If I had the opportunity to redo my whole investing portfolio and start over again, my portfolio would look different than what it looks like now. Over time I learned better ways to have a more tax-efficient portfolio and the ‘scars’ (I couldn’t think of a better word?) of my previous investing methodology are scattered throughout my portfolio. I would have focused on more tax efficient investing in Canada.
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Tax Efficient Investing In canada
I haven’t had the guts to make a complete overhaul of my portfolio because, at heart, I have trouble accepting change! Here are ways to incorporate tax efficient investing in Canada into your portfolio, the right way… the first time! This is what I would do if I was in my early 20’s and started my journey of investing with the knowledge, experience, and wisdom that I have now.
Related: Canadian Dividend Investing Blogs to Follow
As you know, there are lots of places to keep your money. In an RRSP, in a TFSA, or in non-registered accounts. There are certain accounts that are better for certain investment allocations that will help you pay less tax in Canada.
After all, the money you earned from your income is taxed, and thenthemoney you save to invest is also taxed to an extent (capital gains etc.)… so might as well learn some tips to avoid paying so much tax!
Related Post: Which One to Invest in First: The RRSP vs TFSA?
How is Investment INcome Taxed in Canada
As a basic refresher, here are the taxes on investment income in Canada:
- Capital gains from Canadian sources: How are stocks taxed in Canada? 50% of the capital gain is taxed at your marginal rate.
- Interest income: 100% taxed at your marginal rate
- Canadian eligible dividends: Tax on dividends in Canada are favourably taxed, according to Taxtips.ca, you can earn approximately $54,000 in 2022 in British Columbia before any tax is payable (if you had no income other than Canadian eligible dividend income)
- Canadian non-eligible dividends:Not as favourably taxed, but still not bad. Taxtips.ca says you can earn approximately $33,314 in 2017 before you have to pay any federal taxes.
- Foreign dividend income: Fully taxed at the marginal rate but can you can recover the foreign withholding tax
- Dividends from US corporations: There is a 15% foreign withholding tax on dividend income from US corporations if you hold it outside of an RRSP.
- US and foreign capital gains: The same as capital gains from Canadian sources, 50% of the capital gain are taxed w hen you sell.
Related: Capital gains Tax Rate in Canada
Most Tax Efficient Investments Canada
First, you have to determine your asset allocation in Canada. Then you divvy up that asset allocation into the specific accounts that you have in order to be more tax efficient.
There is a problem on focusing on not paying taxes though. Although it would be ideal to have a tax-efficient portfolio, it was also hindering me in a way.
They say don’t let the tax tail wag the investment dog.
For many years, I refrained from investing in USstocks outside of my RRSP (I ran out of room in my RRSP because I have a defined benefit pension) for the longest time because I didn’t want to pay taxes on US dividends. Therefore I was heavily asset allocated in Canada.
I missed out on a lot of growth and dividends from some fantastic US businesses.
So, even though it would be ideal if I had a 100% tax-efficient investing strategy, I also look for the opportunity for growth as well instead of just tax minimization. And I just said, “to hell with tax minimization, bring on the US and international markets!”
Here are the most tax efficient investments in Canada, and what investments go best where to reduce the taxes you pay on your investments in Canada (if you were to have an idealistic portfolio), including tax efficient ETF in Canada.
Canadian ETFs and Growth Stocks
Canadian ETFs that spit out little distributions and Canadian growth stocks (e.g. Canadian pot stocks, penny stocks, if you will, haha) are best kept in a TFSA.
In 2023, the TFSA contribution room is up to $88,000.
| Year | TFSA Contribution Room |
| 2009 | $5000 |
| 2010 | $5000 |
| 2011 | $5000 |
| 2012 | $5000 |
| 2013 | $5500 |
| 2014 | $5500 |
| 2015 | $10,000 |
| 2016 | $5500 |
| 2017 | $5500 |
| 2018 | $5500 |
| 2019 | $6000 |
| 2020 | $6000 |
| 2021 | $6000 |
| 2022 | $6000 |
| 2023 | $6500 |
| 2024 | $7000 |
| Total | $95,000 |
Related: How to Invest in your TFSA: 6 Ways to Do It
This is because if you expect (well, is the key word hope? Speculate?!) that the ‘sky is the limit’ for your chosen Canadian stock, then you won’t have to pay any capital gains tax when you cash it out or sell the stock.
Canadian dividend stocks are best kept outside of a TFSA because they are favourably taxed.
That being said, it still is nice to see my longstanding FTS.TO (Fortis) dividends get paid out tax free. I have a number of dividend paying Canadian dividend growth stocks in my TFSA.
There are people in Canada who have amassed a million dollar TFSA. Yes, you read that right. 7 figures in their TFSA. This former trader on Bay street amassed a million dollar TFSA but is in an ongoing battle with the Canada Revenue Agency because they found it fishy to have such a high-value TFSA.
Covered Call ETFs in Canada would do well in a TFSA or in non-registered because of the tax efficiency of capital gains.
