Investing in taxable accounts

Investing in taxable accounts

Fans of this site will know I take a “hybrid” approach to investing:

  • Approach #1 – we own a number of Canadian dividend paying stocks for income and growth. We own nearly 30 different Canadian stocks within our non-registered account and across our Tax Free Savings Accounts (TFSAs).  We own these stocks because we believe buying and holding our DIY bundle of Canadian dividend-paying stocks will, over time, provide some steady monthly income for future wants and needs in retirement.

You can find more details about how I built my own Canadian dividend stock portfolio here.

  • Approach #2 – we’re owning more units of low-cost U.S. Exchange Traded Funds (ETFs) inside our RRSPs over time.While dividend paying stocks are great, we believe this is smart because we’re investing abroad beyond Canada’s borders.  In doing so, we’ll add growth and diversification to our portfolio. While we still own some Canadian stocks and some U.S. stocks inside our RRSPs, (names like AT&T, Verizon, Procter & Gamble, and Johnson & Johnson to name a few) we’re buying more (and holding more) U.S. ETF units every quarter going-forward.

So, with those approaches in mind – you should know we strive to max out contributions to our registered accounts (i.e., x2 RRSPs + x2 TFSAs) before making investments inside our taxable investment account*

*I do hold some investments inside my taxable account but I’ve also long since maxed out my personal TFSA and RRSP.

Investing with ETFs

Recently, in the My Own Advisor mailbox, I’ve received a few reader questions about taxable account investing.  Some of those questions go like this:

Hi Mark,

I really enjoy your site and your journey.  I’ve been investing for a bit and getting more comfortable with investing.  Recently, I even transferred my full/out of contribution room mutual fund RRSP account to a self-directed RRSP account.  I’m going to review what lower-cost ETFs I should buy for that account based on your site in the coming weeks! 

However, how should I invest in a taxable account?  I would like to minimize taxes in the future!

Hi Mark,

I read all your dividend income updates like this one.  Congrats so far!  It seems as though you invest in Canadian dividend paying stocks with your unregistered account.  I’m learning that anything that pays a dividend, even low-dividend-payers, can incur taxation even at modest account sizes.  How are you going to manage this?  Also, what do you make of the Horizon’s swap-based ETFs?  Thanks!

Thanks for your questions readers.  Lots to unpack there – so let’s get at it!

  1. Considerations for any account – TFSA, RRSP, non-registered, other!

I think it goes without saying but to answer these questions above from readers – there are far more considerations than just what ETFs to own.

For any account (TFSA, RRSP, taxable, or even your kids’ RESPs) I think you should consider the following questions:

  • Is my approach diversified?  Do I understand the investment risks I’m taking on for any potential return or even returns that could be below market performance?
  • What is my desired asset allocation?  Meaning, in general, how much equities to bonds to cash do I want to hold?  Why?
  • What are my investing objectives?  How long do I intend to invest?  (Remember:  I believe plans for your money should come before products!)
  • Should my TFSA + RRSP + RESP + taxable be managed as “one big portfolio? (Me:  yes, I think it should!)
  • And more and more and more…

Ultimately folks, you should strive to own assets that met your investing objectives; don’t just buy ETFs for the sake of buying ETFs.  Know why

You might also wish to consider tax efficiency as part of asset location.

I wrote about asset location before including asset location in retirement.

General rules of thumb on that go like this:  put the most tax-efficient assets in the taxable account (because of the Canadian dividend tax credit and capital gains treatment) AND put the least tax-efficient assets in your registered accounts, more specifically your RRSP.

You can read up on the tax treatment of Canadian dividend paying stocks here.

  1. How should you invest in a taxable account?

That could play out in soooo many ways, given there are never any hard and fast rules for everyone.  That said, here are some starting considerations for asset location and tax efficiency based on what I’ve learned and do:

RRSP Assets TFSA Assets Taxable Assets
·         Canadian stocks

·         U.S. stocks

·         Real Estate Investment Trusts

·         Canadian or U.S.–listed ETFs

·         Bond ETFs

·         GICs

·         Canadian stocks

·         Canadian Real Estate Investment Trusts

·         Canadian-listed ETFs

·         Bond ETFs

·         GICs

·         British American Depositary Receipts (ADRs)

·         Canadian stocks

·         U.S. stocks that pay little to no dividends

You won’t find international, U.S. dividend paying stocks or any U.S.-listed ETFs under my “TFSA Assets” column because withholding taxes on dividends earned will apply to the tune of 15%.

