Author Topic: RRSP and TFSA - What to hold in what account  (Read 12159 times)

Dmy0013

  • Stubble
  • **
  • Posts: 100
  • Location: Central Canada
RRSP and TFSA - What to hold in what account
« on: March 03, 2016, 09:20:58 AM »
Just curious if it makes a difference what I put into each account.

I am not so much asking should I put bonds in this one and stock in that one!?

I am more so curious about american / International Stock.  I read an article yesterday where the writer stated that American Dividend and International Dividend paying companies are taxed differently then say a Canadian company would be when held within an RRSP or TFSA

It also said that American Stocks are somewhat more protected inside your RRSP then compared to your TFSA.  Is there any truth to this? 

To be a little more specific I purchase mainly

Candian index - 20%
Inernational Index - 20%
American Index - 20%
Canadian Bond Index - 40%

Should I be buying Canadian and Bond in my TFSA?  and the american and international in my RRSP?  Does it make a difference?
« Last Edit: March 03, 2016, 09:22:34 AM by Dmy0013 »


Mmm_Donuts

  • Bristles
  • ***
  • Posts: 380
Re: RRSP and TFSA - What to hold in what account
« Reply #2 on: March 03, 2016, 09:53:09 AM »
I second the suggestion to read the CCP articles.

My own short answer would be, yes US ETFs are generally more efficient to hold in an rrsp, because they are exempt from withholding tax on the dividends. But that's only if the ETF is a US dollar fund. For example, VTI is a USD fund. Its Canadian dollar counterpart, VUN, would not receive the tax exemption. However the downside to holding VTI in a USD RRSP is that you need to pay a small fee to convert your currency. There are ways to get around that, but if you're starting out you probably want to keep it simple. In the end, when starting out, I would keep it simple and just buy VUN. It is treated the same in your TFSA as in your RRSP so in theory you could hold it anywhere.

Bonds are best held in an rrsp vs TFSA, because of their slow growth rate. It's better to hold faster growing equities in your TFSA, because you won't be taxed on their growth.

If you read the CCP, they'll suggest an even more simple, 3 fund portfolio. If you go w Vanguard funds, you would be holding VCN, VXC, and VAB (Canadian equities, international equities including US, and Canadian bond aggregate.) it's very simple because all funds are in Canadian dollars. If you go this route, you don't need to worry about opening a USD account, and your VXC and VCN can go either in your TFSA or RRSP.
« Last Edit: March 03, 2016, 09:55:22 AM by Mmm_Donuts »

K-ice

  • Pencil Stache
  • ****
  • Posts: 932
  • Location: Canada
Re: RRSP and TFSA - What to hold in what account
« Reply #3 on: April 20, 2016, 12:29:48 PM »
I have asked this before and I like the debate.

You can search asset "location" not just allocation to find more info.

Here is what I have learnt, and try to follow, from my research.

You really only need to worry about it if your TFSA and RRSP are full or close to full. Then some must go into Taxable I'll call that TAXBL

RRSP

American stocks in US$ like VTI.  And bonds 

Why?  VTI for the US tax advantage, Bonds because relatively they shouldn't make a lot so you are better paying the small amount of tax on them when you are 70.

TFSA

Anything that you think will make a large return. (Unfortunately these sometimes make a large loss that you can't claim)
Any Canadian stocks without a dividend but a hopeful capital gain. International stocks and US stocks but only once the RRSP is full of your US stocks.

TAXBL

Canadian dividend stocks like VDY (There is a dividend tax credit that you can't use in RRSPs)
Cash and GIC because they make little interest and are easy to access
Bonds (only once the bonds stuffed into your RRSP are over flowing)



So looking at you allocation my preferred location is in bold
Canadian index - 20% Dividend paying in TAXBL. Non-Dividend in TFSA
International Index - 20% TFSA
American Index - 20% RRSP
Canadian Bond Index - 40% RRSP if RRSP is full put in TAXBL



