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Taxes. Ugh. Who needs ’em?
OK fine, I know I know. They’re used to pave our roads, build our schools, and pay for our sweet, sweet healthcare system, but other than that, who needs ’em?
In this country (and the US as well), working stiffs by far have the highest tax burden, since low-income families have a lower overall rate (and have government subsidies that help them), and rich people who derive their income from investments have all sorts of options to avoid paying taxes. But all hope is not lost, because when you’re working, the government does provide you with a few tools to help you legally save on taxes. For the topic of this post, I will focus on RRSPs and TFSAs, which are available to all Canadians. RESP’s will be a topic of a future post.
RRSP
RRSPs stand for Registered Retirement Savings Plan and, as the name implies, is supposed to be used to save for retirement. To our American friends, this is the equivalent of your 401k/403b/457/Traditional IRA (incidentally, why the Hell did you name them so confusingly?!?)
Basically, you contribute pre-tax money directly off your paycheque and anything you invest in will grow tax-free. You can put in up to 18% of your pre-tax salary, and this will lower your taxable income, often resulting in a refund cheque when you file your taxes in April.
So how should a potential early retiree use this thing?
Well, first and foremost, max out your contribution limit! The average Canadian (and American) saves about 4% of their income (according to Stats Can and the St. Louis Federal Reserve), and that is just awful. At that rate, the average Canadian/American will experience a very painful drop in living standards when they retire and realize they have no money to live on. Maxing out your RRSP represents an 18% savings rate, which is a healthy first step in the right direction and absolutely necessary if you’re planning on retiring anytime before your 60’s.
Additionally, many employers offer some form of Defined-Contribution retirement plan that matches a percentage of your RRSP contributions. This is basically free money, yet mind-bogglingly some people don’t participate. As a finance blogger, I’m not supposed to straight up call people idiots, but if your employer has a plan like this and you’re not participating, you’re an idiot. Go talk to HR, sign the stupid forms, and get this set up right the Hell now. There’s literally no downside.
TFSA
The TFSA was introduced by the Harper government in 2009, and stands for Tax Free Savings Account. For our American Friends, this is our equivalent of your Roth IRA.
Basically, you contribute after-tax money into it and any investments you make are tax-free. Because you use after-tax money, this won’t generate a tax refund, but on the other hand you can withdraw from it whenever you want and you get that withdrawal contribution room back the following year.
That last part is the most interesting and most misunderstood feature of the TFSA, and I’ll talk about that in a few paragraphs, but first, the most important thing you can do with your TFSA is again, max out the contribution room every year. It is more or less impossible to retire early if you’re not maxing out both your RRSP and your TFSA. Fortunately, if you can max out your RRSP, the government will write you a check come tax time because you’ve lowered your pre-tax income, and you can then use that to fill up your TFSA. It’s a strategy I wanted to call “double-fisting,” but I just looked that up on Google and that name has…er…other meanings.
Now, back to the withdrawal rule and why it’s so interesting. A TFSA is basically a retiree’s best friend, because anything inside of it never gets taxed or reported, and you can spend it whenever you want. So you want your TFSA room to be as big as possible. But your TFSA room can only increase by $5500 a year, so it seems the only way to get more room is just to wait for each year to roll over, right?
Nope! Say you have a TFSA with a contribution room of $10,000. You transfer $10,000 of cash into it and buy an ETF. Now, pretend that ETF rises in value by 2x, so the balance is now $20,000. How much contribution room do you have in your TFSA now? The answer is $20,000! Even if you sell that ETF and withdraw $20,000, that $20,000 withdrawal gets re-added back to your contribution room next year, so by owning something inside your TFSA that experienced a capital gain, you have permanently increased the size of your TFSA!
Let me say that again: When you experience a capital gain, you PERMANENTLY increase the size of your TFSA
Now remember, the two main asset classes are equities and bonds. Bonds will pay you a nice income, but won’t increase in value dramatically. Equities are more volatile, but over time will increase in value far greater than bonds. So by holding equities in your TFSA, you will increase the size of your TFSA over time greater than the default $5500 per year, and therefore be able to shelter more of your portfolio from taxes forever. Now, note that the opposite also holds true. If your equities go down, your contribution room also goes down. BUT as long as you index and don’t sell, over the long term your room will increase as the stock market rampages ahead.
The government named the account a “Tax-Free Savings Account” on purpose. If everyone understood and took advantage of this, the government would lose out on a lot more tax revenue than they intended to. The name itself implies you should just park cash in here rather than equities and therefore waste the best feature of the TFSA. And it worked. 80% of Canadians have their TFSA money sitting in a savings account, not realizing that they’re actually doing the least efficient thing with their TFSA, all because of that misleading name. Clever, huh?
