Author Topic: Canadian investor - Need ETF advices  (Read 8467 times)

max9505672

  • Bristles
  • ***
  • Posts: 286
Canadian investor - Need ETF advices
« on: January 12, 2017, 07:24:53 PM »
Hi Mustachians!

I have as an objective to be financially independent in, hopefully, the next 10 years. All the investments stated below are long term.

So I have now opened 3 accounts (RRSP, TFSA, margin) with Questrade and I am now looking for final advices before investing in different funds.

I was originally going to invest in a model portfolio proposed by CanadianCouchPotato : 25% VAB / 25% VCN / 50% VXC, but after advices and some more reading, I've reconsidered some other funds depending on each accounts.

Here's a quick summary of my current investments:


Objective asset allocation : 20% bonds / 20% Canada / 40% US / 20% Rest of the world

Basically, I have a hard time deciding the AA of each account type and would appreciate advices on that mather along with specific ETF's suggestions. Here's what I'm currently considering:

- TFSA : I've been suggested high yielding stuff that is not eligible dividends such as REIT's.
     Considering : VRE, VCN

- RRSP : I've been suggested US domiciled and considering VTI.

- Unregistered : I've been suggested Canadian eligible dividends funds for tax preferential treatment. Still looking for a good fund.

Thanks for you help.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3422
  • Location: France
Re: Canadian investor - Need ETF advices
« Reply #1 on: January 12, 2017, 08:06:41 PM »
Only buy REITs if you have a compelling reason; not having them is fine (they are part of the relevant indices already).

For 'Canada', VCN, ZCN or similar is fine.

No need to go unregistered if you have enough room in your TFSA. What is the total amount of money you want to invest?

When doing your asset allocation, you have to remember the RRSP is pre tax money. Most people will have to pay tax when that money is taken out. Unless you think you will be getting a lot of income in retirement and will have an income greater than now (in which case the RRSP room shouldn't be used!), you can just guess that it'll be taxed in the bottom bracket.

In other words: the true value of the RRSP when doing your asset allocation is probably only 80% of its value on paper.

human

  • Pencil Stache
  • ****
  • Posts: 791
Re: Canadian investor - Need ETF advices
« Reply #2 on: January 12, 2017, 08:33:23 PM »
Personally I just stick with VXC (85%) and VCN (15%). VXC, VCN and VAB seem like a solid portfolio. Adding dividend funds seems like it would just give me a headache trying to figure out what mix is actually best tax wise. I know low fund fees seem to be focused on more than tax, I did try to read up on tax implications but at one point my head was spinning so I just dove in. If you think you have a firm grasp on the issues maybe you should go for it.

Would the REIT be part of you Canadian allocation or a separate allocation?

I do think VXC would make things easier on the US - rest of world front, from what I understand Vanguard tries to match world markets. I believe the current world/US split of VXC is 55% US and rest world.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3422
  • Location: France
Re: Canadian investor - Need ETF advices
« Reply #3 on: January 12, 2017, 08:55:29 PM »
Personally I just stick with VXC (85%) and VCN (15%). VXC, VCN and VAB seem like a solid portfolio. Adding dividend funds seems like it would just give me a headache trying to figure out what mix is actually best tax wise. I know low fund fees seem to be focused on more than tax, I did try to read up on tax implications but at one point my head was spinning so I just dove in. If you think you have a firm grasp on the issues maybe you should go for it.

Would the REIT be part of you Canadian allocation or a separate allocation?

I do think VXC would make things easier on the US - rest of world front, from what I understand Vanguard tries to match world markets. I believe the current world/US split of VXC is 55% US and rest world.

VTI + XEF or ZEA is def more tax efficient.

VTI in an RRSP has no tax loss at all. When you have the same amount of US in VXC or wrapped directly in VUN, you are losing at least 0.3% in tax, and some in extra MER.

On $50k that'll probably be a couple of hundred dollars that isn't compounding for you a year. Not the end of the world, buy how much do you get paid an hour?

On smaller investments, it's fine, just go simple. But if you're investing tends of thousands of dollars into something, you might as well take the free money, no?

human

  • Pencil Stache
  • ****
  • Posts: 791
Re: Canadian investor - Need ETF advices
« Reply #4 on: January 12, 2017, 09:19:38 PM »
ugh, just goes to show that everyone;s circumstances are different. My RRSP room is quite small since I'm a public servant and have a pension. I just started investing recently and starting in 2018 my yearly RRSP room will be about 3-4k a year.

Or would holding VTI in taxable accounts offer the same savings? Shows how much I know on the matter.


Heckler

  • Handlebar Stache
  • *****
  • Posts: 1347
Re: Canadian investor - Need ETF advices
« Reply #5 on: January 12, 2017, 10:05:35 PM »
ugh, just goes to show that everyone;s circumstances are different...

last year, we each had ~$100k RSP limit after paying off our HCOL mortgage in 13 years.  I'm in a struggle to decide if I should open yet another (taxable) account instead of maxing the RSPs out in a couple years.  Currently running 7 accounts.  Try rebalancing that!  I would have been happy going with VXC or even VT, but I setup my AA just before CCP change his recommendation to VXC. 


Max - the simpler and more diversified the better!   

daverobev

  • Magnum Stache
  • ******
  • Posts: 3422
  • Location: France
Re: Canadian investor - Need ETF advices
« Reply #6 on: January 13, 2017, 10:54:35 AM »
ugh, just goes to show that everyone;s circumstances are different. My RRSP room is quite small since I'm a public servant and have a pension. I just started investing recently and starting in 2018 my yearly RRSP room will be about 3-4k a year.

