# Asset Allocation Question



## Chingyul (Mar 26, 2015)

Not sure if this is more a tax question or an investment question, but we'll start here.
I've been running a couch potato strategy for the last 3 or 4 years, but running TFSA and RRSP as two separate portfolios for ease of re balancing. I'm using TD e-series through TD DI. Basic 4 funds (30% CDN index, 25 % us index, 25% int. index, 20% cdn bonds).
I've been saving extra cash for down payment and just recently closed on the purchase, so the extra cash can now go back into investments.

I have a DB plan through work, so my RRSP room is quite low, and I've maxed my TFSA and RRSP, hence the interest in tax efficiency in a non-registered account.

Question 1: Is it even worth it? Total portfolio is ~$110k, and ~$40k in non-reg (I have more RRSP stuck in a DSC mutual fund....)

After some reading, I think I might have it sorted out, but would like some input.
Max out bonds in RRSP, fill remaining RRSP room with international index.
Remaining international index in TFSA, and fill rest of TFSA room with US index.
Remaining US in non-reg, and all the Canadian funds.

I'm an annual contributor, so going forward, I'd like to think no one asset class is going to go so far out of line that I can't do the proper re balancing between the 3 account, and just cascade overflow from RRSP to TFSA to non-reg.


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## CalgaryPotato (Mar 7, 2015)

Here is my best understanding of the current priority based on tax rules from you need to register no matter what down to the best choices to leave unregistered when you run out of room. I'd love to see others feedback on this:

Real Estate Income Trusts
Bond Funds/Bonds you don't plan to hold until maturity
International Equity Funds
US Equity Funds
Canadian Equity Funds
GICS, Cash, Bonds you will hold to maturity.

The last one seems counter intuitive, but I've read it's true when the interest rates are this low. 

The one question I would ask though, is all this money designated for retirement? If you have a DB benefit plan, plus your RRSP maxed out, do you not plan to touch any of this money until retirement? If so it's a great asset mix. If not, maybe make sure you've put some thought into other goals along the way and if you really won't be touching any of this for 10+ years.


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## Eclectic12 (Oct 20, 2010)

Using the TFSA instead of the RRSP for the US index fund may mean that the dividend portion of the cash paid has 15% sliced off by the IRS. Now depending on what type of fund, while the RRSP is technically exempt ... it might be taken anyway in the RRSP. For a taxable account, this foreign tax paid will be reported on one's tax return and the foreign tax credit will return some or all of the taxes paid.

http://canadiancouchpotato.com/2012/09/20/foreign-withholding-tax-which-fund-goes-where/
http://canadiancouchpotato.com/2015/01/30/the-wrong-way-to-think-about-withholding-taxes/


I think I'd prefer the bonds in the TFSA as you would make a top taxed investment tax free instead of tax deferred to be later taxed as income (i.e high). If you are sure the RRSP withdrawal in the future is going to be at a substantially lower income level, this may not matter so much. I haven't run the numbers.


Cheers


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## CalgaryPotato (Mar 7, 2015)

Eclectic... wouldn't you want the top earner in the TFSA (equities) since you won't pay tax when you take it out? You pay on whatever you take out of the RRSP as income, so keeping your lower gainers in there seems better. (The bond funds)

Also my understanding is, it depends on if he holds a Canadian ETF or a US ETF for his US exposure to whether he can recover his withholding taxes in an RRSP.

http://www.moneysense.ca/invest/etfs/ask-the-spud-when-should-i-use-us-listed-etfs


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## Eclectic12 (Oct 20, 2010)

CalgaryPotato said:


> Here is my best understanding of the current priority... I'd love to see others feedback on this:
> 
> Real Estate Income Trusts


IMO ... this depends on what it pays and one's priorities. 

As an example, a REIT like RioCan that pays between 30% to 70% as "income" results in a high yearly tax ... this I prefer it in a registered account. The other extreme is a REIT like Chartwell Retirement Home that pays 60% to 100% of it's cash distribution as RoC means tax deferred (and possibly eventually yearly tax at the capital gains rate) ... this I prefer in a taxable account (i.e. both unit sale and a majority of the income will be taxed at the capital gains rate). Being able to use 100% of what was paid to a taxable account is a cash flow advantage, n'est pas?