Putting It Together
OK, so now how do we use these vehicles to make our portfolio tax-efficient? When investing, you will generally have 3 types of accounts: An RRSP, a TFSA, and a Non-Registered account (a normal Investment account). Making your portfolio tax-efficient simply means holding each asset in the right account so you pay the least amount of tax. Got it? Great.
Canadian Equities
We’re talking about ETFs that track the TSX here, mainly. Canadian Equities are equities, so you’ll want to stick them in a TFSA to take advantage of their long-term capital appreciation potential. If you run out of room, a Non-Reg is also a good place to put it since stocks listed on the TSX pay dividends that are eligible for the Canadian dividend tax credit.
International Equities
These are ETFs that track the S&P500, EAFE or Emerging Markets. TFSA’s are an ideal place for these since they’re equities. After that, RRSPs (since their dividends don’t qualify for the dividend tax credit). And then after that, Non-Reg.
US-Listed Equities
A special note for American equities listed on the NYSE. This is different than a TSX-listed ETF that tracks the S&P500. If it’s actually listed on the NYSE, these should never be held in a TFSA. The reason for this is that when an American stock pays a dividend to a foreign investor, the IRS withholds a 15% tax on it to cover any taxes that you may have to pay. The exception is if the stock is held in a retirement account. Unfortunately, they don’t consider the TFSA a retirement account, so you would have tax withheld by the IRS, but you can’t claim it back on your tax return since you don’t report your TFSA income on your taxes. Never hold US-listed equities in a TFSA. Hold it in an RRSP first, then Non-Reg if you run out of room.
Bonds
Bonds don’t really appreciate much in value, so holding them in a TFSA is wasteful. Hold them in an RRSP instead and in a Non-Reg if you run out of room.
REITs
REITs, or Real Estate Investment Trusts, own real estate like shopping malls, apartment buildings, office buildings, etc. They collect rent from their tenants and pass it on to their shareholders. This rental income is treated like ordinary income for tax purposes, so these should be held in the same place as Bonds: RRSPs. However, unlike bonds they do have some potential for capital appreciation, so a TFSA is acceptable as a second choice. After that, Non-Reg.
Preferred Shares
Preferred shares are hybrid vehicles, midway between a stock and a bond. They trade on the stock market like regular shares, but they’re not nearly as volatile as a company’s common stock. They also pay dividends like a share rather than income like a bond, so they’re useful for getting a higher yield, plus that income is tax-efficient since it qualifies for the Canadian dividend tax credit (you can get up to 50K of dividend income tax free), so these are best held in a Non-Reg account.
Summary
OK got it? Let’s Review:
| Asset Class | Choice #1 | Choice #2 | Choice #3 |
|---|---|---|---|
| Canadian Equities | TFSA | Non-Reg | |
| Internation Equities | TFSA | RRSP | Non-Reg |
| US-Listed Equities | RRSP | Non-Reg | |
| Bonds | RRSP | Non-Reg | |
| REITs | RRSP | TFSA | Non-Reg |
| Preferreds | Non-Reg |
Example
Let’s try an example together. Meet Mike and Amy, our imaginary investor couple who has saved up $1,000,000 in cold hard cash. They want to start investing, but in a tax-efficient way, so they decide to construct a portfolio. They’re fairly conservative, so they want to go 50% equity, 50% fixed income. After much research, they decide they want a portfolio like this:
| Target Portfolio | |
|---|---|
| Bonds | 20% ($200k) |
| Preferreds | 15% ($150k) |
| REITs | 15% ($150k) |
| Canadian Equities | 10% ($100k) |
| International Equities | 30% ($300k) |
| US-Listed Equities | 10% ($100k) |
Note: This portfolio is for illustrative purposes only. In no way am I recommending this allocation for your personal situation.
Mike & Amy have accumulated a whole bunch of RRSP room while they were working, as well as some TFSA room but never bothered opening any accounts. Fortunately, all that room carries forward indefinitely so they go to a brokerage firm and open up accounts, filling them up with all the cash they’ve saved. Here’s what their initial accounts look like:
| RRSP | TFSA | Non-Reg | |
|---|---|---|---|
| Cash | $400k | $100k | $500k |
| Total | $400k | $100k | $500k |
So the challenge is, which assets go into which buckets?
We do this by going over each account type and figuring out which assets really REALLY want to live there. Similar to draft picks in the NBA, we want everyone to get their #1 choice first before we move on to the #2 choices.