Or would holding VTI in taxable accounts offer the same savings? Shows how much I know on the matter.

In a taxable account, the 15% will be withheld but you'll be able to claim it back on your Canadian taxes as foreign tax paid. So it doesn't matter. Assuming you will pay ANY tax it's a wash.

I'd probably stick to VUN.TO unreg.

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #7 on: January 13, 2017, 03:05:12 PM »
No need to go unregistered if you have enough room in your TFSA. What is the total amount of money you want to invest?
I'm planning to invest 5500$ now (directly to TFSA). TFSA is going to be maxed including 2017.

I'm also planning to invest around 20K$ more in 2017 in an unregistered account (ideally with Canadian eligible dividends) since I want to keep RRSP space for upcoming years.

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #8 on: January 13, 2017, 03:09:05 PM »
Personally I just stick with VXC (85%) and VCN (15%). VXC, VCN and VAB seem like a solid portfolio. Adding dividend funds seems like it would just give me a headache trying to figure out what mix is actually best tax wise. I know low fund fees seem to be focused on more than tax, I did try to read up on tax implications but at one point my head was spinning so I just dove in. If you think you have a firm grasp on the issues maybe you should go for it.

Would the REIT be part of you Canadian allocation or a separate allocation?

I do think VXC would make things easier on the US - rest of world front, from what I understand Vanguard tries to match world markets. I believe the current world/US split of VXC is 55% US and rest world.
I kind of have the same feeling. It gets a little complicated especially when you try to match your objective asset allocation with your TFSA/RRSP/other account % and different funds.

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #9 on: January 13, 2017, 03:13:04 PM »
Personally I just stick with VXC (85%) and VCN (15%). VXC, VCN and VAB seem like a solid portfolio. Adding dividend funds seems like it would just give me a headache trying to figure out what mix is actually best tax wise. I know low fund fees seem to be focused on more than tax, I did try to read up on tax implications but at one point my head was spinning so I just dove in. If you think you have a firm grasp on the issues maybe you should go for it.

Would the REIT be part of you Canadian allocation or a separate allocation?

I do think VXC would make things easier on the US - rest of world front, from what I understand Vanguard tries to match world markets. I believe the current world/US split of VXC is 55% US and rest world.

VTI + XEF or ZEA is def more tax efficient.

VTI in an RRSP has no tax loss at all. When you have the same amount of US in VXC or wrapped directly in VUN, you are losing at least 0.3% in tax, and some in extra MER.

On $50k that'll probably be a couple of hundred dollars that isn't compounding for you a year. Not the end of the world, buy how much do you get paid an hour?

On smaller investments, it's fine, just go simple. But if you're investing tends of thousands of dollars into something, you might as well take the free money, no?
Do you think $15k would be enough to go VTI + XEF or ZEA with RRSP??

daverobev

  • Magnum Stache
  • ******
  • Posts: 3422
  • Location: France
Re: Canadian investor - Need ETF advices
« Reply #10 on: January 13, 2017, 05:56:18 PM »
Personally I just stick with VXC (85%) and VCN (15%). VXC, VCN and VAB seem like a solid portfolio. Adding dividend funds seems like it would just give me a headache trying to figure out what mix is actually best tax wise. I know low fund fees seem to be focused on more than tax, I did try to read up on tax implications but at one point my head was spinning so I just dove in. If you think you have a firm grasp on the issues maybe you should go for it.

Would the REIT be part of you Canadian allocation or a separate allocation?

I do think VXC would make things easier on the US - rest of world front, from what I understand Vanguard tries to match world markets. I believe the current world/US split of VXC is 55% US and rest world.

VTI + XEF or ZEA is def more tax efficient.

VTI in an RRSP has no tax loss at all. When you have the same amount of US in VXC or wrapped directly in VUN, you are losing at least 0.3% in tax, and some in extra MER.

On $50k that'll probably be a couple of hundred dollars that isn't compounding for you a year. Not the end of the world, buy how much do you get paid an hour?

On smaller investments, it's fine, just go simple. But if you're investing tends of thousands of dollars into something, you might as well take the free money, no?
Do you think $15k would be enough to go VTI + XEF or ZEA with RRSP??

Only you can decide if it's worth the hassle! Assume you'd be losing 15% of 2% divis on the entire $15k, ie 0.3% drag. That's about $50. The cost of doing Norbert's Gambit to buy VTI is about $5 (you buy DLR, which is free; journal to DLR.U which is free; then sell DLR.U which is a trade you have to pay for).

daverobev

  • Magnum Stache
  • ******
  • Posts: 3422
  • Location: France
Re: Canadian investor - Need ETF advices
« Reply #11 on: January 13, 2017, 06:00:01 PM »
Oh, here, *very* pertinent:

Quote
Worlds apart

The second change replaces the Vanguard FTSE Global All Cap ex Canada Index ETF (VXC) with the iShares Core MSCI All Country World ex Canada Index ETF (XAW). These funds cover the global equity markets outside Canada: they’re both about 55% United States, 35% international developed markets (Europe and the Asia-Pacific region), and 10% emerging markets.

XAW was launched just weeks after I launched my simplified ETF portfolios in 2015, and two years later it has emerged as a slightly better choice than its Vanguard counterpart. The lower fee is the most obvious advantage: with an MER of 0.22%, the iShares fund it’s five basis points cheaper. Less obvious is XAW’s tax advantage.