Having an investment with mixed income like a REIT (or ETF) means I have half an hour to an hour's worth of bookkeeping a year as well as the different types of income to report on that year's tax return which the registered account would avoid.


Cheers


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## Eclectic12 (Oct 20, 2010)

CalgaryPotato said:


> Eclectic... wouldn't you want the top earner in the TFSA (equities) since you won't pay tax when you take it out? You pay on whatever you take out of the RRSP as income, so keeping your lower gainers in there seems better. (The bond funds)


I'll have to think about it ... though one needs to figure out what the big gainers will be consistently. Then too, if the dividends keep being bumped up - the 15% paid to the US will keep growing as well. 




CalgaryPotato said:


> Also my understanding is, it depends on if he holds a Canadian ETF or a US ETF for his US exposure to whether he can recover his withholding taxes in an RRSP.


As I understand it, the problem is that with source company (say Microsoft) sending the dividends to the say iShares, they only know it's a Canadian ETF so the withholding tax is sliced off. In a taxable account, the income is reported so that the FTC can be claimed. In an RRSP, once can look up how much was withheld on the ETF web site but there's no tax return to apply for the FTC.

Where the investor bought Microsoft shares directly in their RRSP, the broker would have filed the paperwork for the RRSP exemption and nothing would be taken. (The same paperwork reduces the US withholding tax from 30% to 15% in a taxable account.)

All of this is to highlight that in a taxable account, there is a recovery process (i.e. tax return & FTC) where in the RRSP there is no recovery, only whether the US knows there is a tax treaty exemption.

The US ETF is exempt because it's US entity and like holding the Microsoft shares directly, the ETF knows the investor is a Canadian so that the exemption will apply.


When I get time, I'll review the moneysense article in more detail.


Cheers


*PS*

As is pointed out on the Canadian Coach Potatoe web site, the US 15% withholding tax may be a drop in the bucket compared to other factors so keeping the full picture in mind is important.


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## My Own Advisor (Sep 24, 2012)

Eclectic12 said:


> As is pointed out on the Canadian Coach Potatoe web site, the US 15% withholding tax may be a drop in the bucket compared to other factors so keeping the full picture in mind is important.


Correct.

When you consider, if in retirement you're in the lowest tax rate, 20% in Ontario, then with the 15% withholding tax you're still ahead IMO to invest US stocks inside a USD $$ TFSA.

I will likely be moving my US stocks to the USD $$ TFSA in retirement for tax-free, USD, dividends. 

YMMV


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## Chingyul (Mar 26, 2015)

CalgaryPotato said:


> The one question I would ask though, is all this money designated for retirement? If you have a DB benefit plan, plus your RRSP maxed out, do you not plan to touch any of this money until retirement? If so it's a great asset mix. If not, maybe make sure you've put some thought into other goals along the way and if you really won't be touching any of this for 10+ years.


This portfolio is set for retirement with no plans to touch it in 10+ years.
I think I can keep up with maxing available RRSP room (minus pension adjustment) and TFSA, so the un-registered should continue to factor in.


Thanks for the advice so far. As it gets bigger, I might start looking at ETFs, and a slightly more diversified portfolio (the complete couch potato or a variant).


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## Eclectic12 (Oct 20, 2010)

^^^^

It's good that you are aware that a pension has a pension adjustment (PA) which reduces the RRSP contribution room earned. 

The wording "RRSP room (minus pension adjustment)" could cause confusion for those less familiar with it. This sounds like it's an extra factor that has to be subtracted off by the individual. CRA takes care of the subtraction using the PA reported on the tax return. This means that what appears on the notice of assessment for that tax year (i.e. NOA for 2013 that is generated after filing the 2013 tax return) has taken the PA into account.

Where one reports from the T4 form the appropriate box for the PA, everything takes care of itself from there. The times I can think of that one might want to dig deeper is where one expected more RRSP room to be available as the pension/PA are being learned about or if one wants to spot check the calculations.


Cheers


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