Let’s start with the TFSA. We know that equities should go in there (but NOT US-listed ones), so let’s start with the Canadian and International Equities. Both are way too big to jam in the TFSA, so we’ll have to do our best. Rather than fill the TFSA up with all Canadian or all International, let’s have both in there, so we buy $50k each in the TFSA. The TFSA is now full. Mike’s accounts now look like this:
| RRSP | TFSA | Non-Reg | |
|---|---|---|---|
| Canadian Equities | $50k | ||
| International Equities | $50k | ||
| Cash | $400k | $0 | $500k |
| Total | $400k | $100k | $500k |
Now let’s move on to the RRSP. Bonds and REITs really want to live there, and fortunately we have enough room, so let’s go ahead and jam them in. Also, US-listed equities. We don’t have enough room for all US-listed equities, so we’ll buy as much as we can.
| RRSP | TFSA | Non-Reg | |
|---|---|---|---|
| Canadian Equities | $50k | ||
| International Equities | $50k | ||
| US-Listed Equities | $50k | ||
| Bonds | $200k | ||
| REITs | $150k | ||
| Cash | $0 | $0 | $500k |
| Total | $400k | $100k | $500k |
And finally, Non-Reg. Preferreds want to go there, so let them!
| RRSP | TFSA | Non-Reg | |
|---|---|---|---|
| Canadian Equities | $50k | ||
| International Equities | $50k | ||
| US-Listed Equities | $50k | ||
| Bonds | $200k | ||
| REITs | $150k | ||
| Preferreds | $150k | ||
| Cash | $0 | $0 | $350k |
| Total | $400k | $100k | $500k |
At this point, we’ve used up all the room in our tax-sheltered accounts, so we’ll just buy the remaining in Non-Reg.
| RRSP | TFSA | Non-Reg | |
|---|---|---|---|
| Canadian Equities | $50k | $50k | |
| International Equities | $50k | $250k | |
| US-Listed Equities | $50k | $50k | |
| Bonds | $200k | ||
| REITs | $150k | ||
| Preferreds | $150k | ||
| Total | $400k | $100k | $500k |
We have now constructed a portfolio that is pretty tax efficient. The RRSP is sheltering all our income-producing assets, the TFSA is holding our equities, and the Non-Reg is holding stuff that either churns out tax-efficient dividends (preferreds) or is expected to appreciate in value, generating capital gains (equities).
As of course as time goes on and Mike & Amy generate more contribution room in their RRSP or TFSA, we will want to redo this analysis and move stuff around accordingly. Generally, as their TFSA grows (the two of them will be generating $11000 of room each year), we want to move more and more International equities in there. Eventually, they will reach a point where they have enough room in all their accounts that every asset can go to its #1 choice, at which point they will essentially never have to pay taxes ever again.
So that what making your portfolio tax-efficient means. Just holding the right assets in the right accounts. No rocket scientists needed.
Questions? Concerns? Let’s hear it in the comments!
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Last couple articles have been great! – Keep it up guys (I write this at 10:00am stuck in my cube)
Thanks! And about being stuck in your cube, don’t think of it as being “stuck”, think of it as “temporarily freedom-challenged” (emphasis on TEMPORARILY).
For the Bonds, REITs, and Preferreds, is it ETFs of them or individual shares/units of them, or both that treated that way for taxes?
Or are ETFs of the Bonds (CLF, XRB, etc.), REITs (eg: XRE), and Preferreds (CPD) treated the same way (tax-wise) as Equities?
The tax treatment for an ETF depends on what it holds. So a Bond ETF would report their income as interest, a Canadian Equity ETF would report theirs as dividends, etc.
The best way to be sure is just to check with the ETF. For example, you can go to iShares’ website and look up how they classify the income for each ETF. Here’s the page for XIU, an ETF that tracks the TSX 60.
https://www.blackrock.com/ca/individual/en/products/239832/?referrer=tickerSearch
Go there, click Distributions, then go to the Calendar Year summary. You can see for each year how much income was paid and how it was classified. For this fund, it’s mostly Eligible Dividends.
If you do the same for XGB, which tracks Canadian Government Bonds (https://www.blackrock.com/ca/individual/en/products/239486/?referrer=tickerSearch), you can see that the income they paid is mostly “Other Income,” which is treated as interest income for tax purposes.
That helps quite a bit, thanks Wanderer.
Your Posts keep coming at the right time as I figure all of this out! Thanks for that 🙂
Our pleasure 😉
Wouldn’t it make more sense if REITs were put in a TFSA? While they provide a nice fixed income, the capital gain can’t be ignored especially this year.
REITs experience some capital appreciation, but not as much as equities over the long run. I’d say put REITs in your TFSA if you’ve already filled it up with equities and you have extra room, but I wouldn’t kick equities out to replace with REITs.
Thanks for posting. This is exactly the kind of article I’ve been looking for!