Although both of these funds hold several underlying US-listed ETFs, the iShares version uses a Canadian-listed ETF for international developed markets. This difference in structure has no effect in a taxable account, but if you hold your global equities in an RRSP or a TFSA, the Vanguard ETF will be subject to a greater amount of foreign withholding taxes. According to Justin Bender’s detailed analysis, this amounts to a drag of about 0.10%. Add that to VXC’s higher fee and the cost difference becomes significant in registered accounts.

 - from http://canadiancouchpotato.com/2017/01/13/model-portfolio-update-for-2017/

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #12 on: January 13, 2017, 08:55:21 PM »
Thanks for your help everybody. Here are 2 options I've come up with that seem to satisfy my AA, my current available insvestments and advices I received from you all. Feel free to comment !


RichMoose

  • Pencil Stache
  • ****
  • Posts: 968
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Canadian investor - Need ETF advices
« Reply #13 on: January 13, 2017, 09:23:14 PM »
Thanks for your help everybody. Here are 2 options I've come up with that seem to satisfy my AA, my current available insvestments and advices I received from you all. Feel free to comment !



Hey Max,

I understand your logic in putting the US stuff in RRSP because of the withholding tax issue, but I believe it would be much more tax efficient to put VAB in your RRSP and just buy VFV/VSP/VUN/VUS in your TFSA. Put growth in TFSA first to max that benefit of tax free compounding gains.

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #14 on: January 13, 2017, 10:08:40 PM »
Thanks for your help everybody. Here are 2 options I've come up with that seem to satisfy my AA, my current available insvestments and advices I received from you all. Feel free to comment !



Hey Max,

I understand your logic in putting the US stuff in RRSP because of the withholding tax issue, but I believe it would be much more tax efficient to put VAB in your RRSP and just buy VFV/VSP/VUN/VUS in your TFSA. Put growth in TFSA first to max that benefit of tax free compounding gains.
Thanks for you comment!

So basically you suggest an AA of 20% bonds in RSSP and 80% US in TFSA? That would expose me a lot to US market no?

RichMoose

  • Pencil Stache
  • ****
  • Posts: 968
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Canadian investor - Need ETF advices
« Reply #15 on: January 14, 2017, 08:37:37 AM »
Hey Max,

I understand your logic in putting the US stuff in RRSP because of the withholding tax issue, but I believe it would be much more tax efficient to put VAB in your RRSP and just buy VFV/VSP/VUN/VUS in your TFSA. Put growth in TFSA first to max that benefit of tax free compounding gains.
Thanks for you comment!

So basically you suggest an AA of 20% bonds in RSSP and 80% US in TFSA? That would expose me a lot to US market no?

No sorry, should have been more clear. I would put your bond component all in your RRSP (about 21% of assets right now).

In your TFSA spread between US, Can, and ROW. 40/20/20 is reasonable.

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1347
Re: Canadian investor - Need ETF advices
« Reply #16 on: January 14, 2017, 09:14:49 AM »
Hey moose, XAW is Ex-Can, not Ex-US.  It bogled my mind why you'd recommend a world fund that doesnt include US.


http://therichmoose.com/portfolios/

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #17 on: January 14, 2017, 09:40:58 AM »
Hey Max,

I understand your logic in putting the US stuff in RRSP because of the withholding tax issue, but I believe it would be much more tax efficient to put VAB in your RRSP and just buy VFV/VSP/VUN/VUS in your TFSA. Put growth in TFSA first to max that benefit of tax free compounding gains.
Thanks for you comment!

So basically you suggest an AA of 20% bonds in RSSP and 80% US in TFSA? That would expose me a lot to US market no?

No sorry, should have been more clear. I would put your bond component all in your RRSP (about 21% of assets right now).

In your TFSA spread between US, Can, and ROW. 40/20/20 is reasonable.
Ho ok! Can you explain the reason why it would be more tax efficient?

Would something like this make sense?


Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6820
Re: Canadian investor - Need ETF advices
« Reply #18 on: January 14, 2017, 09:43:20 AM »
My GF is a public servant and will get a decent pension. Because of that she is holding zero bonds. She doesn't need the safety net they would provide since her pension will provide all her absolutely essential living expenses and her investments are really just for nice-to-haves and full-on luxuries.

If your pension is significant you may want to consider what purpose your bond allocation plays for you.

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #19 on: January 14, 2017, 09:49:55 AM »
My GF is a public servant and will get a decent pension. Because of that she is holding zero bonds. She doesn't need the safety net they would provide since her pension will provide all her absolutely essential living expenses and her investments are really just for nice-to-haves and full-on luxuries.

If your pension is significant you may want to consider what purpose your bond allocation plays for you.
No pension other than gouvernment pension. I prefer not to count on it too much.

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1347
Re: Canadian investor - Need ETF advices
« Reply #20 on: January 14, 2017, 10:08:56 AM »
Max, why are you doubling up on the US in TFSA?  Is it two different account owners?

RichMoose

  • Pencil Stache
  • ****
  • Posts: 968
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Canadian investor - Need ETF advices
« Reply #21 on: January 14, 2017, 10:11:12 AM »
Hey moose, XAW is Ex-Can, not Ex-US.  It bogled my mind why you'd recommend a world fund that doesnt include US.


http://therichmoose.com/portfolios/

Thanks! I obviously didn't double check that.

And thanks for checking out the site! New post on TFSAs today. Let me know if you see other errors.

RichMoose

  • Pencil Stache
  • ****
  • Posts: 968
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Canadian investor - Need ETF advices
« Reply #22 on: January 14, 2017, 10:30:31 AM »
No sorry, should have been more clear. I would put your bond component all in your RRSP (about 21% of assets right now).

