Canada Tax-Efficient Investing Guide
the tax-efficient investing in Canada. The asset location is the "strategy of placing the investments in the most tax-efficient account type". The most tax-efficient (the lowest tax cost) to the least tax-efficient: the "interest income (the GICs, the bonds, the savings accounts: the fully taxable at the marginal rate — the best in the RRSP)", the "US dividends (the 15% US withholding tax — the best in the RRSP — the 'RRSP exemption from the US withholding tax')", the "capital gains (the 50% inclusion rate — the good in the non-registered)", and the "Canadian dividends (the dividend tax credit — the good in the non-registered)". The swap-based ETFs (the "Horizons Total Return Index ETFs") are the "tax-efficient in the non-registered account" — the "no dividend distributions, the no capital gains distributions — the 'total return swap' avoids the annual tax".
Account Type by the Investment
- RRSP (the tax-deferred): The "best for: the US stocks and the ETFs (the no US withholding tax), the US-listed ETFs (the VOO, the IVV, the VTI), the bond ETFs (the VAB, the XBB, the ZAG), the GICs and the fixed income, the REITs (the fully taxable distributions), the strip bonds (the phantom interest)".
- TFSA (the tax-free): The "best for: the Canadian dividend stocks and the ETFs (the tax-free eligible dividends), the high-growth stocks (the tax-free capital gains), the GICs (the tax-free interest), the swap-based ETFs (the no tax on the swap income)".
- Non-registered account (the taxable): The "best for: the Canadian dividend ETFs and the stocks (the dividend tax credit reduces the tax), the swap-based ETFs (the Horizons HXS, the HXQ, the HXT — the no annual distributions), the capital gain growth stocks (the 'buy and hold — the no annual tax until the sale')".
Tax-Efficient Investment Products
- Swap-based ETFs (the Horizons): The "total return swap ETFs — the HXS (the S&P 500), the HXQ (the NASDAQ 100), the HXT (the TSX 60)". The "no dividend distributions — the MER includes the swap fee". The "tax-efficient in the non-registered account — the no annual taxable distributions". The "risk: the counterparty default risk on the swap".
- Corporate class funds: The "swap-based mutual funds" — the "tax-deferred growth — the no annual taxable distributions". The "T-series funds — the return of capital (the ROC) distributions — the ROC is NOT taxed in the year received".
- Capital gains ETFs: The "strategies that defer the capital gains distributions" — the "low-turnover ETFs — the VCN, the VFV — the low capital gains distributions".
Tax-Efficient Withdrawal Strategy
- Retirement withdrawal order: The "1. withdraw from the TFSA (the tax-free withdrawals)", the "2. withdraw from the non-registered account (the capital gains at the 50% inclusion)", the "3. withdraw from the RRSP/RRIF (the fully taxable withdrawals)".
- Tax-free income in the retirement: The "TFSA withdrawals are NOT included in the income" — the "TFSA withdrawals do NOT affect the OAS clawback, the GIS, and the age credit".
For the swap-based ETFs and the corporate class investing, see our ETF Investing Guide →. For the RRSP vs TFSA comparison, see our RRSP Guide → and our TFSA Guide →.