Best to keep U.S. stocks and your low-cost U.S. ETFs inside your RRSP.

British ADRs are however within the “TFSA Assets” column for a reason – and you can find out more here.

As a general rule of thumb, I believe it makes sense to maximize contributions to your registered accounts before non-registered investing.  I mean, why not use tax-free (TFSA) and tax-deferred (RRSP) accounts to your advantage first?

To help you minimize taxes in the future (when it comes to taxable investing), consider owning the following, again just examples:

  • Canadian stocks (that apply for the Canadian dividend tax credit),
  • Canadian ETFs (like XIU) that are very tax-efficient, OR
  • Stocks that pay little to no dividends – since capital gains when you incur them are – all things considered an efficient form of taxation.

So, your potential portfolio could look like this…as a totally hypothetical example only!

RRSP Assets TFSA Assets Taxable Assets
Any one or more of the following:

·         Canadian stocks (BMO)

·         U.S. stocks (JNJ)

·         Real Estate Investment Trusts (CAR.UN or ZRE)

·         Canadian or U.S.–listed ETFs (VCN, XIC, XIU, VTI, VYM, XAW, VXC)

·         Bond ETFs (VAB)

·         GICs

Any one or more of the following:

·         Canadian stocks (FTS)

·         Canadian Real Estate Investment Trusts (HR.UN or XRE)

·         Canadian-listed ETFs (ZCN, XIC, XIU, XEI)

·         Canadian Bond ETFs (ZSB)

·         GICs

·         British ADRs (BP)

·         Canadian stocks (CNR) (or tax efficient ETFs like XIU)

·         U.S. stocks that pay little to no dividends (BRK.B)

As always, you can find some of my favourite, low-cost ETFs to own across various accounts on this page here.

I think most investors, who are wary of any individual stock selection, could easily hold 3-4 ETFs and be done with it.

Alternatively, should you feel 3-4 ETFs are too much to rebalance or monitor – could consider these simple but very effective all-in-one funds.  One fund, across many accounts, and be done!

  1. What I do – Canadian dividend stocks in my taxable account

As mentioned above, I’m going to keep investing using Canadian dividend paying stocks in my taxable account for the foreseeable future.  The downside of this is – as my income might rise over time, dividends are not as efficient as capital gains.  So, I’m actually not buying any more stocks within this account short-term.

I’m not doing this for a few reasons:  1) the more employment income I make, the more I’m taxed even with the Canadian dividend tax credit.  2) while my own TFSA and RRSP accounts are out of contribution room, we have debt.  So, we’re focused on paying down debt in the coming years prior to semi-retirement which will hopefully occur in 5-10 years.  3) We’ll work on maxing out my wife’s RRSP account soon too (before she intends to stop full-time work in the next 5-10 years).

Those are plenty of good priorities for now…

What do I make of these Horizon’s swap-based ETFs? 

I think these are interesting products for sure…using agreements as part of their fund structure so investors only pay capital gain taxes when they sell the ETF units down the road – but these are complex products.  Personally, I think complex products should come with a warning since the more complex the fund – the more problematic it may be for you to manage your portfolio.

I provided a take already on these funds in this dividend income update here – so check that out!

Summary

How to invest, what to own where, why and for how long are all very simple questions with some complex answers.  Besides, personal finance and investing will always be personal.

For what it’s worth, for anyone new to investing, I would focus on understanding the merits of registered investing using your RRSP and TFSA (and the RESP as well) first before even considering investing in a taxable account – certainly knowing what I know now.

For more seasoned investors, I would consider investing inside a taxable account only when RRSPs, TFSAs, and RESPs are full of contribution room.  Even then, your focus should likely be on debt repayments and killing a mortgage if those accounts are full.

If and when you find yourself in a very enviable financial position where you have no debt, all registered accounts are maxed out, I hope you return to this blogpost for any assistance in growing your wealth.  I will be certainly one of the first people to say “congratulations” if that’s where you are financially – good on you!