In your TFSA spread between US, Can, and ROW. 40/20/20 is reasonable.
Ho ok! Can you explain the reason why it would be more tax efficient?

Would something like this make sense?



It's more tax efficient because we know that historically speaking stocks return more than bonds. If stocks return inflation+6% and bonds return inflation+3%, it makes the most sense to put your stock allocation in your TFSA first because those compounding gains will never be taxed again. It would be a bit of an over-simplification, but if we assume you put your bond allocation in your TFSA and allocate 1/4 of your future $5500 annual TFSA contribution each year to bonds, your total bond portion of your TFSA would be worth $100,000 (after accounting for inflation). Of that your cumulate contributions are $55,000 and cumulative return is $45,000. Now if you allocated that same to stocks instead, you would have $192,000 (again inflation adjusted). Of that contributions are $55,000 and cumulative return is $137,000. In reality it would be even more exaggerated because over time you would find yourself putting more and more of your contributions to bonds as they need to be topped up to maintain your desired AA.

I'm not saying don't hold bonds, but I would definitely try use the TFSA to it's full potential by putting higher returning stocks there first.

Also, the withholding tax savings just isn't high enough to make up the difference. Yields on US markets are under 2% right now. Withholding tax rates are 15% of the dividend, so currently it would save under 0.3% - less than $46 a year for your current RRSP value.

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #23 on: January 14, 2017, 10:31:42 AM »
Max, why are you doubling up on the US in TFSA?  Is it two different account owners?
No, I am the only account owner.

but you are right, for Option 1, I could ditch VFV/VSP/VUN/VUS or VUN and double the one I keep.

For Option 2, it's because XAW is about 55% US and 45% ROW.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3422
  • Location: France
Re: Canadian investor - Need ETF advices
« Reply #24 on: January 14, 2017, 12:49:19 PM »
No sorry, should have been more clear. I would put your bond component all in your RRSP (about 21% of assets right now).

In your TFSA spread between US, Can, and ROW. 40/20/20 is reasonable.
Ho ok! Can you explain the reason why it would be more tax efficient?

Would something like this make sense?



It's more tax efficient because we know that historically speaking stocks return more than bonds. If stocks return inflation+6% and bonds return inflation+3%, it makes the most sense to put your stock allocation in your TFSA first because those compounding gains will never be taxed again. It would be a bit of an over-simplification, but if we assume you put your bond allocation in your TFSA and allocate 1/4 of your future $5500 annual TFSA contribution each year to bonds, your total bond portion of your TFSA would be worth $100,000 (after accounting for inflation). Of that your cumulate contributions are $55,000 and cumulative return is $45,000. Now if you allocated that same to stocks instead, you would have $192,000 (again inflation adjusted). Of that contributions are $55,000 and cumulative return is $137,000. In reality it would be even more exaggerated because over time you would find yourself putting more and more of your contributions to bonds as they need to be topped up to maintain your desired AA.

I'm not saying don't hold bonds, but I would definitely try use the TFSA to it's full potential by putting higher returning stocks there first.

Also, the withholding tax savings just isn't high enough to make up the difference. Yields on US markets are under 2% right now. Withholding tax rates are 15% of the dividend, so currently it would save under 0.3% - less than $46 a year for your current RRSP value.

Assuming the same income tax rate at time of contribution and withdrawal, for tax only it doesn't matter if you choose RRSP or TFSA; one doesn't 'shield better' (US withholding aside).

Say 20% tax; you put $80k into a TFSA or $100k into an RRSP.

You invest 100% in thing x which over whatever timeframe doubles.

So you have $160k TFSA, $200k RRSP. Withdraw, lose 20% RRSP, so $160k or $160k.

The thing is to put low growth stuff unregistered, if you have already filled up your registered room of either type.

IT IS NOT BETTER TO USE A TFSA OVER THE RRSP FOR 'HIGHER GROWTH' INVESTMENTS

RichMoose

  • Pencil Stache
  • ****
  • Posts: 968
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Canadian investor - Need ETF advices
« Reply #25 on: January 14, 2017, 04:03:35 PM »
Assuming the same income tax rate at time of contribution and withdrawal, for tax only it doesn't matter if you choose RRSP or TFSA; one doesn't 'shield better' (US withholding aside).

Say 20% tax; you put $80k into a TFSA or $100k into an RRSP.

You invest 100% in thing x which over whatever timeframe doubles.

So you have $160k TFSA, $200k RRSP. Withdraw, lose 20% RRSP, so $160k or $160k.

The thing is to put low growth stuff unregistered, if you have already filled up your registered room of either type.

IT IS NOT BETTER TO USE A TFSA OVER THE RRSP FOR 'HIGHER GROWTH' INVESTMENTS

Gee Dave, no need to shout. I think you're talking about a different issue ie. the tax implications of contributing to a RRSP vs TFSA. Once that contribution decision has been made though, I think it's hard to argue from a tax perspective that it's not better to put growth allocation in your TFSA.

As I said, inside your TFSA your gains will never be taxed again. So the higher the gains, the better off you are because you would be taking the most advantage of your tax-free growth. My position is not against RRSPs or putting stocks in RRSPs, in fact I think RRSPs are perfect for higher-earning Mustachians and I personally have a larger RRSP than TFSA. But I can assure you I would never suggest anyone use their TFSA for bonds, unless the TFSA is their only investment savings account.

