Favourable Tax Strategy for ETF Holdings.

[Experimental_FIRE]

In 2025 I'd like to re-organize my portfolio to take advantage of the most favourable taxation set up. When I set things up originally I just set up all the accounts to have a balanced AA in each account, rather than across all accounts. That means I hold things that are less tax advantaged (i.e. VUN in taxable account).

I read a Justin Bender article a while back that had me ponder my current allocation across the various vehicles available to Canadians. Unfortunately, I can't find a link to the exact article and it's outdated since the FHSA was added.

I fiddled around with an AI tool and I got to this recommendation. I used only the Vanguard ETFs for ease. What do you think of this strategy? Do you see any glaring problems? What changes would you recommend?

Personally, for the FHSA account I'd likely hold VUN and not sure why it recommended VCN. I think it makes most sense to hold all the VCN in the taxable account if possible. Justin also said that it is best to hold VDU in the taxable account.

Here's a more consistent strategy based on the three Vanguard ETFs you've mentioned (VDU, VCN, and VUN) and considering tax efficiency:

Tax-Free Savings Account (TFSA)
VUN (Vanguard U.S. Total Market Index ETF): Holding U.S. equities in a TFSA is advantageous because all gains and dividends are tax-free, even though U.S. dividends are subject to a withholding tax.

First Home Savings Account (FHSA)
VCN (Vanguard FTSE Canada All Cap Index ETF): Since FHSA also shelters gains from taxes, it's good for Canadian equity exposure. This is similar to the TFSA benefit but specifically tailored for a first home purchase.

Registered Retirement Savings Plan (RRSP)
VDU (Vanguard FTSE Developed All Cap ex U.S. Index ETF): International equities often face withholding taxes on dividends, but in an RRSP, these taxes are generally not withheld, making it ideal for foreign investments.

VUN (Vanguard U.S. Total Market Index ETF): U.S. equities in an RRSP avoid the U.S. withholding tax on dividends, maximizing growth potential.

Taxable (Cash) Account
VCN (Vanguard FTSE Canada All Cap Index ETF): Canadian equities receive favorable tax treatment through the dividend tax credit and capital gains are taxed at a reduced rate, making it more tax-efficient in a taxable account.

This strategy aims to maximize tax efficiency across different types of accounts.

[Heckler]

Glaring problem to your stated goal: Neither VDU or VUN in RRSP will save you any foreign withholding tax.  XEF ($C) and VTI ($U) do, if you would cost effectively exchange USD.

My suggestion is either

-do your tax research in thorough detail, not blindly with AI.   
Justin Bender has several comparisons for international investments in his blog (CPM, link below). 
Another reliable source: https://www.finiki.org/wiki/Tax-efficient_investing

Or

-keep it simple with an asset allocation ETF like most suggest, even Bender, who you’ll find over at https://canadianportfoliomanagerblog.com/

[Heckler]

Second thing glaring at me: a “balanced AA” typically includes fixed income.  I realize many here don’t see the importance - yet.

[Experimental_FIRE]

Second thing glaring at me: a “balanced AA” typically includes fixed income.  I realize many here don’t see the importance - yet.

I have a Canadian bond portion I didn't mention that I hold in my RSP. The point of the post isn't that I'm blindly trusting AI. I use it as a tool at times to gather quick information and links to further reading.

Thanks for the link to finiki. It's helpful.

[Heckler]

Here's the first in Bender's series on US, and then international ETFs and taxes.

https://canadianportfoliomanagerblog.com/investing-in-u-s-equity-etfs-vun-vti-xuu-itot/

which leads to:

https://canadianportfoliomanagerblog.com/foreign-withholding-tax-u-s-equity-etfs/
https://canadianportfoliomanagerblog.com/currency-conversion-fees-u-s-equity-etfs/

Then international:

https://canadianportfoliomanagerblog.com/investing-in-international-equity-etfs/
https://canadianportfoliomanagerblog.com/foreign-withholding-tax-international-equity-etfs/
https://canadianportfoliomanagerblog.com/currency-conversion-fees-international-equity-etfs/


Most of Vanguards funds you can find a "fine print" in the holdings.  In the case of VDU, at the top of page 2 it states "Information displayed is for the U.S.-domiciled Vanguard FTSE Developed Markets ETF in which the fund primarily invests. "

https://fund-docs.vanguard.com/VDU_FTSE_Developed_All_Cap_ex_U.S._Index_ETF_9558_FS_EN_CA.pdf

[Experimental_FIRE]

Thank you, there is some really good information here. If you showed these videos to someone just starting they would run quickly in the other direction and sign up with a financial advisor so they don't need to think about it :)

[Heckler]

Totally agree! 

And that’s why Bender (and several other bloggers/FPs) Model Portfolios are VEQT, VGRO, VBAL or their equivalents.

https://boomerandecho.com/weekend-reading-veqt-and-chill-edition/

https://canadianportfoliomanagerblog.com/model-etf-portfolios/

https://canadiancouchpotato.com/model-portfolios/

https://www.moneysense.ca/save/investing/best-all-in-one-etfs/

[Heckler]

https://www.blackrock.com/ca/investors/en/literature/brochure/withholding-tax-reference-guide-en-ca.pdf

See page 1, bullet 2.

If you hold VUN in non-registered (taxable) it’s eligible for tax credits on the FWT.

[okits]

FHSA: how likely are you to use it to buy real estate vs. rolling into your RRSP?  May change how you allocate your assets.

[Lews Therin]

While things like VTI lose a tiny bit due to the dividend withholding... I'd still prefer having a larger rest of the world than concentrate on having only the most optimal choices. I wouldn't want my TFSA and FHSA be only VCN, as I would have too much Canada alone exposure.

Sometimes it's best to accept a tiny bit of loss.

[erp]

While things like VTI lose a tiny bit due to the dividend withholding... I'd still prefer having a larger rest of the world than concentrate on having only the most optimal choices. I wouldn't want my TFSA and FHSA be only VCN, as I would have too much Canada alone exposure.

Sometimes it's best to accept a tiny bit of loss.

A thousand times this - it's okay to accept a little bit of (most kinds of) inefficiency in exchange for something valuable. If VTI gives you the investment distribution you want then take the tax hit in exchange for the diversification you need. I often see people who have tax optimized to such a degree that they've lost sight of the reason they were investing in the first place.

[Experimental_FIRE]

While things like VTI lose a tiny bit due to the dividend withholding... I'd still prefer having a larger rest of the world than concentrate on having only the most optimal choices. I wouldn't want my TFSA and FHSA be only VCN, as I would have too much Canada alone exposure.

Sometimes it's best to accept a tiny bit of loss.

That makes sense. There's always the question of how much exposure to have in different markets. I have 20% in Canada and some might say that's too much considering how nicely something like VTI has performed recently.

[Lews Therin]

Recently shouldn't be the issue. It should be due to your separate decision of how much you want, rather than who has been doing better recently!