One thing I’m bit confused is that I thought international equities held by a Canadian fund directly, the withholding tax is recoverable (as per Dan Bortolotti’s article here: http://www.moneysense.ca/columns/foreign-withholding-tax-explained/). Wouldn’t it make sense to hold that in a non-registered account since the withholding tax is lost forever in a TFSA/RRSP? Although the permanent TFSA room increase is attractive with capital appreciation…
Hmm that is interesting. Strangely I don’t see any tax being withheld from my International distributions when held in my TFSA, while for my US-listed equities when tax gets withheld it’s a separate line item. Maybe this is a quirk with my brokerage account. I will dig further and get back to you.
Thanks! The foreign withholding tax is quite confusing to me. Here is the most comprehensive material I can find on this topic: https://www.pwlcapital.com/pwl/media/pwl-media/PDF-files/Justin%20Bender%20Assets/PWL_Bender-Bortolotti_Foreign-Withholding-Taxes_v04_hyperlinked.pdf?ext=.pdf
I look forward to what you can dig up as well!
OK so after some digging, it looks like you’re correct in that there’s a foreign withholding tax levied on Canadian-listed ETFs that track International assets even if held in a TFSA/RRSP and it’s done silently on the dividends before you actually get it. That’s why it’s not broken out as a separate line item. However, that doesn’t mean that it should be held in Non-Reg.
Here’s how the withholding tax works: You pay 15% up front to the foreign government before you get your dividends. Come tax time, you get a T3 (or T5) that says “you got paid $10000 in foreign dividends, and you have a foreign tax credit of $1500.” So because foreign dividends are taxed as regular income, you add $10000 to your taxable income and calculate your taxes owed on that. Then, you deduct the foreign tax credit to take into account the fact you’ve already paid $1500. You would then owe extra taxes if your marginal tax rate is > 15% or you would get a refund if your marginal tax rate is less than 15%.
In a TFSA or RRSP, you have to pay that stupid 15% tax on the dividends (no way around that) but you won’t owe anything extra because nothing gets reported to the CRA.
So basically, if your marginal tax rate is <15%, then you should keep those assets in Non-Reg. However, if your marginal tax rate is higher, then you should hold them in a TFSA/RRSP first if you have room.
That being said, the lowest tax bracket in Ontario is like 20% (Fed + Provincial), so for all intents and purposes, my original statement of "International should go in TFSA, then RRSP, then Non-Reg." is still correct since it's practically impossible to be in a lower tax bracket unless you're already retired and have zero income.
TFSA room accumulates even if you never open an account. You have a TFSA. Go open one.
Really appreciate the calculations (math is sexy!). FYI, Canadian Couch Potato just put out a new version of their foreign withholding taxes paper, which I find is a good reference to keep around (https://www.pwlcapital.com/pwl/media/pwl-media/PDF-files/White-Papers/2016-06-17_-Bender-Bortolotti_Foreign_Withholding_Taxes_Hyperlinked.pdf?ext=.pdf)
That’s what we keep telling everyone buy nobody believes us 🙂
In the PWL paper cited above there is a technique they allude to whereby one can avoid withholding tax entirely for US stocks in an RRSP by holding a US listed ETF (like VTI) but to really optimize for that you’d have to do something called “Norbert’s Gambit”. I’ve done Norbert’s gambit and it’s great if done correctly because the cost of transferring CAD to USD and back becomes a small security spread and a trading commission (a mere fraction of what a brokerage normally charges to convert). However I don’t think I’d advise a rookie to do that trade, it’s sort of a non-novice trade but certainly not advanced. Are you in the camp that simplicity trumps the savings in that case?
so… I created an ECE453 assignment last year where I had students test/debug an app that figured out in which account to put investments. The codebase is here:
https://github.com/patricklam/distribute
Really good post!….if i were to stick to a really simple portfolio of ETF’s like the one mentioned on Canadian couch potato and followed tax efficient allocations like you mentioned i guess the international equities excluding Canada would go in the TFSA, Bonds would go in the RRSP and after maxing these two the Canadian equities would go in the unregistered account.
Since i’m still learning what would be % Yield on a model balanced portfolio in the below link..how would i calculate it?
40 % in RRSP – Vanguard Canadian Aggregate Bond Index ETF VAB
20 % in Unregistered – Vanguard FTSE Canada All Cap Index ETF VCN
40% in Vanguard FTSE All-World ex Canada Index ETF VXC
VAB – 12 month trailing yield : 2.76% B
Dividend schedule : Monthly
VCN – 12 month trailing yield : 2.50% B
Dividend schedule : Quarterly
VXC – 12 month trailing yield : 1.92% B
Dividend schedule : Quarterly
http://canadiancouchpotato.com/wp-content/uploads/2016/01/CCP-Model-Portfolios-Vanguard-2015.pdf
This portfolio would be globally diversified, have a MER in addition to having safe stuff. What would be the potential pitfalls of something like this?