It's important to remember that, regardless of tax rebate when contributing to RRSPs, you will certainly be paying tax on your withdrawals including the gains.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3422
  • Location: France
Re: Canadian investor - Need ETF advices
« Reply #26 on: January 14, 2017, 04:55:25 PM »
Assuming the same income tax rate at time of contribution and withdrawal, for tax only it doesn't matter if you choose RRSP or TFSA; one doesn't 'shield better' (US withholding aside).

Say 20% tax; you put $80k into a TFSA or $100k into an RRSP.

You invest 100% in thing x which over whatever timeframe doubles.

So you have $160k TFSA, $200k RRSP. Withdraw, lose 20% RRSP, so $160k or $160k.

The thing is to put low growth stuff unregistered, if you have already filled up your registered room of either type.

IT IS NOT BETTER TO USE A TFSA OVER THE RRSP FOR 'HIGHER GROWTH' INVESTMENTS

Gee Dave, no need to shout. I think you're talking about a different issue ie. the tax implications of contributing to a RRSP vs TFSA. Once that contribution decision has been made though, I think it's hard to argue from a tax perspective that it's not better to put growth allocation in your TFSA.

As I said, inside your TFSA your gains will never be taxed again. So the higher the gains, the better off you are because you would be taking the most advantage of your tax-free growth. My position is not against RRSPs or putting stocks in RRSPs, in fact I think RRSPs are perfect for higher-earning Mustachians and I personally have a larger RRSP than TFSA. But I can assure you I would never suggest anyone use their TFSA for bonds, unless the TFSA is their only investment savings account.

It's important to remember that, regardless of tax rebate when contributing to RRSPs, you will certainly be paying tax on your withdrawals including the gains.

No. As my example showed. You are 100% missing the point. Please re read.

*Edit* that's not meant to come across as rude. The reason I put the last line in large font was for emphasis; your misconception comes up frequently and needs straightening out. It's a slightly tricky piece of knowledge. But in both cases you are NOT taxed on the growth. In the RRSP you are just investing on the government's behalf, and giving them 100% of the growth on their (in my example) 20%. You keep 100% of the growth on your 80%, exactly the same as in the TFSA. Assuming a constant tax rate.
« Last Edit: January 14, 2017, 05:45:16 PM by daverobev »

RichMoose

  • Pencil Stache
  • ****
  • Posts: 968
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Canadian investor - Need ETF advices
« Reply #27 on: January 15, 2017, 10:40:49 AM »
*Edit* that's not meant to come across as rude. The reason I put the last line in large font was for emphasis; your misconception comes up frequently and needs straightening out. It's a slightly tricky piece of knowledge. But in both cases you are NOT taxed on the growth. In the RRSP you are just investing on the government's behalf, and giving them 100% of the growth on their (in my example) 20%. You keep 100% of the growth on your 80%, exactly the same as in the TFSA. Assuming a constant tax rate.

Sure, I understand what you're saying about investing in RRSPs vs TFSAs and I 100% agree that when tax rates are constant a topped up RRSP (using your refund to re-invest in RRSP) is equal tax-wise to a TFSA when both accounts are invested in stock ABC. However, my argument is slightly different. Hopefully this will help explain it better.

Let's say person A, a single childless working 30 y/o Ontario male, in a fictional inflation-free world earns $75,000 a year and is a moderate spender on a strict budget. He has just enough money to: 1) max out his RRSPs for a $13,500 yearly contribution, and 2) use the refund and a bit of extra cash to max the TFSA at $5,500 a year. He can only save a max of $19,000 including his tax refund and not a penny more. Person A has already maxed out his tax benefit in his contribution decision so now he needs to decide where to put the stocks and where to put the bonds.

Scenario A: He decides to allocate his bonds to the TFSA only and stocks to RRSP only. So every year he buys $5,500 in bonds and $13,500 in stocks. Bonds return inflation+3% over long time periods and stocks return inflation+6%. At 60 y/o, his account values are as follows:
TFSA: $275,000
RRSP: $1,114,000
To make things a little easier, at retirement he rebalances all accounts and maintains a 4% WR, he will earn gross $55,560 per year. Of that $11,000 is non-reportable TFSA income and $44,560 is in the form of RRSP/RRIF withdrawals. He will pay $7,280 in taxes at current rates for a net income of $48,280.

Scenario B: He decides to allocate stocks to TFSA only, then buy $5,500 of bonds in RRSP with the remaining in stock. His RRSP allocation portion is about 60/40 to start and we will assume he keeps the portfolio the same as in Scenario A otherwise so he has the exact same ending total networth.  At 60 y/o, his account values are as follows:
TFSA: $466,000
RRSP: $923,000
At retirement he rebalances all accounts and maintains a 4% WR, again he will earn gross $55,560 per year. Now $18,640 is non-reportable TFSA income and $36,920 is in RRSP/RRIF withdrawals. He will now pay just $5,530 in taxes for a net income of $50,030.

Although he completed the same tax return, paid identical tax, kept the same overall AA, and achieved the same overall investment performance in both scenarios during his working years, by shifting his higher growth assets to his TFSA he increased his TFSA value relative to his RRSP value by retirement. This decision gives him an extra $145 per month in spending cash.

It's not perfect, but I hope this better explains my reasoning. :)

Mmm_Donuts

  • Bristles
  • ***
  • Posts: 377
Re: Canadian investor - Need ETF advices
« Reply #28 on: January 15, 2017, 11:11:23 AM »
Mr Rich Moose, I believe you are missing dave's point here. You're talking about putting low growth assets into an RRSP vs putting them in a TFSA. Dave is saying they are better in a taxable (unregistered) account. So, put your high growth stocks in either registered account, and low growth in taxable.

