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Asset Location - How to reduce taxes on your investment portfolio


You’ll often hear the phrase “asset allocation” in the financial world, which refers to the general allocation of different types of assets with different return and volatility characteristics.  How much of your portfolio is tilted towards growth versus protection?  How are those investments then split between different geographic regions?  Asset allocation is about finding the mix of investments that meets your goals within your tolerance and comfort for volatility. When you change your asset allocation, you’re changing how aggressive or conservative a portfolio is.

Although asset location sounds similar it’s quite different.  When you decide on your asset allocation this will create a mix of assets that each provide different types of investments returns (e.g., interest, dividends, or capital gains).  Each of these returns gets a different tax treatment.  Asset location is about holding investments in the appropriate type of accounts to ultimately reduce the drag taxes have on your overall portfolio. Let’s look at each of these investment returns and how we can reduce the taxes on your investment portfolio.


When you buy a bond (fixed income), you are effectively lending money to a government or a corporation in return for interest and your future principal.  Interest is the most heavily taxed form of investment return. Personally, it’s taxed at your marginal tax rate. Corporately, interest income is taxed at the highest marginal tax rate immediately.  Because of how aggressively interest is taxed, it’s smart to use accounts that can shelter the interest you are receiving.  Recommended accounts include RRSP, RRIF, LIRA, and LIF accounts. For professionals who have individual pension plans (IPP), this is also a good option.  With these accounts, you’ll be able to defer this highly punitive tax and avoid the drag tax has on interest-bearing investments.  If you’ve utilized all your RRSP contribution room and you still have some fixed income that needs to be sheltered, a TFSA can be a secondary alternative.

Foreign Dividends

Dividends from corporations outside of Canada do not receive the preferential tax treatment that Canadian dividends receive. Foreign dividends (including US) are subject to tax at your marginal tax rate.  Within a corporation, they are subject to the highest marginal tax rate immediately.  RRSP, RRIF, LIRA, LIF, and IPPs are the best accounts for investments paying foreign dividends.  Unlike interest income, where the TFSA can be used as a secondary option, it’s recommended that you avoid using your TFSA with investments that pay foreign dividends because of withholding taxes.  For example, US dividends paid into a TFSA are subject to a 15% withholding tax which you won’t be able to claim a credit on.

Canadian Dividends

Canadian dividends receive preferential tax treatment in Canada as compared to interest or foreign dividends.  The dividend is grossed up by 38% and then taxes payable are calculated.  Once the taxes payable have been calculated, you will then be able to apply the federal dividend tax credit which is 15.0198% multiplied by the grossed-up value. For example, if you earned $100 in dividends, your taxes payable would be calculated on the grossed-up amount of $138 ($100 x 1.38).  If your marginal tax rate were 50.4%, the taxes owed would be $69.55 ($138 x 50.4%). The tax credit however would be $20.73 ($138 x 15.0198%) reducing total taxes owed to $48.82.  If you can, it’s still recommended to shelter these dividends using the tax-sheltered accounts we mentioned prior, just not before sheltering interest or foreign dividends.

Capital Gains

Capital gains receive the most favourable tax treatment with only half the gain being taxed.  A $100 capital gain would result in only $50 being taxed, either at your marginal tax rate if owned personally in a taxable account, or at the highest marginal tax rate if owned corporately.  Either way, having only half the gain being taxed is a huge advantage as compared to dividends or interest.  Capital gains are also great because they’re only triggered when you sell an investment.  This provides further ability to defer taxes by utilizing a buy and hold strategy with your taxable accounts.  If you have room, TFSAs can be a wonderful option for investments you believe will grow significantly because gains and withdrawals are completely tax-free. Within an RRSP, you’re able to trigger the gain tax-free, but withdrawals are fully taxable as income.


In closing I’ll walk you through the process I use to ensure my asset location is optimized reducing my overall taxes to ensure my portfolio can continue to grow as quickly as possible.


Step 1 – Do I have any interest-bearing investments or foreign dividends?

If you do, look to use RRSP, RRIF, LIRA, LIF or IPP accounts.  If these are already full, you can utilize your TFSA to shelter interest income. Do not use your TFSA for foreign dividends due to extra withholding tax.

Step 2 – Do I have Canadian dividends?

Shelter any Canadian dividends utilizing either your RRSP, RRIF, LIRA, LIF, IPP or TFSA.  If you can’t because all these accounts are full, at least you’ll receive a dividend tax credit because of the preferential tax treatment Canadian dividends receive.

Step 3 – Do I have securities I expect to grow significantly in value?

If you have high-growth investments that could lead to large capital gains, I recommend looking at your TFSA first. You’ll be able to grow, sell, and withdraw the funds without ever paying tax. If your TFSA is full, you can use accounts like your RRSP, RRIF, LIRA, LIF or IPP.  You can trigger the gain without paying tax, but eventually, when the money is withdrawn, the funds will be taxable as income. If all your tax-deferred and tax-free accounts are full, it’s alright to hold these in your taxable accounts because taxes ultimately won’t be paid until the gain is triggered. This is especially true if you deploy a buy-and-hold strategy.

- Brandt Butt, Investment Advisor, CIM®

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Brandt is an Investment Advisor and part of an award-winning team at Endeavour Wealth Management with iA Private Wealth. Brandt’s focus is working with incorporated physicians and dentists between the ages of 35-45 who are looking to set themselves up on the right financial path in hopes of reaching a point where they are choosing to work, instead of having to.

Brandt’s team delivers value through advanced financial planning solutions for incorporated professionals while working closely with their accounting and legal professionals. By doing so, Brandt’s clients’ situations are optimized which can save them hundreds of thousands in taxes each year allowing them to grow their net worth faster with the goal of reaching complete financial independence.

This information has been prepared by Brandt Butt who is an Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.


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