Kaspian

  • Handlebar Stache
  • *****
  • Posts: 1536
  • Location: Canada
    • My Necronomicon of Badassity
Re: RRSP and TFSA - What to hold in what account
« Reply #4 on: April 20, 2016, 02:42:44 PM »
"Table 4" here is what you're looking for:

http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/

Bonds:  TFSA, RRSP
International:  RRSP
Canadian:  Non-registered, TFSA
US:  Non-registered, RRSP

That is the most tax-efficient way.  However, some people plan on doing a lot of buying/selling trading so they don't want to pay tax on capital gains and do it all inside their TFSA or RRSP.  Capital gains are treated pretty well (so far) tax-wise.  I pay occasionally rebalancing the non-registered account. 
« Last Edit: April 20, 2016, 02:47:11 PM by Kaspian »

tyir

  • 5 O'Clock Shadow
  • *
  • Posts: 60
Re: RRSP and TFSA - What to hold in what account
« Reply #5 on: April 21, 2016, 12:05:55 AM »
"Table 4" here is what you're looking for:

http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/

Bonds:  TFSA, RRSP
International:  RRSP
Canadian:  Non-registered, TFSA
US:  Non-registered, RRSP

That is the most tax-efficient way.  However, some people plan on doing a lot of buying/selling trading so they don't want to pay tax on capital gains and do it all inside their TFSA or RRSP.  Capital gains are treated pretty well (so far) tax-wise.  I pay occasionally rebalancing the non-registered account.

You're mostly correct but it is a bit over simplified. Someone looking at this might put the US in unregistered and C$ in TFSA.
If you have only TFSA and unregistered, it is still better to put the US in the TFSA, even thought you lose the FWT on dividends. This is because Canadian dividends are naturally much more tax efficient than US dividends.


MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1890
Re: RRSP and TFSA - What to hold in what account
« Reply #6 on: April 21, 2016, 12:24:00 AM »
Here's my translation to US equivalents:
Tax-Free Savings Account (TFSA) is like Roth IRA in U.S.  Income is taxed, then moved into the TFSA.
Registered Retirement Savings Plan (RRSP) is like Traditional IRA in U.S.  Contributions are deducted from your income for tax purposes.  You pay tax on withdrawal.

In U.S., bond income is at ordinary tax rates (no advantage).  Similarly, RRSP / Trad IRA defer tax until retirement, but then get taxed at ordinary income tax rates.  Bonds get a benefit - they defer tax for later, letting the income compound.  Over decades, bonds tend to grow slower than stocks, so this account would grow slower and result in less tax.

For both U.S. and Canada, do bonds go in tax-deferred?

RichMoose

  • Pencil Stache
  • ****
  • Posts: 969
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: RRSP and TFSA - What to hold in what account
« Reply #7 on: April 21, 2016, 08:59:43 AM »
To further complicate things, if you use a 5 or 6 fund portfolio (include Emerging Marking and REITs), REITs are definitely best held in the TFSA because they don't pay eligible dividends.

Kaspian

  • Handlebar Stache
  • *****
  • Posts: 1536
  • Location: Canada
    • My Necronomicon of Badassity
Re: RRSP and TFSA - What to hold in what account
« Reply #8 on: April 21, 2016, 01:20:35 PM »
You're mostly correct but it is a bit over simplified. Someone looking at this might put the US in unregistered and C$ in TFSA.
If you have only TFSA and unregistered, it is still better to put the US in the TFSA, even thought you lose the FWT on dividends. This is because Canadian dividends are naturally much more tax efficient than US dividends.

Yep, the assumption was that the OP was going to max out the tax shelters right away.  Without knowing the OP's current TFSA and RRSP room and how much they have to invest, it makes it almost impossible to guess what they should do.  As per CCP, if it's a small amount it really doesn't matter if you put it all in a TFSA or RRSP.  Tax implications aren't a big deal at that point and can be considered much later.

nobodyspecial

  • Handlebar Stache
  • *****
  • Posts: 1469
  • Location: Land above the land of the free
Re: RRSP and TFSA - What to hold in what account
« Reply #9 on: April 21, 2016, 08:52:25 PM »
REITs are definitely best held in the TFSA because they don't pay eligible dividends.
And REITs pay big dividends which you can re-invest inside your TFSA in addition to your annual limit
 

K-ice

  • Pencil Stache
  • ****
  • Posts: 932
  • Location: Canada
Re: RRSP and TFSA - What to hold in what account
« Reply #10 on: April 21, 2016, 09:07:00 PM »
Would you experts agree that if your TFSA & RRSP are full & you want to increase your Canadian ETFs you should pick VDY over VCN?