Happy investing and thanks for reading!

Mark

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, we're inching closer to our ultimate goal - owning a 7-figure investment portfolio for semi-retirement. We're almost there! Subscribe and join the journey. Learn how I'm getting there and how you can get there too!

47 Responses to "Investing in taxable accounts"

  1. Steve Livingston · Edit

    Hey Mark. Thanks for all you do with your website!!! I have the bulk of my exposure in my TFSA in Canadian dividend stocks. My RRSP is full and small to medium sized due to my defined benefit pension taking most of my contribution room every year. I run the Risk of being over exposed to Canada if I only have Canadian stocks in my non registered account. My non registered account it 2/3 of my total portfolio and is currently split between Canadian Dividend stocks and Us Stocks. I believe I get my 15%withholding tax back at tax time. Without overweighting Canada is holding US securities a good option in this scenario?
    Thanks
    Steve

    Reply
    1. My understanding is, no practical experience on this though, your withholding tax on U.S. dividends in a taxable account are recoverable on your tax return.
      https://www.moneysense.ca/columns/ask-moneysense/claim-withholding-tax-from-u-s-stocks-and-how-to-get-it-back/

      “RRSPs are exempt from U.S. withholding taxes but RESPs and TFSAs are not. This is because the U.S. does not recognize them as tax-deferred registered accounts. Therefore, foreign taxes paid withheld in an RESP or TFSA cannot be recovered.

      If these withholdings were in non-registered accounts, you could reduce your taxes on the foreign income paid to Canada by filing for a foreign tax credit using Schedule 1. This ensures that you don’t pay tax on the same income in both Canada and the foreign jurisdiction. That option, however, is not available when the foreign income is within a registered account for the reasons mentioned above. In a non-registered account, Form W8 can also be filed to reduce the amount of withholding from U.S. dividends.”

      From a tax filing perspective, management perspective, CRA, etc. it seems holding some U.S. dividend paying stocks AND CDN dividend stocks is a challenge and could be simplified by only holding CDN stocks (for dividend tax credit or for just plain old capital gains) or some CDN ETFs that are tax efficient unto themselves.

      I also run the risk of being overexposed to Canada and working on that via my RRSP and future RRIF.

      Thanks for the kind words 🙂

      Reply
  2. I’ve wembled on having some non-reg investments for a while now. I still have a non-reg account (with almost nothing in it) but I found I’m too lazy to keep track of stuff. I don’t need the complication or the growth/income in my life so I’ve not bothered. I don’t recommend my path for others, just stating my situation. Maybe if the market does a major slide…..but at this stage, I can’t see me doing it.

    Great summary though, I enjoyed reading it.

    Reply
  3. Quite a summary. After reading and understanding it already myself I can see how there are many considerations and things to learn for newer investors.

    I can confirm it’s easy to claim and recover witholding tax on US dividends in an unregistered acct. A key point is if you hold more than 100K US investments in an unregistered account you must report this in from T-1135 vs. not needing to in your RRSP.

    Lloyd if you do end up with some stocks in your unregistered easiest thing to use is adjustedcostbase.ca for tracking book values. Very simple, as long as you don’t drip these stocks.

    Reply
    1. I never heard about T-1135. If one invests in mutual funds and etfs that invest global wise, how could one calculate how much is US investments? Is there a tax consequence? I am pretty sure lots of people have more than 100K US investment.

      Reply
    2. Thanks for that: “I can confirm it’s easy to claim and recover withholding tax on US dividends in an unregistered acct.”

      Great point to share about the > $100K on USD investments in an unregistered account you must report this in from T-1135 vs. not needing to in your RRSP. I was aware of that but I did not mention it in this post.

      Reply
        1. I think that’s smart. No need to complicate income reporting if you don’t have to and have other accounts to manage asset location.

          Reply
          1. Non issue currently as I don’t hold those US assets in unregistered anymore. All CDN. At some point soon I’ll be making a move with some foreign assets in kind from RRSP. I haven’t decided TFSA or unregistered. Moving some CDN out of TFSA into unregistered and replace with foreign?

