# What's Best for Taxable Account?



## gocanada (Jan 3, 2014)

Hey all,

I'm lucky enough to have maxed out both my TFSA and RRSP, so now have to worry about the implications of holdings within a taxable (non-registered account).

My portfolio is made up of Canadian, US, International and Bond ETFs, along with some REIT ETFs.

My understanding is that the best choice for the taxable account is Canadian allocation, due to the way their dividends are taxed. 

After that, what is best? With Bond rates so low, is that the next thing to have in there (I understand that ZDB is particularly tax efficient for non-registered accounts)? Or are US ETFs the way to go since part of the withholding tax is recoverable?

Cheers!


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## My Own Advisor (Sep 24, 2012)

Great position to be in. re: maxed out TFSA and RRSP. That is ideal.

I would consider opening up a self-directed non-reg. account and holding tax-efficient Canadian dividend paying stocks or tax-efficient Canadian dividend ETFs, like XIU.
http://www.myownadvisor.ca/dividend-tax-credit-101/

I personally wouldn't put bonds in a non-reg. account when you can have the DTC for stocks, that will provide more longer-term growth. Again, your situation may be different.

I forgot to add BlackRock wrote a nice overview of withholding taxes here:
https://www.blackrock.com/ca/indivi...ure/withholding-tax-reference-guide-en-ca.pdf


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## treva84 (Dec 9, 2014)

With respect to tax efficiency:

Dividends > Capital Gains > Interest


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## humble_pie (Jun 7, 2009)

gocanada said:


> Hey all,
> 
> I'm lucky enough to have maxed out both my TFSA and RRSP, so now have to worry about the implications of holdings within a taxable (non-registered account).
> 
> ...




good plans above ^^

some fine tuning: i'd put the REITS in TFSA in order to end the bookkeeping/recordkeeping/taxation hassle

US holdings in RRSP since they won't have to be reported on the T1135 tax form (although they will be included in estate tax return, so it's a good idea not to die, or at least to put the occasion off)

traditional advice always says put bonds in RRSP since interest income will be fully taxed anyhow

capital gains are the most tax-favoured investment income form since only half (50%) of any gain is taxable at one's MTR; one therefore tends to hold securities for gains in non-registered

however, it goes without saying that gains are the most quixotic & the most challenging form of investment income to achieve


.


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## gardner (Feb 13, 2014)

Before putting a lot of money into non-registered bond funds, I advise reading up on the tax efficiency of this. There's a good discussion here:

http://canadiancouchpotato.com/2013/03/06/why-gics-beat-bond-etfs-in-taxable-accounts/
http://canadiancouchpotato.com/2015/03/03/which-bond-etf-is-most-tax-efficient/

In many cases the total after tax return on bond funds is even worse than conventional interest and can be negative. Personally I use GICs for my non-registered fixed-income allocation and keep bonds (XQB mainly) only in registered accounts.


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## james4beach (Nov 15, 2012)

I agree with My Own Advisor. Canadian stocks that pay eligible dividends are great for non-registered, as is XIU (which pays nearly purely eligible dividends). After that, any Canadian stocks are a good fit for non-registered. Remember that if these result in a capital loss, that's good for your as well -- you can carry that indefinitely and apply it towards a capital gain later.

humble_pie also points out something important: the record keeping hassle. REITs should be in tax sheltered accounts, but many people also try to keep their ETFs in tax sheltered accounts for the same reason. Tracking the ACB, RoC and reinvested distributions is a lot of work. Over the decades, this is a lot to manage so you might not want to burden yourself with more than one or two ETFs in non-registered. (If you have to pick just one, XIU is it).

So I think a good rule of thumb is, Canadian individual stocks are the best fit for non-registered. *All* of my individually held Canadian stocks are in non-registered.

If you've filled your stock allocation, then on the fixed income side, GICs are the best for non-registered. They also have the easiest record keeping (simple interest on T5 slip, even from discount brokerages). On tax efficiency, ZDB is quite good for a bond fund and really does minimize taxable interest income. However, as I mention above, any ETF creates extra record keeping hassle so while it is tax efficient, I'd still lean towards GICs because they are just so darn simple.