RichMoose

  • Pencil Stache
  • ****
  • Posts: 969
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: RRSP and TFSA - What to hold in what account
« Reply #11 on: April 21, 2016, 10:14:19 PM »
Would you experts agree that if your TFSA & RRSP are full & you want to increase your Canadian ETFs you should pick VDY over VCN?

I say "no", unless you are very close to retirement and expect higher retirement expenses. Deferred capital gains are just as good or better than paying taxes on dividends during working years. Also I can't justify paying 4x the MER for the extra yield.

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6637
  • Location: BC
Re: RRSP and TFSA - What to hold in what account
« Reply #12 on: April 22, 2016, 12:05:21 AM »
I have asked this before and I like the debate.

You can search asset "location" not just allocation to find more info.

Here is what I have learnt, and try to follow, from my research.

You really only need to worry about it if your TFSA and RRSP are full or close to full. Then some must go into Taxable I'll call that TAXBL

RRSP

American stocks in US$ like VTI.  And bonds 

Why?  VTI for the US tax advantage, Bonds because relatively they shouldn't make a lot so you are better paying the small amount of tax on them when you are 70.

TFSA

Anything that you think will make a large return. (Unfortunately these sometimes make a large loss that you can't claim)
Any Canadian stocks without a dividend but a hopeful capital gain. International stocks and US stocks but only once the RRSP is full of your US stocks.

TAXBL

Canadian dividend stocks like VDY (There is a dividend tax credit that you can't use in RRSPs)
Cash and GIC because they make little interest and are easy to access
Bonds (only once the bonds stuffed into your RRSP are over flowing)


Great Debate....  I have a different view...

I view three accounts as parts of a single investment plan -- non registered, TFSA, RRSP.  The asset mix target is for the single investment plan...

Foreign dividend funds in the the RRSP.  I also like to put the lower return bond or fixed income in RRSP -- your goal here is the deferred tax up front, rather than wanting a big win as taxes might then be more upon retirement.

Riskier investments, especially with capital gains in the non-registered, so I can harvest losses that occur and I actually don't mind paying cap gains taxes on the wins.  Also, a bit of emergency fund money here, in cash or TD fixed income mutual funds (with no commission to withdraw), low MER.. This is the short term savings fund.

TFSA -- my husband likes the big win approach, like the quoted poster above...  I just like investing for some growth, with low chance of losses because it burns to have a capital loss that you can't use!!!!   So the TFSA gets Canadian ETF's, US non dividend stocks, etc.   

BUT...in the end .... RRSP is still the largest size fund due to contribution limits / tax advantages, so it hold a bit of everything to attain my toverall otal asset allocation.

......

Now as for RESP -- I am switching over to fixed income now, as we will withdraw within 3-10 year time period..

plainjane

  • Handlebar Stache
  • *****
  • Posts: 1675
Re: RRSP and TFSA - What to hold in what account
« Reply #13 on: April 22, 2016, 04:46:36 AM »
Posting so I can find this thread again.

RRSP and TFSA are effectively full.  So right now we're putting "excess" money into Canadian (e-series) & US (VTI with Questrade).  I'm considering switching from VTI because the currency conversion costs are too high with 2x/month transactions. 

Pretty soon we won't be able to maintain the desired AA through purchases.  I guess we'll start re-balancing within the existing RRSP and TFSA funds.  I've hit my current knowledge limit of best next steps, and there is surprisingly little for self-learners on the topic - mostly places saying "it's complicated, please start paying someone".

FI40

  • Stubble
  • **
  • Posts: 115
Re: RRSP and TFSA - What to hold in what account
« Reply #14 on: April 22, 2016, 09:30:33 AM »
I've hit my current knowledge limit of best next steps, and there is surprisingly little for self-learners on the topic - mostly places saying "it's complicated, please start paying someone".