Max, you say you're holding off on contributing more to your RRSP until future years, I'm guessing because you expect your income to be higher. Just wanted to point out that you can contribute up to your limit without claiming any deductions. This way the investments can grow tax deferred, and you can claim the dedications in any future year where your income makes it worthwhile.


daverobev

  • Magnum Stache
  • ******
  • Posts: 3422
  • Location: France
Re: Canadian investor - Need ETF advices
« Reply #29 on: January 15, 2017, 11:21:16 AM »

Scenario A: He decides to allocate his bonds to the TFSA only and stocks to RRSP only. So every year he buys $5,500 in bonds and $13,500 in stocks. Bonds return inflation+3% over long time periods and stocks return inflation+6%. At 60 y/o, his account values are as follows:
TFSA: $275,000
RRSP: $1,114,000
To make things a little easier, at retirement he rebalances all accounts and maintains a 4% WR, he will earn gross $55,560 per year. Of that $11,000 is non-reportable TFSA income and $44,560 is in the form of RRSP/RRIF withdrawals. He will pay $7,280 in taxes at current rates for a net income of $48,280.

Scenario B: He decides to allocate stocks to TFSA only, then buy $5,500 of bonds in RRSP with the remaining in stock. His RRSP allocation portion is about 60/40 to start and we will assume he keeps the portfolio the same as in Scenario A otherwise so he has the exact same ending total networth.  At 60 y/o, his account values are as follows:
TFSA: $466,000
RRSP: $923,000
At retirement he rebalances all accounts and maintains a 4% WR, again he will earn gross $55,560 per year. Now $18,640 is non-reportable TFSA income and $36,920 is in RRSP/RRIF withdrawals. He will now pay just $5,530 in taxes for a net income of $50,030.

Although he completed the same tax return, paid identical tax, kept the same overall AA, and achieved the same overall investment performance in both scenarios during his working years, by shifting his higher growth assets to his TFSA he increased his TFSA value relative to his RRSP value by retirement. This decision gives him an extra $145 per month in spending cash.

It's not perfect, but I hope this better explains my reasoning. :)

Buying $5500 of anything in a TFSA is NOT the same as buying $5500 of the same thing in an RRSP. RRSP is pre-tax; TFSA is post-tax. Your AA is different between the two scenarios. ANd because of that the growth rate will be different.

Let's make round numbers; again assuming 20% tax going in and out.

So every $100 in the RRSP is the same as $80 in the TFSA. And let's pretend the TFSA is $5k, and RRSP $10k.

$5k of bonds in the RRSP is equivalent to buying $4k in the TFSA.

So the two scenarios are:

1: $4k bonds TFSA, $1k stocks; $10k stocks RRSP, vs
2: $5k stocks TFSA; $5k bonds and $5k stocks, RRSP

Your gross income would not be the same in these cases; but (again, assuming tax in == tax out, ie 20% or 40% or whatever exact number) the after-tax will be the same.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3422
  • Location: France
Re: Canadian investor - Need ETF advices
« Reply #30 on: January 15, 2017, 11:24:07 AM »
Mr Rich Moose, I believe you are missing dave's point here. You're talking about putting low growth assets into an RRSP vs putting them in a TFSA. Dave is saying they are better in a taxable (unregistered) account. So, put your high growth stocks in either registered account, and low growth in taxable.

Max, you say you're holding off on contributing more to your RRSP until future years, I'm guessing because you expect your income to be higher. Just wanted to point out that you can contribute up to your limit without claiming any deductions. This way the investments can grow tax deferred, and you can claim the dedications in any future year where your income makes it worthwhile.

I'm saying that, if you've used up the room, then low-growth should be unregistered to decrease capital gains; but I'm also saying that, in an interest rate equivalent world (ie, the marginal rate of the refund for RRSP is the same as the marginal rate for RRIF or RRSP withdrawals), the TFSA and RRSP are 'equal shelters'. If you are in a lower bracket in retirement, the RRSP wins (unlikely if you have CPP/OAS; but quite possible for early retirees); if the opposite is true, the TFSA is superior and RRSP contributions are a dubious benefit. You may be better just paying the tax and investing unregistered.

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #31 on: January 15, 2017, 11:57:41 AM »
No sorry, should have been more clear. I would put your bond component all in your RRSP (about 21% of assets right now).

In your TFSA spread between US, Can, and ROW. 40/20/20 is reasonable.
Ho ok! Can you explain the reason why it would be more tax efficient?

Would something like this make sense?



It's more tax efficient because we know that historically speaking stocks return more than bonds. If stocks return inflation+6% and bonds return inflation+3%, it makes the most sense to put your stock allocation in your TFSA first because those compounding gains will never be taxed again. It would be a bit of an over-simplification, but if we assume you put your bond allocation in your TFSA and allocate 1/4 of your future $5500 annual TFSA contribution each year to bonds, your total bond portion of your TFSA would be worth $100,000 (after accounting for inflation). Of that your cumulate contributions are $55,000 and cumulative return is $45,000. Now if you allocated that same to stocks instead, you would have $192,000 (again inflation adjusted). Of that contributions are $55,000 and cumulative return is $137,000. In reality it would be even more exaggerated because over time you would find yourself putting more and more of your contributions to bonds as they need to be topped up to maintain your desired AA.