Calculating portfolio yield is simply a weighted average of the yield of each holding. So in this case, 2.76% x 0.4 + 2.5% x 0.2 + 1.92% x 0.4 = 2.372%.
As for the portfolio itself, I don’t know your exact situation so I’m not legally allowed to comment on how suitable it is for you (this might be a question for a good fee-based advisor http://www.greaterfool.ca/contact-garth/). That being said, I have a great deal of respect for Canadian Couch Potato and when we self-directed we used a portfolio very similar to this one. We used TD e-funds rather than ETFs, but the allocation was 60 equities 40 fixed just like this and it worked out pretty well for us.
Thank you again! definitely passing this on to our sons: 18 and 21.
Does the rationale for splitting up the portfolio to favour US equities in RRSP rather than TFSA still hold true for index mutual funds? TD e-series for US equities, for example.
It’s not obvious from looking at the TD e-series US equities prospectus whether these are US-listed US equities. However, to be safe, I would put them into the RRSP, just in case. Once your portfolio grows to 100K, consider switching to ETFs, as they are more transparent and have lower fees (we will discuss ETFs versus mutual funds and fee minimization in a future post).
Thanks for the posts and the articles!
My wife and I are Canadian citizens, now living in a tax-neutral Caribbean island. We have a combination of TFSA, RRSP and non-reg accounts. Would you have any different suggestions from the above as a result of our non-resident tax status?
Thanks for all the help!
Really? Which island?
My limited understanding of non-resident tax status is that you file your taxes in the jurisdiction of residence, meaning you would file a tax return wherever you are now, so I can’t comment since I have no idea where you are.
In fact, I know some digital nomads move around so much they have effectively NO country of residence, and thus don’t file taxes at ALL. We were briefly intrigued by that idea, but we come back to Canada often enough to visit family/friends that our residence remains Canadian.
How would you rebalance this group of investments if the target 50-50 balance got out of whack? Could the limited amount of space in the TFSA and RRSP mean that when you rebalance that certain assets might end up in a less desirable account tax wise?
Thanks for the continually great info!
Possibly, yeah. But it’s still better to have the proper asset allocation in a less tax efficient way than have the wrong asset allocation just to keep within your TFSA limits or whatever.
2 questions,
1. Does RRSP contribution room also grow when an RRSP account holder experiences a capital gain?
2. You mentioned that the opposite also holds true for TFSA, that if you experience a capital loss your contribution room actually shrinks. So in effect this means that if you have a room of $10,000 for year X, if you contribute full $10,000 lump-sum at the start of that year, you cannot contribute any more no matter how your investment performs?
I have $185000 in TD e-series in Non Registered (Can, US, Int equity and Can bonds) My RRSP and TFSA are maxed. I am afraid to move my Non Registered e-series into ETF because I don’t understand how I would have to track my investments for tax reporting purposes. Can you provide any insight?
If you sell with a capital gain, you incur a taxable event. Basically, (your sell price – your buy price)/2 gets added to your income. If you’re below your buy price, you get to claim a capital loss that you can credit against a future gain. So basically, if you’re at a capital loss position, it makes sense to sell it and move to the same position in ETFs. If you’re at a capital gain position, you may want to space it out to minimize taxes. Oh and please note that we are not certified professionals, so we can only give you our opinion on what we would do. Please consult a professional before making these changes.
Hi, I just discovered your site and it’s great so far. I have been trying to find early retirement info for Canadians as there are many good resources for US citizens. So, thank you! I am hoping to be in a similar boat in a few years (in our 40s with a small child). Anyways my question is how do you handle your taxes in retirement to not put a dent in your withdrawal rate/spending? Are you doing a RRSP meltdown / conversion or depleting your non-reg funds first?
Thanks so much!
How are you able to put International Equities into your RRSP if one’s RRSP contributions are from pre taxed salary from your paycheque.
Source: “After that, RRSPs (since their dividends don’t qualify for the dividend tax credit)”.
We use Canada-listed ETFs that track international indexes, such as XIN and XEM.
Sorry, I think what I meant to say was, how are you able to put those into the RRSP’s. I thought that you could only put your paycheque into RRSP’s. Is there an unlimited contribution amount you can put in RRSP’s.
No, the RRSP contributions are limited to 18% of your previous salary, up to $23,820. You’ll need to work with your RRSP provider to find out which investment options you have. If they all suck, you might consider buying it from a better outside provider, and get a tax refund at tax time.
I know this post is old, but i’m wondering if you have any advice for my situation:
Currently i’m maxing out my RRSP through work because they give me 20% of my max for free 🙂
However, the funds that they offer are not as lucrative as the ETF’s i can get through questrade. I’m about to transfer my old RRSP from my old job to questrade, but how should i handle the one at my current job? Should i transfer it out to questrade every year? (and take the hit on transfer fees?)