I can relate to this, but this is where I make some reasonable return assumptions and future tax rate assumptions, and an Excel sheet with various scenarios, and pick the one that looks best. There are just too many exceptions to the general rules.

RichMoose

  • Pencil Stache
  • ****
  • Posts: 969
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: RRSP and TFSA - What to hold in what account
« Reply #15 on: April 22, 2016, 09:40:42 AM »
Posting so I can find this thread again.

RRSP and TFSA are effectively full.  So right now we're putting "excess" money into Canadian (e-series) & US (VTI with Questrade).  I'm considering switching from VTI because the currency conversion costs are too high with 2x/month transactions. 

Pretty soon we won't be able to maintain the desired AA through purchases.  I guess we'll start re-balancing within the existing RRSP and TFSA funds.  I've hit my current knowledge limit of best next steps, and there is surprisingly little for self-learners on the topic - mostly places saying "it's complicated, please start paying someone".

Maybe post a bit of a breakdown of what you have where and what your desired AA is. Some of us have been doing this stuff for a while and I'm sure we could give you some pointers.

plainjane

  • Handlebar Stache
  • *****
  • Posts: 1675
Re: RRSP and TFSA - What to hold in what account
« Reply #16 on: May 24, 2016, 06:55:37 AM »
Maybe post a bit of a breakdown of what you have where and what your desired AA is. Some of us have been doing this stuff for a while and I'm sure we could give you some pointers.

TFSA is full (including 2016) and RRSP we have the space for 2016.  Our target AA is:
30% Canadian bond
25% Canadian equities
25% US equities
20% Foreign equities
As of this weekend everything is within a percentage point of that target.  In the past, we've always put in money every paycheck that matches our desired AA, so we rarely got too far out of whack, or we could correct it with the TFSA contribution.

Currently the RRSPs and TFSA have a mix of Cdn bond, Cdn equity, US equity, and foreign equity (mix of e-series, Tangerine, and a small amount of VCN with QT).  The non registered accounts have US equity (VTI in QT, TD e-series) and Canadian equity (TD e-series).

In 2016, we have space for 40% of our investing to go into RRSPs, the other 60% will need to go into non-registered accounts. Our preference is to use TD e-series and contribute semi-monthly.  The person holding the non-registered accounts is in the 30% marginal tax bracket.

Currently the plan (starting June 1) is to put
26% Canadian bond (RRSP eseries & work)
14% Foreign equity (RRSP eseries & work, and then probably drop the whole 2017 TFSA in there to help rebalance)
30% Canadian equity (non-registered eseries)
30% US equity (non-registered eseries)

Should I instead do 60% Canadian equity in the non-registered, and rebalance the RRSPs on a quarterly basis until there is no Canadian in tax-advantaged at all?  Or something else? 

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6829
Re: RRSP and TFSA - What to hold in what account
« Reply #17 on: May 24, 2016, 09:33:17 AM »
Should I instead do 60% Canadian equity in the non-registered, and rebalance the RRSPs on a quarterly basis until there is no Canadian in tax-advantaged at all?  Or something else?

I hold 100% CDN equities in my Non-Reg accounts to get the benefit of the qualified dividends.

RichMoose

  • Pencil Stache
  • ****
  • Posts: 969
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: RRSP and TFSA - What to hold in what account
« Reply #18 on: May 24, 2016, 01:18:39 PM »
I would move things around a bit for tax reasons. Fill your RRSP with bonds first and take out the bonds in your TFSA. TFSAs should be for equities and REITs only.

Then put Canadian equities (including Canadian preferreds if you hold those) in your non-registered accounts first to benefit from low-tax dividends.

K-ice

  • Pencil Stache
  • ****
  • Posts: 932
  • Location: Canada
Re: RRSP and TFSA - What to hold in what account
« Reply #19 on: May 24, 2016, 03:11:26 PM »
^^^^

I find Tux has good advice. Do this.

