# Tax Efficient Couch Potato Investing with TD e-Series



## numonee (Apr 21, 2010)

Hello:

I am a Couch Potato investor looking for information/advice about how to invest tax efficiently in international index funds outside of tax-sheltered accounts. 

Snapshot of my current TD e-series portfolio with about $100k invested as follows (all funds in $CDN):

RSP: 
$16000 TD US Index (TDB902)
$16000 TD International Index (TDB911)

TFSA
$7000 TD CDN Index (TDB900)
$36000 TD CD BD Index (TD909)

Cash
$25000 TD CDN Index (TDB900)

Current Asset allocation: 
Equity index fund 32%
International equity index fund 32% 
Bond index fund 36%

I have already maxed out my 2016 TFSA and RRSP contribution limits and have about $8000 more to invest. I want to keep my investments simple, sticking with TD e-series but I feel like I am over-investing in the TD CDN Index (TDB900) fund because I've always read that it's the best fund to invest in once your tax sheltered accounts are maxed out (and investing in TD e-series funds). I want to get more international exposure (TD US Index and TD International Index) but I don't know if it is advisable to invest in these funds outside of tax-sheltered accounts.

Can someone please advise on the tax effects of investing in international funds outside of tax-sheltered accounts? If there are any similar posts, please advise.

Thanks in advance.

numonee


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## vi123 (Oct 29, 2015)

Take a look at HXS.


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## Eclectic12 (Oct 20, 2010)

Here is an article going into detail for ETFs (the general principals will hold for a MF or most stock).
http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/


Suggestions on what is held where ...
http://canadiancouchpotato.com/2012/09/20/foreign-withholding-tax-which-fund-goes-where/


And a reminder to now sweat the small stuff at times ...
http://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/


Cheers


*PS*

There are a few specialty ETFs that will use a swap structure to avoid the foreign withholding tax on dividends/income but the investor should be aware of the difference in structure.


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## numonee (Apr 21, 2010)

Thanks for providing these useful links, Eclectic12.
I have read through them and have read similar advice but it gets confusing when you start to read about lining up investments for tax efficiency. I'm investing in the same funds, just don't want to get taxed when it can be avoided. I hope that it doesn't make too much of a difference for tax purposes if I start investing in the international e-Series funds outside of the sheltered accounts.


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## Video_Frank (Aug 2, 2013)

> just don't want to get taxed when it can be avoided.


Don't let the tax tail wag the dog. If your asset allocation plan calls for you to hold more US equity then buy it and hold it in your non-registered account. Yes, it's less desirable than inside an RRSP but it's the price you have to pay to hold US equities. FWIW, I hold 40% or so in US equities (VTI and VXUS) and it's all in non-registered.


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## numonee (Apr 21, 2010)

Video_Frank said:


> Don't let the tax tail wag the dog. If your asset allocation plan calls for you to hold more US equity then buy it and hold it in your non-registered account. Yes, it's less desirable than inside an RRSP but it's the price you have to pay to hold US equities. FWIW, I hold 40% or so in US equities (VTI and VXUS) and it's all in non-registered.


Yes, I will bite the bullet and continue working towards my desired asset allocation. It's definitely costing me much more to have my money sitting in a savings account.


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## Eclectic12 (Oct 20, 2010)

numonee said:


> ... I have read through them and have read similar advice but it gets confusing when you start to read about lining up investments for tax efficiency. I'm investing in the same funds, just don't want to get taxed when it can be avoided.
> 
> I hope that it doesn't make too much of a difference for tax purposes if I start investing in the international e-Series funds outside of the sheltered accounts.


Now I'm confused ... I was sure you *didn't* have a choice, based on the registered accounts being maxed so that a taxable account had to be used.

The advice to minimise unrecoverable tax is a Canadian mutual fund or ETF that holds US or international stocks directly.
Last I recall checking a while ago, the TD eSeries across the board matched this profile. A quick look at the TDB911 has the top holding looking like international stock.

Once in a taxable account, from what I've read ... it will always have a drop due to taxes withheld and capital gains on selling. The key advice from the article is to avoid choosing an investment that adds an extra layer that is reducing the return.


Even if one is using the HXS ETF to avoid the US dividend withholding tax ... there is still going to be the CG from selling in a taxable account.


Cheers


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## numonee (Apr 21, 2010)

Eclectic12 said:


> Now I'm confused ... I was sure you *didn't* have a choice, based on the registered accounts being maxed so that a taxable account had to be used.
> 
> The advice to minimise unrecoverable tax is a Canadian mutual fund or ETF that holds US or international stocks directly.
> Last I recall checking a while ago, the TD eSeries across the board matched this profile. A quick look at the TDB911 has the top holding looking like international stock.
> ...




The confusion may lie in my interpretation of what I read. I followed these guidelines when deciding where to hold my funds: http://www.milliondollarjourney.com/tax-optimizing-the-couch-potato-portfolio.htm

The key point I focused on:

Here are some possibilities on how to minimize your investment taxation providing that your tax sheltered accounts are maxed out:

RRSP:

Fixed Income/Bonds/GIC’s
Foreign Equities
Income Trusts
REITs

TFSA

Fixed Income/Bonds/GIC’s
Income Trusts
REITs

Non-Registered:

Canadian equities


I am still new to investing and trying to understand the tax consequences of any investment I make. Any advice (with a simplified explanation) is appreciated.

Thanks.


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## Eclectic12 (Oct 20, 2010)

There is a problem with letting the tax implications be the sole factor.

For example, it is true that for a top earner interest income will have a higher rate of tax charged to it. However, with interest rates ranging from 0.05% through 3% ... sheltering the dividends that are being paid out at 10% of my cost, with an unknown future CG (currently at FMV of +80%) is far more effective.


Then there is what the investment pays out. Take the "RRSPs / TFSAs ... REITs".

I hold some REITs who pay between a low of 78.9% to a high of 100% RoC. RoC is most of the time, tax deferred to the sale of the investment. If I don't add more in a few years time, the RoC will become a yearly taxed item at CG rates. 

At the time I was paying down my mortgage aggressively so it seemed better to me to be using cash payments from this particular investment. There was little or no taxes reducing what can be applied to pay down the mortgage. It meant I had to do have a bit of extra bookkeeping but having learned the ins/outs of it plus having modified my bookkeeping systems, IMO it was no big deal.

OTOH, once I noticed that a lot of the time, another REIT's payout is 40% or less tax advantaged (worst year recently was 69% or so of cash paid was taxed the same as employment income or interest) - I moved that one into my TFSA ASAP.


Bottom line is that the guidelines are good but YMMV.


Cheers


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## My Own Advisor (Sep 24, 2012)

FWIW, this is what I do:
http://www.myownadvisor.ca/dividends/

TFSA = CDN content only
RRSP = focus on US content
Non-Reg = CDN dividend paying stocks only.


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## numonee (Apr 21, 2010)

My Own Advisor said:


> FWIW, this is what I do:
> http://www.myownadvisor.ca/dividends/
> 
> TFSA = CDN content only
> ...


Thanks for responding, My Own Advisor. I have been following your blog. Interesting content.


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