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## Jimmy (May 19, 2017)

Another idea are total return ETFs where the NAV shows all the return, no dividends hence no dividend taxation. Only capital gains when you sell them. Horizons have a series.

http://www.horizonsetfs.com/ETF/HXH


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## james4beach (Nov 15, 2012)

Horizons has several interesting ones of this total return variety (no distributions)

HBB is a bond index, total return
HXT is TSX 60 index, total return
HXS is S&P 500 index total return, CAD, non hedged

They all look very interesting and have performed very well so far, providing extremely tax efficient returns. But there are some caveats:
- these are swap-based ETFs that are structured very differently from traditional ETFs
- they have counterparty risk against National Bank, I think
- they might be vulnerable to tax loopholes being closed (especially HBB)


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## Ihatetaxes (May 5, 2010)

Our non-registered accounts hold most of our Canadian and US holdings. I have some VTI in our RRSPs but use VUN in non registered. Buy VUN in non-registered and at tax time you will get T3 from Vanguard for tax withheld that you can claim on tax return and get a credit so the dividend is essentially US withholding tax free. http://canadiancouchpotato.com/2016...hholding-taxes-affect-returns/comment-page-1/


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## humble_pie (Jun 7, 2009)

james4beach said:


> Horizons has several interesting ones of this total return variety (no distributions)
> 
> HBB is a bond index, total return
> HXT is TSX 60 index, total return
> ...




it's thought that the tax authorities could view the horizons derivatives-holding ETFs as tax evasion, not tax avoidance

some investors can create similar nano-portfolios which, in essence, transmogrify dividend streams into capital gains. A few in cmf forum are visibly using futures combinations to do this. A less challenging performance will be based on options alone. Vertical, calendar, diagonal & iron option spreads can be set up to capture capital gains.

i haven't looked recently, but there used to be LEAPs options on standard bond contracts. I suppose that, if one thought about it, one could create bond option combos that would transmogrify streams of bond interests into capital gains ... each:

.


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## gocanada (Jan 3, 2014)

@Ihatetaxes, what is the reason you use VUN instead of VTI in your non-registered account? Is this to avoid the hassle of currency conversions in calculating ACB/capital gains? Alos, what is the reason you do not hold any international funds in your non-registered accounts?


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## gocanada (Jan 3, 2014)

@My_Own_Advisor, @james4beach, 

RE: Canadian Dividend Stocks

I can definitely see some of the advantages of Canadian dividend-paying stocks. The tax advantages does seem like one of them, but if my math (and us of online calculators is correct), capital gains tax can actually be lower than the taxes on dividends, depending on the amounts (my assumption is that total returns would be equal). My other concern with this approach is that my focusing on dividend-paying Canadian stocks, one would be missing out on a lot of international diversification - the Canadian market is a relatively small amount of the global economy and focusing on dividend-paying stocks within this limits diversification further. If real returns are equal, and tax can be better or worse depending on the amounts, this doesn't seem like a good tradeoff. Am I missing something?


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## Ihatetaxes (May 5, 2010)

VUN is easier in non-registered. MER of 0.16% isn't a big deal and claim the withholding back at tax time.

We hold all our international in our RRSP's. We are close to just holding bonds and international in RRSP's due to the rate our non-registered accounts are growing. Within a few years probably just bonds. 

Currently...

TFSA - 100% XIC
RRSPS - XEF, VTI, XSB, VAB, GIC ladder 
Non-Reg - XIC, VUN

No REITS, own some commercial real estate instead.


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## gocanada (Jan 3, 2014)

Ihatetaxes said:


> VUN is easier in non-registered. MER of 0.16% isn't a big deal and claim the withholding back at tax time.


Are you able to recover the 15% foreign withholding tax with VUN (ie. do you get a T5 with the amount you can claim as a foreign tax credit)? I know that within RRSPs, the ETF must be US-listed to be exempt from the withholding taxes.


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## gardner (Feb 13, 2014)

Ihatetaxes said:


> VUN is easier in non-registered.