Thank you!
Hi, any reason why you don’t use:
(for EAFE) XEF over XIN
and
(for emerging markets ) XEC over XEM?
They both seem to have better returns with lower MER?
Is there a tax difference between TSE listed ETF (eg. VUN) and NYSE listed ETF (eg. VTI)? Thanks!
Yes. If it’s a US-listed, you need to put it into your RRSP to avoid the US withholding tax.
Thank you for your quick reply FIRECracker. In this case, why don’t us Canadians just buy TSE listed ETFs and don’t worry anything about tax implications among RRSP, TFSA and non-registered accounts? I am a rookie..
This may sound like a stupid question to most, but I am just now starting my research on this topic.
How do I withdraw cash from my investment annually without incurring costs or paying taxes? I read through most of your blog and didn’t see anything addressing this.
Thanks!
Where are you from? American, Canadian, somewhere else? The rules differ depending on the country.
America
Question: how does increasing the TFSA contribution room helps?
If your example we used 10k of contribution room to purchase an ETF that grew to 20k. If we withdraw the 20k, next year we will have 25.5k (the next year room of 5,500$ plus the withdraw of 20k).
But, assuming we like that ETF and it did well, we will just but it again, so really we are back where we started, aren’t we?
Can you expand on how withdrawing from a TFSA only to re-invest in it in the following year is any different than leaving the investment to grow in the TFSA and adding the new contribution?
Think from the perspective of needing to withdraw money for some use; if you have to withdraw money for an expenditure, later you’re replacing it with new investment of the equal amount which would not existed if it shrunk for the amount equivalent to withdrawal
Thanks for this post guys just the info I needed. I changed my portfolio completely since I’ve been reading this blog. Sold almost all of my stocks while they happen to all be worth much more than I paid for them and put them into ETF’s. (would have been harder to sell if they weren’t) I’ve had my Canadian dividend stocks in my non-registered account all this time, time to fix that.
Am I right to set my portfolio to VXC all world except Canada in RRSP, with ZRE and VAB. VCN in TFSA with remaining VCN in non-reg? After those registered accounts are full my non registered account will be VCN, VAB and the couple of Canadian stocks I have left? Thanks so much guys.
I’m forever confused over my VXC etf because it is 50% “foreign” and 50% US. I keep it in my RRSP but also in the non-reg accounts but would never keep it in my TFSA due to the US content. Is the better way to keep it in my TFSA?
Love your site, I found thanks to Mr. Garth.
Actually VXC is TSX-listed, so it would count as “International Equities”. So they go into your TFSA. If you run out of room, but have room left in your RRSP, then put the rest in RRSPs. After that, non-reg.
Time to jam the VXC into my TFSA. Hmm.
Thanks for the quick response.
I believe I read on Garth’s blog he keeps part of his portfolio in US dollars. Do you accomplish this through the US listed equities kept in the rrsp? If so, do you re-balance the portfolio based on whatever the Canadian dollar equivalent of the US equities are? Thanks.
In the article you said that Canadian TFSAs are like American Roth IRAs so is it safe to say that all of the same rules apply as far as increasing contribution room? Also would you happen to know if holding Canadian equities in a Roth IRA could cause the IRS to withhold 15% tax on it as well? Any help would be appreciated.
I would love to lock down money into an RRSP at the 18% maximum but I have one small concern, that being the potential clawing back of OAS and CPP.
If I were to max out the RRSP and use my tax refund to fund my TFSA, that’s great for maximizing the money I receive in the near-term. 40 years from now when I convert my RRSP to an RRIF, I was under the impression that the best plan would be to pay myself the full amount of the first tax bracket (whatever that amount is in 2056) so that I only pay tax at the first tax rate. The remainder of the money I need to support myself would come from my TFSA. Seemed simple, wonderful, so painfully obvious the best way to go at it.
But then I heard from a friend that if you have too much income in your retirement years, OAS and CPP get “clawed back”. Can anyone explain how to determine how to (eventually) optimize my RRIF withdrawal amount? Does this “clawing back” physically mean that if I make so much income in retirement, I would receive smaller OAS and CPP cheques? Or will OAS and CPP be the same amount regardless, I just have to pay income tax at a higher rate once I creep into the higher tax bracket levels?
I am trying to avoid the potential pitfall of maximizing my money early, only to be penalized down the road. Thanks.
Your CPP doesn’t get “clawed back”. Only OAS does (https://canadianfinanceblog.com/the-four-most-common-questions-about-canada-pension-plan-cpp/).
And if you gradually melt down your RRSP before 71, you shouldn’t have to convert it to a RRIF.