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6637
  • Location: BC
Re: RRSP and TFSA - What to hold in what account
« Reply #20 on: May 24, 2016, 06:19:57 PM »
I would move things around a bit for tax reasons. Fill your RRSP with bonds first and take out the bonds in your TFSA. TFSAs should be for equities and REITs only.

Then put Canadian equities (including Canadian preferreds if you hold those) in your non-registered accounts first to benefit from low-tax dividends.

Why would you put REITs into the TFSA before non-reg?
Don't REITS have more tax advantaged income, or is it that they generate more total income, period, compared to dividend paying equities, in general.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6829
Re: RRSP and TFSA - What to hold in what account
« Reply #21 on: May 24, 2016, 07:38:24 PM »
Why would you put REITs into the TFSA before non-reg?
Don't REITS have more tax advantaged income,

I wasn't aware REITs had any tax advantage income in a Non-Reg account. Unlike qualified CDN dividends.

nobodyspecial

  • Handlebar Stache
  • *****
  • Posts: 1469
  • Location: Land above the land of the free
Re: RRSP and TFSA - What to hold in what account
« Reply #22 on: May 24, 2016, 08:50:49 PM »
Even worse some REIT dividends aren't really dividends (as far as CRA are concerned) so it can get complicated outside of a TFSA / RRSP

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6637
  • Location: BC
Re: RRSP and TFSA - What to hold in what account
« Reply #23 on: May 24, 2016, 11:02:27 PM »
Why would you put REITs into the TFSA before non-reg?
Don't REITS have more tax advantaged income,

I wasn't aware REITs had any tax advantage income in a Non-Reg account. Unlike qualified CDN dividends.

Well,  if your REIT passes through the CCA to you, it offsets the income, so you are taxed on the net income, not total income, then it becomes increased capital gains later.   REITS or other income trust may also be designed to pass through dividend income, as well as regular income...   Note, I am still learning about REIT and income trusts...

RichMoose

  • Pencil Stache
  • ****
  • Posts: 969
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: RRSP and TFSA - What to hold in what account
« Reply #24 on: May 25, 2016, 11:22:49 AM »
Why would you put REITs into the TFSA before non-reg?
Don't REITS have more tax advantaged income, or is it that they generate more total income, period, compared to dividend paying equities, in general.

In retirement, having REITs in your non-registered accounts is not a bad thing for added income because your tax rates would theoretically be much lower. But during higher income working years, it's not worth it unless you really value the diversification. The majorities of returns from REITs come from their income and income is taxed one way or another as you realize it. This income is not in the form of a Canadian eligible dividend. REIT distributions are a combination of Other Income, Foreign Non-Business Income, Capital Gains, and Return of Capital. If you look at the top REITs in Canada, the vast majority of distribution income is in the form of Other Income and Return of Capital. For tax purposes I'll break it down by type:
  • Other Income: Taxed at your highest marginal tax rate (similar to employment income)
  • Foreign Non-Business Income: Taxed at your highest marginal tax rate (similar to employment income)
  • Capital Gains: Taxed at 50% of your highest marginal tax rate
  • Return of Capital: A pain in the ass. This income isn't taxed immediately, but it reduces the cost base of that REIT holding. Once the cost base goes to $0, it gets taxed as a Capital Gain. If you sell the units, you have to adjust your cost base to properly calculate the true capital gains.
For example, lets say you buy 100 units of a $10 REIT that pays a 10% distribution. The distribution is equally split between Other Income and Return of Capital. You live in ON and make $74000/yr with your employment so your highest marginal rate is 31.5%.
Year 0 -- Cost Base: $1000 -- Income: $0 -- Tax: $0
Year 1 -- Cost Base: $950 -- Income: $100 -- Tax: $15.75 (OI $50 x 31.5%)
Year 2 -- Cost Base: $900 -- Income: $100 -- Tax: $15.75 (OI $50 x 31.5%)
.....Years go by.....
Year 20 -- Cost Base: $0 -- Income: $100 -- Tax: $23.62 [$15.75(OI $50 x 31.5%)+$7.87(ROC$50 x 15.74%)]
Now your marginal tax rate is 23.62%. This compares to a eligible dividend tax rate of 8.92%. So your after-tax return on your investment has dropped to 7.64%. Still not bad though, right.
Now you decide to sell. Your investment is still worth $1000. Your adjusted cost base is $0, so you have to claim all $1000 as a capital gain and you're left with: $842.60 after tax. Plus after tax income over the years of $1685 ($84.25 x 20) for a total net return of $1527.60 after you deduct the cost of your initial investment.