          2. Quite the shell game to rebalance with asset location really. I’m not there yet but because I want to own more U.S. assets and I get older (and not sell existing CDN assets) in RRSP, I’m going to have to start thinking about US assets inside TFSA or non-reg. Not sure yet what to do. Only a couple of years away since I don’t want to be waaaay overweight in CDN dividend stocks – even though cannew thinks I should be fine!

            Leaning on a CDN-listed ETF that holds U.S. assets but it’s not as tax efficient as I would like!

          3. Without question will take some planning and attention. There will be some compromise no matter the decision. Holding the right assets that also make adjustments easier is also a consideration for me (1 or 2 etfs) – (as mentioned to you). Maintaining an appropriate level of FI is also a factor.

            Am about 50/50 CDN/foreign USD now and pretty happy with that meeting my IPS.

          4. Had to check since I gave you a ballpark about 50/50.

            Currently CDN 44.5% /Foreign 55.5% – EQ=64.8%

            Perfect since some CDN is dripping, and I will be accessing foreign assets before CDN.

            If that’s your goal you’ll get to 50/50 in time!

          5. That’s my struggle. Withdrawing from RRSP will reduce my USD assets but I might spend all CDN assets in RRSP first – since many of them are non-reg. and inside TFSA anyhow.

          6. I get it. In time an issue for me also.

            That seems like a good idea, especially if you already hold a number of them in other accounts. = no brainer to me!

            If you’ve still got a long ways to get to your desired allocation maybe all future TFSA contributions = US etfs, all future RRSP contributions US etfs (no more CDN & turn off drips if applicable), if you’re not already.

          7. Ya, starting to think that way. Maybe 2020+ I put some US ETFs inside the TFSA and all future RRSP contributions = VYM or similar.

  4. One thing you didn’t touch on in your post is a big reason people invest in dividend stocks in their taxable account is because they need the income just to survive. In my taxable accounts I have ETFs, REITs and stocks that I hope will have growth but importantly to me, provide dividend income. I don’t make a lot of money, I’m single, have no other financial help so the dividends to help cover basic expenses.

    Reply
    1. Very fair and it is absolutely a tax advantage to invest in a taxable account, for income; people simply need the income derived from their portfolio to survive and pay for living expenses.

      I can appreciate how dividends from your non-registered account are helping you cover daily expenses. Thanks for that perspective.

      Reply
  5. Just another perspective…

    Bonds and GICs are for mitigating risk of a market meltdown combined with unemployment and generally bad economic conditions. That’s when you need the bond safety valve (and I mean short term government bonds or GICs).

    In an event like this bonds won’t be much help if within an RRSP. You want them easily accessible in a registered account.

    Besides, while we pay a higher percentage of tax on bond interest, the expected return on bonds is almost nothing vs stocks. Therefore the total $ amount we pay (including gains) will be less if bonds go into a registered account and stocks go into a TFSA.

    Reply
    1. Thanks for your input and I would agree = bonds/GICs = when you need a stock market safety valve.

      Definitely interesting take on bonds in RRSP, which may encourage folks to keep a higher cash value in a HISA? Thoughts?

      Reply
  6. Mordko, I’m not following your point. Are you meaning to say bonds for UN-registered accts instead of what you wrote -registered. I think you make a good point to look at how a person could access their FI (safety valve) whether they are working or in retirement for an emergency or period of bad economic times.

    I am retired. All of our bonds and GICs are in registered accounts – LIF and RRSPs. They are accessible because I am regularly doing withdrawals from both to fund my retirement living, and to add to TFSA contributions plus a small amount into unregistered. We also keep a largish HISA and periodically a short term GIC as well ~ 2 years+ spending. I prefer to use my TFSA for 100% equities that offer better long term growth, especially considering we do not plan to utilize these for many years, and are likely to be our last standing account(s).
    A work pension that covers more than our basic living expenses is the initial backstop.

    Reply
  7. Hi Mark, the marginal tax rate is at least 20% in Canada, the US withholding tax rate is 15%. If you will pay net tax, it is still better to put USD investment inside registered account, not taxable account. Obviously, RRSP is the best option. Next will be TFSA, you will save the difference between your marginal tax rate and 15% of the US dividend income.

    We are in the process to move CAD investment out of TFSA, in order to make room for USD investment and to take more advantage of the Canadian dividend tax credit. Some of the USD investment are currently inside RRSP, we hope to transfer all out of one RRSP into TFSA for the next 15 years, to avoid potential OAS claw back in the future.

