# Where does everyone put their MFs/ETFs?



## jumbalaya (Jan 17, 2013)

According to http://www.finiki.org/wiki/Tax-Efficient_Investing#Tax-Efficient_asset_allocation , one should hold Canadian ETFs in a non-registered account. This probably applies to mutual funds, too (say, e-series). I have TDB900 and TDB902 in my TFSA right now... is that not tax efficient? Also, if they were held in a non-registered account, I would have to keep track of the ACB and dividends (re-invested) until I sell (hope to do so in 20-30~ years). Seems quite tedious to me...


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## Spudd (Oct 11, 2011)

You only need to worry about that when you're out of room in your registered accounts. Holding Canadian ETFs in a TFSA is extremely tax efficient (since you pay no tax at all on them). If you ALSO had a non-registered account, then you would need to worry about where to put what.


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## Sampson (Apr 3, 2009)

MFs in the closet...

Kidding aside, I fully follow tax-efficient investing practices.


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## Robillard (Apr 11, 2009)

jumbalaya,
Let's ignore the RRSP for a moment, though for the purposes of this discussion the RRSP is like the TFSA. Suppose you only have a choice between holding investments in your TFSA or a non-registered account. And suppose you only have a choice of 3 kinds of investments:
A Canadian equity fund (like TDB900),
Canadian bonds (like TDB909), and
International investments (like TDB902).

Let's turn the question around and ask what should be moved into a TFSA, rather than what should be moved from a TFSA to a non-registered account.

Generally the kinds of investments that you want to hold in a TFSA are ones that generate "other income", which includes interest income and international income (like foreign dividends). Suppose your marginal Canadian tax rate is 40%, and foreign withholding tax rate on your international investments is 15% (though this varies from 0% to 30% depending on the country in which the underlying investents are held). By moving Canadian bonds from your non-registered account to your TFSA, you reduce the effective tax rate on the income they generate from 40% to zero. By moving the international investments from a non-registered account to your TFSA, you reduce the effective tax rate on the income they generate from 40% to 15%.

Canadian equities are different. The effective tax rate on Canadian eligible dividends varies depending on your tax bracket and your province of residence (anywhere from negative to around 35%). The effective tax rate on capital gains is typically half your marginal tax rate. Assuming that your marginal tax rate on "other income" was 40%, your effective tax rate on capital gains would be 20%, and your effective tax rate on dividends might be around 22%. So, by moving Canadian equities from a non-registered account to your TFSA, you are moving the effective tax rate on income generated by equities from 22% or 20% to zero. 

As a side note, yes you do need to track distributions and ACB for mutual funds or index funds held in a non-registered account. Generally your fund company (or broker) can provide this information though. Also, if you are holding international investmets in a non-registered account, it is your responsibility to claim foreign tax credits fo any foreign withholding tax paid.


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## james4beach (Nov 15, 2012)

Make sure you adjust your ACB according to ROC and capital gains distribution. Nobody will do this for you, and if you're not making these adjustments long term then you could be waaaay off when you finally sell the position.


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## none (Jan 15, 2013)

I've been thinking about this a lot. I'm in a low tax bracket this year and want to keep this money out of my RRSP (may be used for house purchase later - maybe not).

Anyway, because I'm in the lowest bracket - and live in BC my canadian capital gains should be 10.03% which is almost noise as far as I can tell. If I invest 10K and make 10% then really I'm only taxed at 1% of the total amount I put in which assuming I have it in a low MER fund then it will hopefully still be below the MER of many mutual funds. To make it better I only have to pay this 'tax MER' if I make money. That's the way I think about it.

One question though - looking at this table:
http://www.taxtips.ca/taxrates/bc.htm

It says I have a marginal tax rate of -6.84% for eligible dividends. What does that mean?


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## AltaRed (Jun 8, 2009)

none said:


> It says I have a marginal tax rate of -6.84% for eligible dividends. What does that mean?


The government is paying you (in tax credits) to get dividend income. I kid you not. It is a quirk in the tax system whereby the feds got it right, but some provinces did not work their tables very well (at low income rates). Try it based on different provinces, or as a 'what if', with 3 times the employment income plugged into the calculator.


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## none (Jan 15, 2013)

Really??

So what you're saying is that a non-registered account with dividend exclusive stocks (or MF) is actually better than a TFSA filled with dividend stocks(or MF)??

Assuming that the stock price stays static and only dividends are being paid into the account? Is this correct?

So perhaps some kind of bank preferred shares or is there a ETF that would be a good idea?

That is really, really odd.


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## AltaRed (Jun 8, 2009)

none said:


> So what you're saying is that a non-registered account with dividend exclusive stocks (or MF) is actually better than a TFSA filled with dividend stocks(or MF)??


For low income investors in certain provinces. Run the tax calculator for yourself.



> Assuming that the stock price stays static and only dividends are being paid into the account? Is this correct?


Yes, but that is the issue. Stock prices are not constant, i.e. they generally appreciate in value too, as part of Total Return (stock price appreciation + dividend yield). I don't suggest this as a 'strategy', just it is nice to have negative tax on dividends, provided of course that you have enough tax owing otherwise to take advantage of the dividend tax credit. Tax credits do not do anyone any good if they do not otherwise have taxes owing.


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## jumbalaya (Jan 17, 2013)

@robillard: thank you for the illustration, it has been extremely helpful.


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