Let's compare the same with a Canadian dividend paying stock. Same 100 @ $10/unit pays 3% dividend (doesn't ever increase) and 5% annual capital gain.
Year 0 through Year 20 -- Cost Base $1000 -- Income: $30 -- Tax: $2.58
Now you decide to sell. Investment is worth $2685. Cost base is $1000. You claim $1685 as capital gain and you're left with: $2419.78 after tax. Plus after tax income over the years of $548.40 ($27.42 x 20) for a total net return of $1968.18 after you deduct the cost of your initial investment.

This is despite a lower annual return of 8% vs 10% with the REIT.

Clearly I could spin the numbers in many different ways, but I think the following is pretty safe to say: over a long period of time the before tax return of a REIT index will be similar to the before tax return of the Canadian stock index, although they won't follow the same track because REITs should perform better than stocks when interest rates drop and worse when interest rates rise. But... for a working person enjoying a good income, in a non-registered account the Canadian stock index will likely perform better than the REIT index due to less favorable tax circumstances for REITs. To get around this tax drag, the TFSA is a good place to realize the maximum return for REITs.

plainjane

  • Handlebar Stache
  • *****
  • Posts: 1675
Re: RRSP and TFSA - What to hold in what account
« Reply #25 on: May 25, 2016, 12:15:15 PM »
I would move things around a bit for tax reasons. Fill your RRSP with bonds first and take out the bonds in your TFSA. TFSAs should be for equities and REITs only.

Then put Canadian equities (including Canadian preferreds if you hold those) in your non-registered accounts first to benefit from low-tax dividends.

Thank you.  Now I just need to get the TFSA out of Tangerine so I can do it. :)

A silly question, but my Google-fu is weak.  Do dividends from TD e-series for Canadian equity count as Canadian dividends for tax purposes, or do I need to be holding the stocks directly?

RichMoose

  • Pencil Stache
  • ****
  • Posts: 969
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: RRSP and TFSA - What to hold in what account
« Reply #26 on: May 25, 2016, 12:33:10 PM »
Do dividends from TD e-series for Canadian equity count as Canadian dividends for tax purposes, or do I need to be holding the stocks directly?

Yes, the vast majority of the dividends from this mutual fund (TDB900) will be Canadian eligible dividends. There may be a very small percentage of ROC/OI income in the future as the fund does hold a few REITs, but it appears this is currently re-invested within the fund to make all the distributions eligible.

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6637
  • Location: BC
Re: RRSP and TFSA - What to hold in what account
« Reply #27 on: May 26, 2016, 11:01:31 PM »
Why would you put REITs into the TFSA before non-reg?
Don't REITS have more tax advantaged income, or is it that they generate more total income, period, compared to dividend paying equities, in general.