    Any thought on your RRSP USD withdraw plan for your 50 and 60s?

    Reply
    1. Thanks for visiting Bruce.

      Yes, I fully see what you mean – you’re ahead tax-wise and I’ve written about that myself when I’m not working. I just might put some USD assets inside the USD $$ portion of my TFSA. Just not now.

      While working, I really can’t take as much advantage of the CDN DTC as others since my employment income largely reduces this benefit…but it won’t always be this way.

      We have all our USD assets inside our RRSPs now.

      For my plan, I hope to withdraw some RRSP/RRIF assets in-kind to my TFSA in my 50s and 60s. I’m a long ways away from that yet…but that’s my thinking if I don’t spend my RRSP assets first.
      I just need to make sure I have TFSA room for that every year.

      So, if I have TFSA room:

      1) withdraw the shares from RRSP to a non-registered account. Then add income, report income to friends at CRA.
      2) once in non-reg then move to TFSA in-kind.

      Thoughts?
      Mark

      Reply
      1. Thanks for your confirmation. I have been following your site for many years and it is a great resource for us. Thanks for all your great work.

        For my case, we still have USD non-reg’ed and majority of RRSPs are in USD already. We bought some ADRs inside TFSA, most of them had not been performing well as that introduced another kind of currency risk: Euro or British pound vs USD. (next 10 years, would be different if the USD/CAD/Euro tide turns around). The dividend growth rate (of most of the ADRs) are very low and not consistent. Looking back, it would be better to not invest in ADRs, move all USD into RRSP and TFSA (bite the bullet), and leave CAD dividend investment non-reg’ed if all RRSP and TFSA room are used.

        We will be 50 soon and my wife will take early retirement. We will collapse her RRSP before 65. After 65, we will use pension splitting, RRIF splitting, to avoid OAS claw back. We would like to collapse the other RRSP sooner (before 80), to avoid the final unfortunate event of the big hit or OAS claw back without the possibility of pension/rrif splitting if one person is gone.

        Reply
        1. Kind words…always great to hear Bruce.

          You know, I was going to buy some ADRs for the TFSA this year…I came very close since I’m bullish on healthcare. So, I gravitated to AZN and GSK. I covered a few stocks here:
          https://www.myownadvisor.ca/get-u-s-income-from-british-adrs-tax-free/

          Interesting call re: ADRs since I decided to go with some of these for 2019:
          https://www.myownadvisor.ca/5-stocks-im-considering-for-my-tfsa-in-2019/

          I think going forward, and I write about it, I will probably focus on CDN stocks and REITs in the TFSA, CDN stocks and lower dividend payers like CNR in the non-reg., and slowly continue to build up RRSP and LIRA with USD stocks.

          I will at some point want some USD $ stocks inside my TFSA and might just bite the bullet per se with the 15% withholding since I have a feeling with our portfolio + pension + CPPx2 + OASx2 I figure our tax rate will be 20%-30% in semi-retirement.

          Smart stuff to deplete RRSP before 65 for any OAS clawback. You seem to be a in very good place is that is your concern 🙂

          Reply
          1. You are doing great! Everything will work out for you as your planned.

            For AZN vs GSK: After holding both for many years, GSK is in my sell candidate list for a while now, as the stock price and dividend in USD have been going nowhere. AZN dividend is semi-annually, and there has been no growth either.

            Maybe don’t think about the 15% withholding tax, and consider all heath care stocks together is better. JNJ, MRK, PFE, LLY, ABT, ABBV etc.

          2. Very fair Bruce. Thanks for your experiences. I own JNJ, PFE, ABBV – all DRIPping now (1 share each) inside RRSP quarterly. I intend to buy MDT or MRK at some point and build up a position to DRIP that prior to semi-retirement.

            I will turn off some DRIPs in semi-retirement (age 50? when we can hopefully start part-time work) and just collect/spend those dividends for a few years from RRSP withdrawals. That’s the game plan at least!