In a nutshell: Keep Canadian growth stocks and Canadian ETFs generating little dividend income in a TFSA because it is more tax efficient
How Are Stocks Taxed in Canada?
Canadian dividend-paying stocks have a favourable Canadian dividend tax credit, so Candian dividend-paying stocks are ideally kept outside of your TFSA and RRSP. Tax on dividends in Canada is favourable.
Not all Canadian dividend-paying stocks have the favourable dividend some are non-eligible dividends, but the tax rate on that is still good compared to what you would have to pay if you were not tax-efficient.
Here’s a chart on the federal and provincial taxes to be paid on eligible dividends, making them one of the most tax efficient investments for your portfolio:
If you don’t want to keep Canadian companies paying dividends outside of your registered accounts, you can put them in a TFSA.
This is what I ended up doing- a lot of my TFSA is filled with Canadian dividend paying investments.
My dividends in the TFSA are not taxed, and the capital gains incurred from the dividend-paying stocks sold are not taxed.
The worst place to keep Canadian dividend paying stocks is in your RRSP.
I don’t have any Canadian dividend paying equities in my RRSP.
Canadian eligible dividends are taxed at a very preferential rate (like almost nothing). Canadian non-eligible dividends are taxed similarly to capital gains tax.
Related: How are dividends taxed in Canada?
In a nutshell: Canadian dividend stocks are ideally kept in non-registered accounts, the second choice is TFSA
International Equities
International or foreign dividend income is taxed at your marginal rate.
Within a TFSA, the dividend-withholding tax cannot be recovered.
When compared to keeping it outside of a registered account, though, it is still better to keep it in a TFSA.
It is best to keep international equities within an RRSP.
In a nutshell: For international equities that pay dividends, the hierarchy is RRSP > TFSA > non-registered.
US Non-Dividend Paying Equities
US Non-dividend paying equities are best kept outside an RRSP because the capital gains paid on US non-dividend paying equities is the same as capital gains paid for Canadian equities.
I have a single share of BRK.B (Berkshire Hathaway) to get my pass for the Berkshire Hathaway Annual Meeting and it’s still in my RRSP. I recently bought more BRK.B in my non-registered account since it pays no dividends and it will just be capital gains.
In a nutshell: Keep US non-dividend paying equities outside of a TFSA and RRSP
US Dividend Paying Equities
US Dividend Paying Company stocks are best kept inside an RRSP because there is no US withholding tax charged on your US dividend income.
A 15% US withholding tax is applied to US dividend income within a TFSA. This is not recoverable. That being said, it’s still better than paying taxes US dividend income on the marginal rate, which is what occurs if you have it outside of registered accounts.
I tried to keep all my US dividend-paying companies in my RRSP but it ended up spilling out into my non-registered because I ran out of RRSP contribution room.
As Moneysense said, I’d rather have a less volatile more growth-oriented portfolio even if that results in increased taxation.
For something like VTI, I have it both in my RRSP and in my non-registered.
However it’s important to keep in mind the balance of VTI in your non-registered and be cognizant of the T1135 form.
In a nutshell: Keep US dividend paying equities inside an RRSP
Tax Efficient ETF Canada
Here’s the low down on ETF taxation in Canada.
There are a number of ETFs that are Canadian listed on the TSX that are “ETFs within ETFs”. For example, the ex-Canada ETF such as VXC (Vanguard’s Ex-Canada ETF) includes two US listed ETFs and one Canadian listed ETFs.
For these, the capital gains will be taxed the same but the foreign withholding tax is not recoverable on any distributions or dividends received within your registered accounts.
For a list of foreign withholding tax amongst the popular one ticket ETFs and other ETFs such as VEQT or VXC or XAW, Justin Bender has a great foreign withholding tax calculator to estimate your foreign withholding tax.
Basically though, as mentioned, you shouldn’t let the tax tail wag the dog (or your portfolio).
In a nutshell: Best to hold these in your non-registered accounts.
Bonds and Interest Income
Income from bonds and interest income are fully taxed at your marginal rate unless you include them in your RRSP or TFSA.
Therefore, bonds are best kept within your TFSA or RRSP.
I include my bonds in my TFSA and my RRSP. For my cash savings in my high interest savings accounts, I don’t bother putting them in a registered account because I don’t want them to be taking up precious registered account space!
I keep my savings accounts, like my EQ Bank account and my Motive Financial as non-registered.
If for example, your interest income is $1000 for the year, and your marginal rate is 20%, you will have a tax bill of $200.
If you prefer to pay the $200 tax on your $70,000 in savings rather than take up $70,000 of your precious TFSA room with a 2.5% rate, that makes more sense to me.
You should not be wasting your TFSA room on a high interest savings account.
In a nutshell: Keep bonds in a registered account, technically interest income should be in a registered account too but you may prefer to keep it outside.
REITS
REITs are short for Real Estate Investment Trusts.
REITs invest in income producing assets of real estate, such as apartments, shopping malls and hotels
REITs are best kept in a registered account like a TFSA or an RRSP where they are tax-sheltered. I keep my Canadian REIT in my TFSA and my American REIT in my RRSP.