In retirement, having REITs in your non-registered accounts is not a bad thing for added income because your tax rates would theoretically be much lower. But during higher income working years, it's not worth it unless you really value the diversification. The majorities of returns from REITs come from their income and income is taxed one way or another as you realize it. This income is not in the form of a Canadian eligible dividend. REIT distributions are a combination of Other Income, Foreign Non-Business Income, Capital Gains, and Return of Capital. If you look at the top REITs in Canada, the vast majority of distribution income is in the form of Other Income and Return of Capital. For tax purposes I'll break it down by type:
  • Other Income: Taxed at your highest marginal tax rate (similar to employment income)
  • Foreign Non-Business Income: Taxed at your highest marginal tax rate (similar to employment income)
  • Capital Gains: Taxed at 50% of your highest marginal tax rate
  • Return of Capital: A pain in the ass. This income isn't taxed immediately, but it reduces the cost base of that REIT holding. Once the cost base goes to $0, it gets taxed as a Capital Gain. If you sell the units, you have to adjust your cost base to properly calculate the true capital gains.
For example, lets say you buy 100 units of a $10 REIT that pays a 10% distribution. The distribution is equally split between Other Income and Return of Capital. You live in ON and make $74000/yr with your employment so your highest marginal rate is 31.5%.
Year 0 -- Cost Base: $1000 -- Income: $0 -- Tax: $0
Year 1 -- Cost Base: $950 -- Income: $100 -- Tax: $15.75 (OI $50 x 31.5%)
Year 2 -- Cost Base: $900 -- Income: $100 -- Tax: $15.75 (OI $50 x 31.5%)
.....Years go by.....
Year 20 -- Cost Base: $0 -- Income: $100 -- Tax: $23.62 [$15.75(OI $50 x 31.5%)+$7.87(ROC$50 x 15.74%)]
Now your marginal tax rate is 23.62%. This compares to a eligible dividend tax rate of 8.92%. So your after-tax return on your investment has dropped to 7.64%. Still not bad though, right.
Now you decide to sell. Your investment is still worth $1000. Your adjusted cost base is $0, so you have to claim all $1000 as a capital gain and you're left with: $842.60 after tax. Plus after tax income over the years of $1685 ($84.25 x 20) for a total net return of $1527.60 after you deduct the cost of your initial investment.

Let's compare the same with a Canadian dividend paying stock. Same 100 @ $10/unit pays 3% dividend (doesn't ever increase) and 5% annual capital gain.
Year 0 through Year 20 -- Cost Base $1000 -- Income: $30 -- Tax: $2.58
Now you decide to sell. Investment is worth $2685. Cost base is $1000. You claim $1685 as capital gain and you're left with: $2419.78 after tax. Plus after tax income over the years of $548.40 ($27.42 x 20) for a total net return of $1968.18 after you deduct the cost of your initial investment.

This is despite a lower annual return of 8% vs 10% with the REIT.

Clearly I could spin the numbers in many different ways, but I think the following is pretty safe to say: over a long period of time the before tax return of a REIT index will be similar to the before tax return of the Canadian stock index, although they won't follow the same track because REITs should perform better than stocks when interest rates drop and worse when interest rates rise. But... for a working person enjoying a good income, in a non-registered account the Canadian stock index will likely perform better than the REIT index due to less favorable tax circumstances for REITs. To get around this tax drag, the TFSA is a good place to realize the maximum return for REITs.

Thanks!  Good stuff.

Dmy0013

  • Stubble
  • **
  • Posts: 100
  • Location: Central Canada
Re: RRSP and TFSA - What to hold in what account
« Reply #28 on: May 30, 2016, 08:25:56 AM »
Lots of awesome advice thanks everyone!

Trinitysmom

  • Stubble
  • **
  • Posts: 106
  • Location: Winnipeg canada
Re: RRSP and TFSA - What to hold in what account
« Reply #29 on: May 30, 2016, 08:06:27 PM »
I was wondering my husband gets a RRSP match at work but the money doesn't vest for 2 years and as far as I can tell it has to stay in a taxable account until then. Should we only buy canadian ETFs or does it make a difference if we have American and international ones in the taxable account? Thanks

sleepyguy

  • Pencil Stache
  • ****
  • Posts: 671
  • Location: Oakville, Ontario
Re: RRSP and TFSA - What to hold in what account
« Reply #30 on: May 31, 2016, 04:27:48 AM »
Awesome thread!  Thanks for all the info!

plainjane

  • Handlebar Stache
  • *****
  • Posts: 1675
Re: RRSP and TFSA - What to hold in what account
« Reply #31 on: May 31, 2016, 04:51:19 AM »
I was wondering my husband gets a RRSP match at work but the money doesn't vest for 2 years and as far as I can tell it has to stay in a taxable account until then. Should we only buy canadian ETFs or does it make a difference if we have American and international ones in the taxable account? Thanks

I can't think of a scenario where you would be responsible for any taxes on an RRSP match before the money vests. If anyone is responsible for taxes, it would be the employer (since it isn't your money yet). I'd treat this as an extension of your RRSP allocation.