  8. Hi RBull – a question re the 100K (in CAD) foreign investments – where did you find that it only applies to non-registered accounts ?
    The income tax form asks “did you hold foreign property in (year) with a total cost over CAD $100,000 ” – there doesn’t appear to any qualification as to where the property is held. Just curious, thanks

    Reply
  9. There isn’t a tax consequence, they just ask you to report it on the form.
    Also, it isn’t over $100,000 in investments, it is over that amount as a cost. So if you bought something at $50,000 and it had grown to over 100,000, it is still under the threshold to be reported.

    Reply
    1. Well, you need to report it and because there is a T-slip issued for that you do have to pay taxes on eligible dividends, interest, other though. Unless I am totally wrong – just like CDN stocks in a taxable account – but US stocks do not apply for the Canadian dividend tax credit.

      Reply
      1. The form was just 2 lines to fill out, so very easy if your cost basis of investments is below $250,000 when converted to Cdn dollars. Higher than that, more lines.

        My situation was odd. I do not have a cost basis at the minimum. But I have a stock that went up 4 times value. I had bought US$10,000, it went up over 3 times value, then later dropped right back, so I then bought another $10,000. Then it again went up from 35, this time to 144 dollars . At that point, I moved my account to a different brokerage, so the new one didnt know my cost base, and sent me the form with the tax documents. Made me feel rich, lol. Since then the stock price has again dropped considerably.

        Reply
  10. Good guidelines Mark on the accounts to use.

    REITs are actually not bad to hold in the non-registered account, you just have to have very good accounting on all the distributions and return of capital. The same actually happens on index ETF as you may received ROC adjustments. When held for a long time, the ROC will simply increase your capital gains which can be a better rate than the dividend tax you would pay.

    I also personally hold a US stocks in any accounts simply because it outperforms many Canadian holdings. Profit and total return wins over tax efficiency.

    One has to forecast their future tax rate which is very personal and forecast their earnings potential. Profit is stock appreciation + dividend – taxes in a non-registered account. If you focus on minimizing taxes, are you forgetting the stock appreciation or picking the wrong investment.

    I too have a lot of US holdings, I have more than 50% now and in many cases, I am swapping Canadian holdings for a US Index ETF simply because it outperforms the Canadian holding.

    Reply
    1. Fair point: re: I also personally hold a US stocks in any accounts simply because it outperforms many Canadian holdings. Profit and total return wins over tax efficiency.

      I’m trying to get a better handle on tax efficiency and asset location as I get older/portfolio matures.

      I’m hoping to own more US assets over time…trying to buy more via low-cost ETFs for diversification mainly although I do have my eye on MDT and a few other US healthcare stocks.

      Good to hear from you.
      Cheers,
      Mark

      Reply
  11. Hi Mark and everyone, I just started doing research on investing in Jan 2019. I decided to take advantage of a good 3 year GIC with Meridian because time was running out on the deal. They also gave me some extra moolah and covered the transfer fee if I held my TFSA with them. Looking back it might have been a mistake, but I put all of my money into the GIC, which left only a small amount of room in my TFSA to put any stocks. I’m in the lowest tax bracket, so haven’t contributed to my RRSP yet (I’m not sure if that’s a mistake or not?). From what I read above, I shouldn’t have put CNR in my TFSA, but I did. And, I also have TD. I have my other stocks in a non-registered account. Although you mention holding GICs in a TFSA is tax efficient, I was wondering if you think I should see if I can move my GIC out of my TFSA (near the end of the year) and then I’ll have all of that TFSA space in 2020 for buying stocks? Thanks for your help!

    Reply
    1. Nothing wrong with CNR in TFSA or TD in your TFSA. I personally put modest to higher-yielding stocks inside my TFSA (banks, utilities, telcos and REITs) and keep lower-yielding stocks like CNR in my taxable account where I can (lower taxable income via dividends).

      There is no one right answer here.

      As for your GIC issue – potentially you can put that component into your RRSP. At least that’s a consideration. Meaning, you have dividend growing, tax-free dividends inside your TFSA and then you can have bond-like GICs in your RRSP – until you have enough income to contribute to both TFSA and RRSP.

      Definitely strive to max out your TFSA, if you can, every year. Once you can do that, as income grows, max out RRSP. Then, finally, if you’re doing really, really well to max out TFSA and RRSP – start with taxable investing.

      That’s what I would do for my younger self!

      Reply

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