Presumably it does not trigger a T1135 requirement


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## My Own Advisor (Sep 24, 2012)

Tax advantages exist, as always, depending on your income. Meaning, if you have little other income, you can effectively pay zero (as in $0) tax if you only own CDN dividend paying stocks. This is true up to about $50K or so in dividend income. Then the tax man comes calling. 

That reality is very rare. Most people (retirees) have other income than just non-reg. dividend income...pensions, workplace income, CPP and OAS, withdrawals from RRSP, RRIF income, etc. 

Therefore, for the most part depending upon your assets, _capital gains is usually the lowest form of taxation_. Then CDN dividend stocks in a taxable account, then other scenarios.

For some investors, myself included, this is why I'm a hybrid investor. I own CDN dividend paying stocks non-reg., I own CDN REITs inside my TFSA, then I own mostly U.S. and international assets inside my RRSP. Then you don't have to miss out on "...on a lot of international diversification - the Canadian market is a relatively small amount of the global economy." 

You are not missing anything


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## Jaberwock (Aug 22, 2012)

With regard to US dividend paying stocks:

In an RRSP - no withholding tax
In a TFSA - 15% withholding tax - not recoverable
In a non-registered - 15% withholding tax - recoverable as a foreign tax credit

So don't put your US investments in your TFSA.

With regard to Canadian taxes:

In an RRSP or TFSA - no tax is paid on any investment income. (The tax you pay on withdrawal from an RRSP is simply a return of the tax credit you received when you contributed)
In a non registered - interest attracts the highest tax, followed by dividends, then capital gains - actual rates depend on where you live, and what marginal tax bracket you are in.

That may lead you to conclude that you should put your interest bearing investments in your RRSP, and your dividends payers into your non-registered. However, that conclusion is probably wrong. Take for example a stock that is paying a 4.5% dividend versus a 2% GIC, suppose you are in the $90k to $140k income bracket in Ontario, paying 43% tax on income and 22% on dividends:

Comparison of non-registered versus RRSP:

$100k stock in non registered, dividend taxed at 22%, $57k GIC in RRSP, no tax - total tax paid $990 
$100k GIC (2% interest) in non-registered at 50% tax, $57k stock in RRSP - total tax paid $1,000

Comparison of non-registered versus TFSA:

$100k stock in non registered, dividend taxed at 22%, $100k GIC in TFSA, no tax - total tax paid $990 
$100k GIC (2% interest) in non-registered at 50% tax, $100k stock in TFSA - total tax paid $1,000

The difference is negligible. Everyone's situation is different, you should do the calculations yourself, for your own tax bracket. 

Why did I use a $100k investment in the RRSP versus $57k in the non-registered? Because if you are in a 43% tax bracket, then 43% of your RRSP does not belong to you. When you contributed, the government gave you are a 43% tax rebate, it is not your money, you are simply taking care of it for the government and will return it when you withdraw from your RRSP.

Whatever, you decide, you can guarantee that what investments you choose will have a much bigger impact on your returns than how you allocate those investments between taxable and non-taxable accounts.


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## gardner (Feb 13, 2014)

Jaberwock said:


> if you are in a 43% tax bracket, then 43% of your RRSP does not belong to you. When you contributed, the government gave you are a 43% tax rebate, it is not your money, you are simply taking care of it for the government and will return it when you withdraw from your RRSP.


RRSP withdrawal will be taxed at the prevailing rate when the withdrawal is made. Generally, the expectation is that the tax rate will be lower during retirement. The tax applied to RRSP withdrawal will not be the 43% marginal rate it was when you deposited it, but closer to the 25% average rate when your combined retirement income is ~100K or less. Marginal tax rate brackets also inflate over time, so the brackets should have a chance to ratchet up a bit, possibly lessening the average rate compared to what it is now, for a given amount of RRSP withdrawal.


