A: The biggest reason would be the taxation of different accounts in your portfolio.

Different types of investment returns are taxed differently depending on what type of account they are held in (i.e RRSP/RRIF/TFSA/Non-Registered). For example, dividends earned in a RRIF and then withdrawn are taxed as income (highest tax rate), while those same dividends would be taxed at a lower rate if the investment was held in a non-registered account. Those same dividends are not taxed at all if withdrawn from a TFSA.

Let’s look at an example.  Say you had the same 50% stocks and 50% bonds portfolio in your RRSP, TFSA, and Non-Registered account.  And let’s say that the bonds earned 1% and the stocks grew by 6% and dividend income made 1% per year.  Any gains in your RRSP (until withdrawn) or TFSA are tax-free, but the non registered account would require you to pay taxes annually.

And let’s say that the portfolios were broken down like this:

  • RRSP $250K
  • TFSA $100K
  • Non-Registered Account $150K

And you withdrew the investment income from each account each year and your income was $110,000/year.

At $110,000 of income, here are the tax rates for the different types of income:

INCOME BRACKET Interest Income Capital Gains Eligible Dividends
$97,070 to $116,344 38.29% 19.15% 15.55%

If you changed the allocation of your investments to put all the interest-earning investments (bonds) in your RRSPs, and the stocks earning capital gains mostly in your TFSA and investments paying dividends mostly in your non-registered account you’d end up with 15% more income after tax.  This is more money in your pocket.

If you like the details here they are:

 

Income $110,000 Using the Same Portfolio 1.0% 6.0% 1.0%
Bonds Equities Interest Capital gains Dividends Total Income Total Income After tax
RRSP  $250,000  $ 125,000  $ 125,000  $ 1,250  $  7,500  $1,250  $ 10,000  $   6,171
Non Reg  $150,000  $   75,000  $   75,000  $    750  $  4,500  $  750  $ 6,000  $   4,735
TFSA  $100,000  $  50,000  $   50,000  $    500  $  3,000  $  500  $  4,000  $   4,000
 $ 250,000  $ 250,000  $ 2,500  $ 15,000  $     2,500  $ 20,000  $ 14,906
Income $110,000 Tax Efficient Portfolio 1.0% 6.0% 1.0%
Bonds Equities Interest Capital gains Dividends Total Income Total Income After tax
RRSP  $250,000  $ 250,000  $          –  $ 2,500  $      –  $           –  $2,500  $   1,543
Non Reg – div  $150,000  $          –  $ 150,000  $       –  $ 9,000  $     1,500  $10,500  $   8,544
TFSA – cap gains  $100,000  $          –  $100,000  $       –  $ 6,000  $ 1,000  $7,000  $   7,000
 $ 2,500  $ 15,000  $ 2,500  $ 20,000  $ 17,086 – an increase of 15%

 

 

So based on this it makes a lot of sense to allocate your investments from a tax-smart perspective especially if you have a non-registered account.

Let me know if you have any questions.

 

 

 

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