$72,809 is the threshold below which, you will not get any OAS claw back. Are you expecting your income in retirement to be higher than this threshold?
Thank you for the information!
I did more research into it and now I truly believe that this was set up to work the best for early retirement. Seriously! I do.
Working until 65 and dutifully maxing out RRSP contribution room is like buying a billboard to announce to the government you have extra money, and to please be taxed more heavily on it. Working until 44 (my current ‘conservative’ retirement plan) and taking it out lump sum amounts from 45-65 is much a much better use of it. The only downside is a $50 fee from my bank every time I withdraw (which if I do once a year totals $1000 over 20 yrs – and by saving 5% income tax on a mere 20k cancels that out). Oh yeah and that silly withholding tax of 30% if I take out amounts over 15k – most of which I will get back at tax time. This way, my income is always within the first tax bracket (do I really need any more than the first tax bracket to live on while travelling the world?)
So short answer is hell no, my income retirement is going to be, ideally, up to the top of the first tax bracket every year after 44 years of age. My TFSA will be where I store the coconuts.
I was wondering whether it is worth converting a portion of your RRSP to an RRIF. I’ve read you can hold both types at the same time. It should save on the partial withdrawal fee and hopefully more easier to withdraw the money. Plus wondering if you can convert more over time.
Anyone have any experience on that?
We max out our TFSAs and RSPs every year and are definitively interested in holding our dividend stocks in non-registered account to maximize that tax-free moola!
Great info, thanks
So, I’m Australian, and I’ve never looked into tax sheltering until now.
I’m absolutely shocked at our system – it’s basically a slave system to keep the low and middle class working until 59-65 (the age we can withdraw our nest egg money in our Super).
The only two major ways to get tax shelters from what I can see is to put money into Super (our equivalent of the RRSP), or buy a property and use negative gearing.
When I was reading a heap of tax articles by professionals here, they basically said it’s set up for the rich and corporations who can afford the massive property prices here.
Share income and dividends are taxed so heavily here (as part of our personal income), and we don’t have a TFSA.
We even get savings interest added to our taxable income (pushing up our tax rate). Like, wow!
Have never thought about becoming a citizen of another country until now.
Any other Australians on here that have looked into this and found any loopholes or have a good strategy?
P.S. don’t mean to be that depressing poster, but am just shocked at what I’ve found.
This is a great article, thanks alot. Nice to see how things should be allocated in chart form like you have done. Gold Star!
Would a US-listed international equity ETF (eg. IEFA/IEMG) be considered international or US equity? Would they be better qualified for the RRSP or TFSA as a first choice?
Guys/Gals,
I am bit confused about RRSP, hope any one could care to clarify.
I have never contributed to RRSP by pre-tax amount..
Now to the above stated investement purpose…
So now opening up an RRSP account and buying bonds or what so ever…
isn’t it making my after tax amount also blocked and subject to tax while withdrawing at later date along with the dividends/income gained from ETFS ?
Where to put VCN and VFV or equivalent in TFSA?
Do you have a version of this break down for US based readers? How would we strategize our savings in each of our special tax advantage accounts?
Thanks,
Z
TFSA -> VEU, VCN.TO
RRSP -> BND, VTI, VAB.TO, VEU.TO, XEF.TO, XEC.TO
is this correct ?
Wait, you seem to be mixing the ETFs together. VEU is used for the US portfolio, not the Canadian one.
Yes I’m investing in both US and Canada. Please advice.
Ohh I see..It’s VUN.TO in rrsp account. Am I holding them in correct accounts?
Wait wait wait. The two portfolios are meant to be one for Canadian readers and one for American readers.
The Canadian one is denominated in CAD and equally splits the equity portion between Canadian, US, and International Indexes. The American ones is denominated in USD and splits the equity portion between US and the International Index.
You’re not supposed to invest in both at the same time. That doesn’t make any sense. Please go back and reread the workshop before you buy anything.
I’m confused here. I’m investing from Canada, so I guess the right combination for me is as below (correct me if it’s wrong):
TFSA -> VCN.TO, XEF.TO & XEC.TO
RRSP -> VUN.TO, VAB.TO
I would also like to invest in ETFs/REITs/Preferred shares(e.g. VTI / BND / XEF ) listed on NYSE. if possible want to invest on NYSE only. Why doesn’t it make sense? Please advice.
Because VCN, XEF, XEC, VUN, and VAB are listed on the TSE and denominated in CAD. If you invest it NYSE-only listed stocks, your entire portfolio is denominated in USD not CAD.
It’s also more complicated tax-wise. For example, NYSE-listed ETFs will still be taxed if held inside a TFSA, and should be held inside an RRSP instead.