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## james4beach (Nov 15, 2012)

gocanada said:


> I can definitely see some of the advantages of Canadian dividend-paying stocks. The tax advantages does seem like one of them, but if my math (and us of online calculators is correct), capital gains tax can actually be lower than the taxes on dividends, depending on the amounts


I see your point and I agree that capital gains are also very tax efficient. I didn't mean to generalize, it will depend on your situation. It's true that focusing just on dividend paying stocks will limit your selection universe (and probably your sector balance too). It's not a good idea to let the desire for dividends _drive_ your investment selection.

Yes I agree that capital gains are generally the most tax efficient.


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## tdiddy (Jan 7, 2015)

humble_pie said:


> it's thought that the tax authorities could view the horizons derivatives-holding ETFs as tax evasion, not tax avoidance
> 
> .


What is this statement based on? 

Swap based ETFs are a well recognized fund structure popular in Europe. They may be shut down at some point potentially, which is becoming less likely in my opinion (MOF made reference to them as hypothetical investment vehicle without any negative comment in their recent paper on corp tax changes for example) . But I highly doubt they would be considered illegal. Between HXS, HXT, HBB, also new HXX they represent over 1.5billion in assets.


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## humble_pie (Jun 7, 2009)

what based?

countless media commentaries - including op-ed pieces from chartered accountants - at the time of the prior small rejigging around capital gains.

for some reason the horizons future swapping funds were singled out by media writers as being possibly within the crosshairs of the MOF.

it's true that time has passed & there hasn't been a whisper.


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## Jaberwock (Aug 22, 2012)

gardner said:


> RRSP withdrawal will be taxed at the prevailing rate when the withdrawal is made. Generally, the expectation is that the tax rate will be lower during retirement. The tax applied to RRSP withdrawal will not be the 43% marginal rate it was when you deposited it, but closer to the 25% average rate when your combined retirement income is ~100K or less. Marginal tax rate brackets also inflate over time, so the brackets should have a chance to ratchet up a bit, possibly lessening the average rate compared to what it is now, for a given amount of RRSP withdrawal.


Yes, that makes the calculation a lot more complicated. However, if the RRSP has been maxed out, it is quite likely that the holder will be in one of the upper marginal rate levels on withdrawal, especially if income splitting is not an option. Everyone's situation is different, there is no single answer.


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## tdiddy (Jan 7, 2015)

humble_pie said:


> what based?
> 
> countless media commentaries - including op-ed pieces from chartered accountants - at the time of the prior small rejigging around capital gains.
> 
> ...


Yes ok those pieces is what you were referring to. Most of what I read was worst case scenario is ETF closed down, and you have to declare a huge capital gain at potentially inopportune time. I thought you were implying that someone had suggested an investor may be considered as breaking the law (ie stiff penalties/jail time) by investing in a swap ETF at some point.


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## james4beach (Nov 15, 2012)

I personally don't want to take the risk with HBB. My parents have a non-registered portfolio that includes a fixed income portion. I steered them towards ZDB, which is BMO's tax efficient bond fund. This one holds regular bonds, the traditional way, and while it's definitely not as tax efficient as HBB it also has none of the special risks. This month we'll probably add another 30K to ZDB.

I think BMO has done an excellent job with ZDB. They implement a strategy that I use myself, which is selecting low coupon bonds (you could also say selecting discount bonds). This is a sound strategy for holding non-registered bonds. Their performance has also been quite good. 3 year performance of ZDB is about 0.07% annual better than XBB.


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## tdiddy (Jan 7, 2015)

james4beach said:


> I personally don't want to take the risk with HBB. My parents have a non-registered portfolio that includes a fixed income portion. I steered them towards ZDB, which is BMO's tax efficient bond fund. This one holds regular bonds, the traditional way, and while it's definitely not as tax efficient as HBB it also has none of the special risks. This month we'll probably add another 30K to ZDB.
> 
> I think BMO has done an excellent job with ZDB. They implement a strategy that I use myself, which is selecting low coupon bonds (you could also say selecting discount bonds). This is a sound strategy for holding non-registered bonds. Their performance has also been quite good. 3 year performance of ZDB is about 0.07% annual better than XBB.


