TFSAs, unreg accounts, bonds, stocks and taxation

[moustacheverte]

Hi all,

My TFSA is maxed out, I'm holding TD eSeries index mutual funds and the eSeries Canada bonds. My unreg account holds the same mix.

I was told recently that dividends from stocks are taxed at a higher rate than dividends from bonds and thus it would make more sense to put 100% stocks in the TFSA and more bonds to compensate in the unreg account.

The ratios would stay the same.

Does that make any sense? Is it worth moving everything around? Since my TFSA is maxed out, I guess I'd have to wait until the end of the year anyway to change everything, correct?

[Heckler]

http://canadiancouchpotato.com/?s=asset+location&submit=Search

[Frugancial Advisor]

Bonds do not produce dividends, they produce interest - which is 100% taxable. From a purely tax-efficient perspective, it would be best to hold bonds in registered accounts (such as RRSP or TFSA).

Canadian stocks issue dividends which are then subject to the dividend gross-up and tax-credit scheme, which effectively reduces the amount of tax you pay on the dividend. Once again, from a purely tax-efficient perspective, it would be best to hold Canadian equities in a non-registered account.

Also, you can make changes within your TFSA during the year, and even withdrawal or transfer out of your TFSA to reposition your portfolio. Any withdrawals can be re contributed the following year.

This is not to say you should structure your portfolio based purely on asset location. Equities have historically outperformed bonds and have the ability produce large capital gains over time which can effectively be eliminated by being held in a registered account.

Hopefully this helps.

[moustacheverte]

Thanks. I put small amounts every month so it would seem it doesn't matter so much?

[My Own Advisor]

From a tax management perspective:

Keep Canadian dividend paying stocks in non-registered after TFSA and RRSP are maxed.

For CDN $$ TFSA, keep Canadian-listed equities.  Otherwise withholding taxes will apply.

For RRSP, put bonds there, U.S. stocks, U.S.-listed ETFs.  U.S.-listed ETFs and stocks have no withholding taxes.

In terms of taxation, capital gains are taxed less than dividends which are taxed less than interest income.  This is why bonds make sense in a registered account.

[sleepyguy]

Yup I follow the same rule.

RRSP - US eq/International eq/Can Bonds
TSFA - Canadian eq/Can Bonds

Add to the mix my other allocation is Real Estate so I'm in 5 sectors overall.

[Retire-Canada]

In terms of taxation, capital gains are taxed less than dividends which are taxed less than interest income.  This is why bonds make sense in a registered account.

The other thing to look at is every RRSP $ will be taxed [eventually] you just get to [mostly] control when. TFSA $ are never taxed so it makes sense to hold higher growth investments in this account rather than bonds.

[RichMoose]

I don't know if your registered accounts are maxed out or not, but if you want to invest in bonds in a taxable (cash) investment account you can use HBB.TO. It uses a swap agreement so returns are all reflected as capital gains, not interest payments (ie. the value of the ETF goes up but it does not make any monthly distributions).