I'm not saying don't hold bonds, but I would definitely try use the TFSA to it's full potential by putting higher returning stocks there first.

Also, the withholding tax savings just isn't high enough to make up the difference. Yields on US markets are under 2% right now. Withholding tax rates are 15% of the dividend, so currently it would save under 0.3% - less than $46 a year for your current RRSP value.

Assuming the same income tax rate at time of contribution and withdrawal, for tax only it doesn't matter if you choose RRSP or TFSA; one doesn't 'shield better' (US withholding aside).

Say 20% tax; you put $80k into a TFSA or $100k into an RRSP.

You invest 100% in thing x which over whatever timeframe doubles.

So you have $160k TFSA, $200k RRSP. Withdraw, lose 20% RRSP, so $160k or $160k.

The thing is to put low growth stuff unregistered, if you have already filled up your registered room of either type.

IT IS NOT BETTER TO USE A TFSA OVER THE RRSP FOR 'HIGHER GROWTH' INVESTMENTS
So Dave, there would be no difference between investing the bonds in a TFSA and a RRSP? Or would you suggest investing the bonds in unregistered account?
« Last Edit: January 15, 2017, 12:00:09 PM by max9505672 »

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #32 on: January 15, 2017, 12:10:02 PM »
Max, you say you're holding off on contributing more to your RRSP until future years, I'm guessing because you expect your income to be higher. Just wanted to point out that you can contribute up to your limit without claiming any deductions. This way the investments can grow tax deferred, and you can claim the dedications in any future year where your income makes it worthwhile.
Yes I'm aware of that. Actually, I haven't claimed any deductions from the $15K I have in RRSP.

My plan for the next years would be:
1. Max TFSA
2. Contribute just enough to RRSP in order to get to lower tax bracket
3. Invest the rest in an un-registered account paying dividends.

I think that makes sense, the hardest part is figuring out which asset to buy in each account.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3422
  • Location: France
Re: Canadian investor - Need ETF advices
« Reply #33 on: January 15, 2017, 12:24:28 PM »
Contributing to but not claiming an RRSP deduction is, AFAIK mathematically, seen as an all round bad thing; the tax you would've got back is now decreasing at inflation. The government says thanks. Unless you are expecting to be up two tax brackets next/this year, you should probably claim it (and then invest the refund).

I am saying if you have the room, bonds in TFSA or RRSP is fine (if you have US stuff, that wants to go into the RRSP first, if you're doing it as US-domiciled; so it may be you don't have room in the RRSP for bonds). After your registered room is full, THEN bonds can go outside, unregistered.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6820
Re: Canadian investor - Need ETF advices
« Reply #34 on: January 15, 2017, 12:26:24 PM »
My plan for the next years would be:
1. Max TFSA
2. Contribute just enough to RRSP in order to get to lower tax bracket
3. Invest the rest in an un-registered account paying dividends.

I think that makes sense, the hardest part is figuring out which asset to buy in each account.

I'd suggest...

1. Max TFSA
2. Max the RRSP and take deductions just enough in order to get to lower tax bracket
3. Invest the rest in an un-registered account paying dividends.
4. Take remainder of RRSP deduction later in higher earning years

Stasher

  • Handlebar Stache
  • *****
  • Posts: 2161
  • Age: 45
  • Location: Cowichan Valley, Vancouver Island
  • Power through Positivity
    • Mindful Explorer
Re: Canadian investor - Need ETF advices
« Reply #35 on: January 15, 2017, 05:15:27 PM »

I'd suggest...

1. Max TFSA
2. Max the RRSP and take deductions just enough in order to get to lower tax bracket
3. Invest the rest in an un-registered account paying dividends.
4. Take remainder of RRSP deduction later in higher earning years

Yes to this above...

All the discussion above with the multiple accounts and this and that and the other seems all WAY to over complicated.
Simplify your live and don't overanalyze things, enjoy the ride.

I am curious why the simplicity of VCN VXC and VAB isn't safe for you?
I have held that ETF Portfolio in my RRSP and TFSA for a very long time and the gains have been significant. I can also add that I am running 60% VXC 30% VCN 10% VAB for clarity of my position.

RichMoose

  • Pencil Stache
  • ****
  • Posts: 968
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Canadian investor - Need ETF advices
« Reply #36 on: January 16, 2017, 10:57:49 AM »
Well Dave I think we beat this TFSA/RRSP thing to death. :)



There is no wrong here, but I would go with Option 2 personally as it is one less ETF to manage and rebalance. Over time, as your portfolio gets bigger and unregistered accounts come into the mix, the AA/tax efficiency question will have more impact and require more research on your part.

With the RRSP deduction question, I would only defer it in two cases:
1) If you are anticipating high wage growth in the near future that will bump you up tax brackets
2) If claiming the whole deduction would put any portion of your deduction in low tax brackets http://www.taxtips.ca/marginaltaxrates.htm


max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #37 on: January 17, 2017, 09:49:30 AM »

I'd suggest...

1. Max TFSA
2. Max the RRSP and take deductions just enough in order to get to lower tax bracket
3. Invest the rest in an un-registered account paying dividends.
4. Take remainder of RRSP deduction later in higher earning years

Yes to this above...

All the discussion above with the multiple accounts and this and that and the other seems all WAY to over complicated.
Simplify your live and don't overanalyze things, enjoy the ride.

I am curious why the simplicity of VCN VXC and VAB isn't safe for you?
I have held that ETF Portfolio in my RRSP and TFSA for a very long time and the gains have been significant. I can also add that I am running 60% VXC 30% VCN 10% VAB for clarity of my position.
Yes, I'm starting to think it's too complicated also.. But I find it kind of hard to evaluate the impact of those decisions especially if it's on such a long term, I try to maximize the return I can have.