I think this is a reasonable decision for the most conservative portion of portfolio. i hold BXF presently unreg also a good option. I'll likely use HBB at some point (if it is still around) though when I'm ready for longer time horizon in bonds (presently bond portion of my portfolio has dual purpose of potential mortgage down payment) and when interest rates rise, making the difference between HBB and others more significant

however for HXS, maybe HXX (see my post that no one responded to  ) in unreg i think the differences are too big to ignore at this point


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## gocanada (Jan 3, 2014)

Thank you all for you replies. I learned a lot reading them and going through the materials you referenced, especially the white paper on Canadian Couch Potato's site (http://canadiancouchpotato.com/2016/07/11/foreign-withholding-taxes-revisited/).

The advice on Canadian dividend stocks was also helpful. @james4beach, @My_Own_Advisor, etc - I hope my initial reply to that advice did not come off as dismissive. I can definitely see that advantages, related to taxation and psychology, and will likely add more Canadian dividend stocks to the portfolio mix to have some of that approach in the portfolio alongside my current approach.

Thanks again!


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## gocanada (Jan 3, 2014)

humble_pie said:


> I'd put the REITS in TFSA in order to end the bookkeeping/recordkeeping/taxation hassle


Is it better to put US REITs in an RRSP than TFSA as (if I understand correctly) in a TFSA withholding taxes are not recoverable, but in an RRSP withholding taxes do not apply?


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## james4beach (Nov 15, 2012)

gocanada said:


> @james4beach, @My_Own_Advisor, etc - I hope my initial reply to that advice did not come off as dismissive. I can definitely see that advantages, related to taxation and psychology, and will likely add more Canadian dividend stocks to the portfolio mix to have some of that approach in the portfolio alongside my current approach.


For what it's worth: I have not ever gone out looking for dividend stocks. I created a portfolio around what I thought offered the best total return, and it happened to include some big dividend stocks.


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## gocanada (Jan 3, 2014)

james4beach said:


> For what it's worth: I have not ever gone out looking for dividend stocks. I created a portfolio around what I thought offered the best total return, and it happened to include some big dividend stocks.


Is your portfolio mainly made of individual stocks vs index/ETF funds?

I was considering adding some XEI. I don't love the MER, especially since it doesn't hold a large number of stocks anyway, but easy way to get some diversification and nice that I can buy it with no trading fee with Questrade.


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## gardner (Feb 13, 2014)

gocanada said:


> in a TFSA withholding taxes are not recoverable, but in an RRSP withholding taxes do not apply?


This is approximately right. The US withholding taxes are never actually "recoverable", but in non-registered accounts the US tax paid also generates a tax credit to the CRA that would generally offset Canadian taxes you would otherwise pay. In the instance that you don't pay any Canadian taxes, you get nothing.

The CAN/US tax treaty doesn't cover RDSP, TFSA or RESP and since these are taxed in the US, but not taxed in Canada, there is no offsetting tax credit and you lose out totally. The tax treaty does cover RRSP and these are not taxed by the US.


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## james4beach (Nov 15, 2012)

gocanada said:


> Is your portfolio mainly made of individual stocks vs index/ETF funds?


Mine is mostly individual stocks, but this happened mainly because I wanted to avoid ETFs due to US tax complications (PFIC status). I would have been perfectly happy holding XIU, ZSP and maybe ZLB.

Some more detail about how I'm invested overall:
http://canadianmoneyforum.com/showt...pproach-quot?p=1662434&viewfull=1#post1662434


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## james4beach (Nov 15, 2012)

james4beach said:


> I personally don't want to take the risk with HBB. My parents have a non-registered portfolio that includes a fixed income portion. I steered them towards ZDB, which is BMO's tax efficient bond fund. This one holds regular bonds, the traditional way, and while it's definitely not as tax efficient as HBB it also has none of the special risks. This month we'll probably add another 30K to ZDB.


Bought more ZDB this week at $15.77. I found relatively good liquidity, supporting a couple thousand share purchase no problem. This fill was at 1 cent off the NAV, which I think is about as good as it gets unless you're dealing with a very liquid ETF.

The fund's yield to maturity is 2.16% and MER is 0.15% so the expected 10 year return going forward is approx 2.0%


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