REITs flow their rental income through to their unitholders (you), so they don’t pay much corporate tax.
In a nutshell: Keep REITs in a registered account
Most Tax Efficient Investments Canada Summary
As you can see, the basic premise for tax efficient investing in Canada is to keep Canadian growth stocks and ETFs that have high growth potential in a TFSA, keep Canadian dividends outside of registered accounts, keep US dividend paying stocks within an RRSP, keep REITs within a TFSA, and keep bonds in a registered account.
You can use this Simple Tax calculator (now aquired by Wealthsimple) to calculate your estimated tax due.
As you can see, with $60,000 in eligible Canadian dividend income, you will have to pay $0 in taxes.
Yes, you read that right, $60,000 in Canadian eligible dividends and no other sources of income and $0 in income taxes.
The Simple Tax/ Wealthsimple calculator is an easy pseudo investment income tax calculator in Canada. It’s free to use and you can easily tinker around with the numbers.
The $0 in taxes on eligible Canadian dividends in BC up to $60,000-ish will likely change as the government needs to recoup that money that doled out during the pandemic.
There we go, I had a reader comment about the best accounts to put their investments and this is the long-winded answer! I hope this answers her question 🙂
I have followed this mostly with my portfolio with a few exceptions (I have some Canadian eligible dividend stocks in my TFSA, I have a non-dividend US corporation in my RRSP, and I have some US dividends outside in my non-registered account).
My portfolio is not perfect but it’s hard to achieve tax minimization perfection and try to chase growth!
Hope you enjoyed this tax efficient investing in Canada primer! The ‘OG’ Canadian personal finance blog, Million Dollar Journey also has a great post on tax minimization strategies.
You may also be interested in:
- Best way to invest money in Canada
How do you approach tax efficient investing in Canada?
Anything you do differently when you plunk your money into your portfolio?
genymoney
GYM is a 40 something millennial writing about personal finance since 2009 and interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for a free dividend yield spreadsheet and the free Young Money Bootcamp PDF.
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I am an experienced financial enthusiast with a deep understanding of tax-efficient investing, particularly in the context of the Canadian market. My knowledge is not only theoretical but also practical, as I have successfully implemented tax-efficient strategies in my own portfolio. Let's delve into the concepts discussed in the article:
Tax-Efficient Investing in Canada:
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Investment Income Taxation in Canada:
- Capital Gains: 50% of capital gains from Canadian sources are taxed at the marginal rate.
- Interest Income: 100% of interest income is taxed at the marginal rate.
- Canadian Eligible Dividends: Taxed favorably; tax-free up to a certain income threshold.
- Canadian Non-Eligible Dividends: Less favorably taxed but still reasonable.
- Foreign Dividend Income: Fully taxed at the marginal rate, with the possibility of recovering foreign withholding tax.
- Dividends from US Corporations: Subject to a 15% foreign withholding tax if held outside of an RRSP.
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Asset Allocation and Tax Efficiency:
- The importance of determining asset allocation in Canada and distributing it across different accounts for tax efficiency.
- Caution against letting tax considerations excessively influence investment decisions, emphasizing the need for a balanced approach.
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Tax-Efficient Investments in Canada:
- Canadian ETFs and Growth Stocks: Ideal for TFSA due to potential capital gains tax exemption.
- Canadian Dividend Stocks: Favourably taxed; best kept outside TFSA to benefit from favorable tax treatment.
- Covered Call ETFs: Suited for TFSA or non-registered accounts due to tax efficiency in capital gains.
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Taxation of Stocks in Canada:
- Canadian Dividend-Paying Stocks: Preferably kept outside registered accounts, especially in TFSA.
- International Equities: Taxed at the marginal rate; best to keep in RRSP for tax advantages.
- US Non-Dividend Paying Equities: Best kept outside RRSP due to similar capital gains treatment as Canadian equities.
- US Dividend Paying Equities: Preferably kept inside RRSP to avoid US withholding tax.
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Tax-Efficient ETFs in Canada:
- Some ETFs within ETFs have specific tax considerations, and it's recommended to hold them in non-registered accounts.
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Bonds and Interest Income:
- Bonds: Best kept in registered accounts (TFSA or RRSP) due to full taxation at the marginal rate.
- Interest Income: Fully taxed at the marginal rate; could be kept outside registered accounts if preferred.
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REITs (Real Estate Investment Trusts):
- REITs: Best kept in registered accounts (TFSA or RRSP) for tax-sheltered benefits.
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Summary of Tax-Efficient Investments in Canada:
- Key points on keeping growth stocks, dividends, and specific investments in TFSA, RRSP, or non-registered accounts for maximum tax efficiency.
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Calculating Tax Using Tools:
- Reference to a Simple Tax calculator for estimating tax on investment income.
In conclusion, tax-efficient investing in Canada involves a strategic allocation of assets across various accounts to minimize tax liability while considering the specific tax treatment of different investment types. The article provides practical insights based on the author's experience and offers a comprehensive guide for readers seeking to optimize their investment portfolios in the Canadian context.