Anyway the point was, the portfolio I talk about in this workshop is not meant to have all the ETFs in the Canadian portfolio AND the ETFs in the American portfolio being held at the same time. You’ll be holding the same underlying assets in multiple ETFs, half of your portfolio will be held in USD/CAD, and there will be additional tax complications. So if that’s your intention, go right ahead but you never got that advice from me or anyone affiliated with this site.
I see your point. Thanks for the clarification. Should I sell the US ETFs I bought so far (not much)?
Hey wanderer I wanted to know if it’s possible to open a spousal TFSA and contribute to it? Also I’m not sure if I understood correctly, but are you saying if I contribute to the max of my TFSA (52 000$) and it rises to 82 000$ ( hypothetically speaking) and take it all out, the following year my new maximum for my tfsa would be 87 000$?
thank you for your answer
Hi, where should I put commodities such as silver and gold?
In a safe deposit box?
Oh!! Is this the same for something like the Gold ETF (eg. CGL.C). I apologize if this is a dumb question 🙁
Wait:
“Never hold US-listed equities in a TFSA.”
This seems really wrong. American equities typically have low dividend payout, with the bulk of their growth due to capital gain—VTI’s dividend yield, for example, is around 1.7–1.8% historically. Thus the expected IRS-screw-you tax drag is around 0.26%, and probably no more than 0.30%. The historical overall yield for VTI is around 7%. Is seeking an extra 0.30% worth being fully taxed on your entire return?
Let’s say you’re starting out on the path to FIRE, and you have 10k to put towards American equities in your TFSA, and, thereafter, contribute 5k per year, versus doing the entire thing non-registered. Your investment/retirement timeline is 10 years.
In the former scenario, you’d have $87,250, yours to do with as you please, completely tax free. In the latter scenario, you’d have $88,750, but you’d have to pay capital gains on any amount you sell. Do you really think you are going to pay less than $1,500 in taxes, such that excluding glorious US and A from your TFSA was worth it?
What?
Literally the next sentence after I wrote “Never hold US-listed equities in a TFSA,” I wrote “Hold it in an RRSP first.”
Read the damn article.
Full quote:
“Never hold US-listed equities in a TFSA. Hold it in an RRSP first, then Non-Reg if you run out of room.”
Followed by the table entry summarizing your recommendations, in which TFSA doesn’t even make the list for US equities—you recommend RRSP, then non-reg, only.
I am a regular reader of your site and appreciate the information you guys put together, but maybe you should read your own damn article. And then actually math s**t up. Because your math is wrong.
Addendum: figured I couldn’t have been the first to draw this conclusion:
https://canadiancouchpotato.com/2015/01/30/the-wrong-way-to-think-about-withholding-taxes/
Just discovered your site. Amazing stuff. This post brings so much value! Great work.
Is this information still accurate? I believe the TFSA ceiling (increase from gains) is only refillable the next calendar year (not forever), and if not refilled the reg (yearly increase #’s) is the ceiling again – can anyone confirm?
Also, I’ve always wondered – lets say I’ve contributed 50K into my TFSA (lets say the max room of my TFSA is 100k for easy maths). my 50K grows to 80k and i withdrawal 30K (my profit!).
Did i just take out against what im allowed to contribute for the year, or does it know i took profits? I.e, in this same year, can i contribute back another 50k or just 20k?
(Assuming whoever responds understand that re-contributions aren’t available until the year on $ taken out of a TFSA)
Can you give more clarification for TD e series index (Canadian bond, US index, Canadian index and International Index)?
I read somewhere that US index and International index both are not protected from tax no matter it is in TFSA or RRSP and are not recoverable. So what is the tax optimization strategy for those four index of TD e-series?
Sincerely,
Fan of Wanderer
Thanks for the great and straightforward article!
Once you FIRE, do you take your passive income from RRSP, TFSA, and non reg accounts? Is there an order?
Thank you 🙂
Should each of your accounts not have the proper allocation of bonds/equities split? (ie.40 bonds/60 equities). In your examples you show where to put things for tax efficiency but the problem is that some accounts like non registered end up with 100% equities. If there is a downturn, they will have no bonds to rebalance. Is this not risky?
I recently became eligible for a Registered Pension Plan (RRP) at work (municipal government). They contribute, but this money is not touchable until their deemed retirement age (60-65). Also, the amount of contribution is not known. I am still waiting on correspondence as it does not directly say in my mailed package or online account (how frustrating!) They take 236 off my paycheck every two weeks, so $472. This is a big chunk of money that I would usually put into TFSA or RRSP and invest. What are your thoughts on RRP?
First off…I’ve loved all of your posts since I discovered your blog a couple of years ago!
Would it be possible to update the basis of this article to focus on an ETF mix that would fit all of the suggested asset allocations? Have any tax implications changed since the article was written?
Andrew