Location matters

October 08, 2019 | Jeremy Goldfarb


Share

There is more to investing than just asset allocation. A lesser discussed, but very important factor in a successful investors arsenal is "where to buy". More specifically put, the type of account (RRSP, TFSA......) you allocate your investment purchases in can matter quite a bit. Now....this really only applies to those that have maximized their registered accounts and are now adding to corporate or personal regular investment accounts, but take heed because hopefully you will be there someday too.

 

Tax treatment of investment earnings matters. In fact.....it matters a lot, especially if you are a high income earner in a province such as Ontario. Interest income is treated less favorably than dividends, and dividends are treated less favorably than capital gains. Furthermore, anyone with US or foreign investments in the portfolio have even more to think about!!

 

So what does all of this mean. I have attached 2 very good articles on why you will want to pay attention to this so you can read them for more specifics, but here is the Cole's notes explanation.......and I should preface everything that follows by stating the following:

do not let tax circumstances dictate how you will make your investment decisions. Invest first....tax second.

 

 All things being equal, you are going to want to try to hold the investments with the least tax favorable outcome in a registered account like a TFSA or an RRSP. Investments like bonds or GICs that pay interest should go here. More tax favorable investments will find a better home in a taxable (regular) investment account. Not only do you get the benefit of dividend or capital gains tax treatment, you can also use losses to offset gains, and this is not available for registered accounts. Insert equities or stocks here.

 

One also has to be aware of how Mutual funds or ETFs make distributions so one knows where to hold these as well. It's not always so cut and dry.

 

I will not risk losing my audience attention by droning on too long here so I will simply highlight the links to the articles below. Perhaps we will devote an upcoming podcast or seminar soundbite to this issue!

 

Moneysense Article

 

RBC Article