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #38 on: January 17, 2017, 09:55:05 AM »
Well Dave I think we beat this TFSA/RRSP thing to death. :)



There is no wrong here, but I would go with Option 2 personally as it is one less ETF to manage and rebalance. Over time, as your portfolio gets bigger and unregistered accounts come into the mix, the AA/tax efficiency question will have more impact and require more research on your part.

With the RRSP deduction question, I would only defer it in two cases:
1) If you are anticipating high wage growth in the near future that will bump you up tax brackets
2) If claiming the whole deduction would put any portion of your deduction in low tax brackets http://www.taxtips.ca/marginaltaxrates.htm
Yes, I will be in higher tax brackets in the future. I already am in the 3rd tax bracket for a small part of my salary. The goal would be to claim just enough deduction to get me in the lower tax bracket each year for as long as possible. I've calculated until around 2022.

After that I'll just keep contributing as much as I can.

Stasher

  • Handlebar Stache
  • *****
  • Posts: 2161
  • Age: 45
  • Location: Cowichan Valley, Vancouver Island
  • Power through Positivity
    • Mindful Explorer
Re: Canadian investor - Need ETF advices
« Reply #39 on: January 17, 2017, 10:38:04 AM »
You have read through this and the forecasted returns correct?

http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-ETFs-2016.pdf

Hope you find something that works for you.

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #40 on: January 17, 2017, 01:40:05 PM »
You have read through this and the forecasted returns correct?

http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-ETFs-2016.pdf

Hope you find something that works for you.
Yes, this is actually where I found the initial portfolio I wanted to use : http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-ETFs-2016.pdf

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #41 on: January 19, 2017, 10:28:42 AM »
Transferring the totality of the investments I currently have would cost me 740$ (thanks to the 3 years exit fees....).

Most of this 740$ come from the 15000$ I recently invested in my RRSP (November 2016).

Any suggestions on weither I should keep the RRSP there until the exit fees are over transfer everything now?

The MER's on those are approx. 2.5% vs. approx. 0.25% in ETF.

So if I withdraw :

15000$ * (2.5%-0.25)/year * 3 years = 1012$ which is more than the 740$ exit fees.

Naturally, this is without taking in count any yield.. but who can predicts the next 3 years in the market?

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6820
Re: Canadian investor - Need ETF advices
« Reply #42 on: January 19, 2017, 10:35:06 AM »
Transferring the totality of the investments I currently have would cost me 740$ (thanks to the 3 years exit fees....).

I faced that situation and just pulled all my money from the high MER accounts. I think the costs would have ended up being at least the same and having a simplified portfolio that I feel good about is worth a lot.

RichMoose

  • Pencil Stache
  • ****
  • Posts: 968
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Canadian investor - Need ETF advices
« Reply #43 on: January 19, 2017, 02:01:57 PM »
Any suggestions on weither I should keep the RRSP there until the exit fees are over transfer everything now?

It hurts, but I would just withdraw. Dollar wise you'll probably come out pretty close either way but there's a certain piece of mind to knowing your investments are where you want them, how you want them. Did you talk to Questrade about covering some of those fees?

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #44 on: January 19, 2017, 02:18:53 PM »
Any suggestions on weither I should keep the RRSP there until the exit fees are over transfer everything now?

It hurts, but I would just withdraw. Dollar wise you'll probably come out pretty close either way but there's a certain piece of mind to knowing your investments are where you want them, how you want them. Did you talk to Questrade about covering some of those fees?
Good idea, I'll aks them!

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #45 on: January 19, 2017, 07:14:46 PM »
Any suggestions about transfer in kind vs. transfer in cash?

From what I understand, transfer in king is only possible if both brokers have the same product. For example, you have IBM stocks with broker A and what to transfer those stocks to broker B.

Transfer in cash would be used when you need to liquidate before transfering.

In my case, I have mutual funds investments with financial advisor A that I what to transfer to broker B in order to buy differents ETF's (different from the mutual funds I currently have). I guess this would require a transfer in cash?

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1347
Re: Canadian investor - Need ETF advices
« Reply #46 on: January 19, 2017, 07:43:56 PM »
If you plan to sell the MF to buy ETFs, definitely transfer in cash.  Save the commission to sell in your self directed.

Be aware of and DSC fees on your MFs.  Youll pay them either way if applicable.

http://www.financialpost.com/m/wp/personal-finance/retirement/rrsp/blog.html?b=business.financialpost.com/personal-finance/retirement/rrsp/the-death-of-the-deferred-sales-charge

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6820
Re: Canadian investor - Need ETF advices
« Reply #47 on: January 19, 2017, 07:47:09 PM »
Any suggestions about transfer in kind vs. transfer in cash?

Transfer in cash unless you already have the low MER funds you want to hold, which doesn't sound like the case here.

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #48 on: January 19, 2017, 08:09:41 PM »
Any suggestions about transfer in kind vs. transfer in cash?

Transfer in cash unless you already have the low MER funds you want to hold, which doesn't sound like the case here.
Thanks!

max9505672

  • Bristles
  • ***
  • Posts: 286
Re: Canadian investor - Need ETF advices
« Reply #49 on: January 23, 2017, 04:09:03 PM »
If you plan to sell the MF to buy ETFs, definitely transfer in cash.  Save the commission to sell in your self directed.
Could you please elaborate on this?