Trinitysmom

  • Stubble
  • **
  • Posts: 106
  • Location: Winnipeg canada
Re: RRSP and TFSA - What to hold in what account
« Reply #32 on: June 02, 2016, 12:54:56 PM »
I was wondering my husband gets a RRSP match at work but the money doesn't vest for 2 years and as far as I can tell it has to stay in a taxable account until then. Should we only buy canadian ETFs or does it make a difference if we have American and international ones in the taxable account? Thanks

I can't think of a scenario where you would be responsible for any taxes on an RRSP match before the money vests. If anyone is responsible for taxes, it would be the employer (since it isn't your money yet). I'd treat this as an extension of your RRSP allocation.

I am sure we got a form for our taxes that was for the match amount and we had to claim it on our taxes and pay tax on the match.The paperwork is at my parents, So i don't know what type of form it was.

plainjane

  • Handlebar Stache
  • *****
  • Posts: 1675
Re: RRSP and TFSA - What to hold in what account
« Reply #33 on: June 02, 2016, 01:21:18 PM »
I was wondering my husband gets a RRSP match at work but the money doesn't vest for 2 years and as far as I can tell it has to stay in a taxable account until then. Should we only buy canadian ETFs or does it make a difference if we have American and international ones in the taxable account? Thanks
I can't think of a scenario where you would be responsible for any taxes on an RRSP match before the money vests. If anyone is responsible for taxes, it would be the employer (since it isn't your money yet). I'd treat this as an extension of your RRSP allocation.
I am sure we got a form for our taxes that was for the match amount and we had to claim it on our taxes and pay tax on the match.The paperwork is at my parents, So i don't know what type of form it was.

There is a place that you put in what the employer is matching, but that should only impact the amount you have available to contribute to the RRSP in subsequent years.

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/rtrns/t4/slps/cmpltng/bx52-eng.html

Brokenreign

  • Stubble
  • **
  • Posts: 118
  • Age: 35
  • Location: Alberta
Re: RRSP and TFSA - What to hold in what account
« Reply #34 on: June 02, 2016, 01:36:32 PM »
Was it a T4PS? You are certainly taxed on employer rrsp matches (though the effect would be countered by the rrsp deduction). If the cash was actually placed in your account, you would be liable for the taxes that year, regardless of vesting conditions.

Trinitysmom

  • Stubble
  • **
  • Posts: 106
  • Location: Winnipeg canada
Re: RRSP and TFSA - What to hold in what account
« Reply #35 on: June 02, 2016, 02:06:07 PM »
@Brokenreign  I'm not sure about the form I will have to check the next time I am at my parents. When I log into my husbands work RRSP accounts I can see the matched money in a taxable account with an (unvested) next to it. Shares have been bought with the same allocation as the money inside the RRSP. It looks like I can't move the money into the rrsp until it fully vests which is fine I guess but while it's in a taxable account would it be best to only hold canadian indexes, or canadian bonds until I can move it over? Thanks for any advice this is all still pretty new for me.

Brokenreign

  • Stubble
  • **
  • Posts: 118
  • Age: 35
  • Location: Alberta
Re: RRSP and TFSA - What to hold in what account
« Reply #36 on: June 02, 2016, 02:11:30 PM »
@Brokenreign  I'm not sure about the form I will have to check the next time I am at my parents. When I log into my husbands work RRSP accounts I can see the matched money in a taxable account with an (unvested) next to it. Shares have been bought with the same allocation as the money inside the RRSP. It looks like I can't move the money into the rrsp until it fully vests which is fine I guess but while it's in a taxable account would it be best to only hold canadian indexes, or canadian bonds until I can move it over? Thanks for any advice this is all still pretty new for me.

Sorry for not answering your core question! Canadian indexes would be best in a taxable account as dividends and capital gains are taxed much more favorably than the interest from bonds.

Trinitysmom

  • Stubble
  • **
  • Posts: 106
  • Location: Winnipeg canada
Re: RRSP and TFSA - What to hold in what account
« Reply #37 on: June 02, 2016, 02:29:08 PM »
Thanks Brokenreign, that's what I thought, but I don't always trust I know what I'm doing.