In a recent series of posts, reader Phil was looking for feedback on his plans to split portfolio components across different types of accounts available for Canadian investors. You can find one strategy for locating portfolio components in the table below:
|Bonds||TFSA / RRSP||Taxable|
|REITs||TFSA / RRSP||Taxable|
|US Dividend Stocks||RRSP||TFSA||Taxable|
|Foreign Dividend Stocks||RRSP||TFSA||Taxable|
|Canadian Dividend Stocks||RRSP / TFSA||Taxable|
|Non-Dividend Stocks||RRSP / TFSA||Taxable|
The rows are sorted based on how much regular income an asset class produces and how heavily that income is taxed. Since most of the return from bonds is in the form of interest, which is taxed at the investor’s marginal rate, investors may want to first consider the location of bonds. Stocks that do not pay a dividend, on the other hand, provide returns in the form of capital gains, of which only half is taxable and they may be considered last.
The columns are sorted based on how suitable an investment account is for that asset class. US dividend stocks, for instance, are best held in a RRSP. If they are held within a TFSA, a 15% withholding tax will be incurred but a taxable account is the worst location as foreign dividends are not eligible for the dividend tax credit.
Only when there is no more contribution room available in a RRSP or a TFSA, should a taxable account should be considered. Most investors would find that they have enough room in a RRSP and TFSA for all asset classes. A few who have paid off the mortgage and maxed out their RRSPs would likely find that they are running out of contribution room for Canadian dividend stocks and non-dividend payers. These will then spill over into a taxable account.