that all other conditions are equal (say 7% growth for all classes, the same marginal tax rate, the same withholding tax abroad etc.) it would be interesting to rate all the combination of “class x holding”. We have 6 classes x 3 holdings = 18 lines (sorted from best to worst).

    I am not sure they can be really compared, but I think this exercise will bring us to understanding of avoiding foreign content all together, regardless of the holding. With the foreign content we pay withholding tax regardless of anything, including further taxation in Canada. Therefore if two stocks, Canadian and International, both produce 7% total growth (all kinds of it: dividends, capital gain etc.), would not you be better with the Canadian one anyway, as the International will be taxed in another country?

  17. Mark in Nepean

    DGI – I couldn’t agree with you more…

    Dividend paying stocks in an RSP, until no more room; Dividend-paying stocks outside an RSP and re-invest the distributions time and time again…

    That’s my plan.

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  20. Each and every disposition reported above notwithstanding,a dividend seeking investor is foolhardy to ignore US dividend payers. Dividend payers that are dividend growers and have any pedigree are very few in Canada,and these have been bid up so high, that we old timers don’t have the time,a.k.a patience, to await better prices.
    The choices are far greater down south. I don’t know about “foreign” ones, and the US is certainly foreign in their opinion of the matter.

  21. John Jacobson

    I am 19 and currently taxed at a low marginal tax rate. I would rather save my RRSP contribution room until I am older at making more money (I predict at some point I will be in the top tax bracket). RRSPs simply give a credit towards income tax I pay now instead of a TFSA which simply does not tax what you pull out so I would rather save my contribution room for later. Regarding foreign investments (specifically US ETFs) does it really make sense to use up my RRSP contribution room? And furthermore, if RRSPs just give a credit towards income tax, how does that work with avoiding US withholding tax?

  22. Would very much appreciate some/any material relevant to retirees. Thank you.