XAW vs VCN in TFSA

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
Post Reply
thgeone
Newcomer
Newcomer
Posts: 2
Joined: 06 May 2017 13:11

XAW vs VCN in TFSA

Post by thgeone » 26 Jul 2017 20:34

Hey guys,

I'm building a CCP portfolio of XAW, VCN and ZDB. It will be split between my TFSA and non-reg.

My question is if I should max my TFFA with VCN or XAW.

If I put VCN, I lose out on the dividend tax credit on Canadian equities.
If I put XAW, I lose out to 0.30% of FWT due to the US holdings.

What should I do?

Thanks in advance.

User avatar
InvestorNewb
Silver Ring
Silver Ring
Posts: 383
Joined: 08 Oct 2012 12:28

Re: XAW vs VCN in TFSA

Post by InvestorNewb » 26 Jul 2017 21:01

My TFSA is maxed with VCN. My reason for doing this was that I like not having to pay any withholding taxes on the dividends and with US/int'l equities there would be non recoverable withholding taxes.

VCN seems like the better option in the TFSA for tax reasons but nobody can predict the future and say which one will grow the most. The growth from XAW could easily outweigh the taxation benefit for holding VCN.

My plan is to eventually use dividends to cover expenses so VCN makes more sense for me in the TFSA.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

User avatar
AltaRed
Diamond Ring
Diamond Ring
Posts: 18082
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: XAW vs VCN in TFSA

Post by AltaRed » 26 Jul 2017 22:12

I'd put XAW in the TFSA simply because the yield on XAW is almost half that of VCN (i.e. 1.7%), and the slight non-recoverable tax leakage on that yield is almost certainly lesss impact than the higher yield of VCN that provides eligible dividends. That is splitting hairs though. The bigger question is what was noted already... Who knows which of those two will perform better capital appreciation wise?

Don't lose sight of the forest for the trees, or for spreadsheet types, don't get distracted by the 2nd decimal place.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom

longinvest
Gold Ring
Gold Ring
Posts: 1374
Joined: 10 Sep 2012 17:26
Location: QC

Re: XAW vs VCN in TFSA

Post by longinvest » 26 Jul 2017 23:50

AltaRed wrote:
26 Jul 2017 22:12
I'd put XAW in the TFSA simply because the yield on XAW is almost half that of VCN (i.e. 1.7%), and the slight non-recoverable tax leakage on that yield is almost certainly lesss impact than the higher yield of VCN that provides eligible dividends. That is splitting hairs though. The bigger question is what was noted already... Who knows which of those two will perform better capital appreciation wise?

Don't lose sight of the forest for the trees, or for spreadsheet types, don't get distracted by the 2nd decimal place.
+1 :thumbsup:
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

User avatar
Mordko
Silver Ring
Silver Ring
Posts: 126
Joined: 24 Jan 2016 09:26

Re: XAW vs VCN in TFSA

Post by Mordko » 28 Jul 2017 15:19

The answer to the OP's question will vary from person to person, depending on income. To get an accurate answer you would need to model both options.

User avatar
AltaRed
Diamond Ring
Diamond Ring
Posts: 18082
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: XAW vs VCN in TFSA

Post by AltaRed » 28 Jul 2017 16:17

Mordko wrote:
28 Jul 2017 15:19
The answer to the OP's question will vary from person to person, depending on income. To get an accurate answer you would need to model both options.
More importantly, the future performance of one versus the other. Too many folks get distracted/derailed by the nuances of taxation on distributions.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom

User avatar
Mordko
Silver Ring
Silver Ring
Posts: 126
Joined: 24 Jan 2016 09:26

Re: XAW vs VCN in TFSA

Post by Mordko » 05 Aug 2017 22:02

Right but the future performance is not known while the taxes are.

User avatar
AltaRed
Diamond Ring
Diamond Ring
Posts: 18082
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: XAW vs VCN in TFSA

Post by AltaRed » 06 Aug 2017 13:10

Let's do an example on $100k of XAW and $100k of VCN.

XAW current distribution yield @ 1.72% has BT cash flow of $1720/yr Withholding tax @ 15% is $258/yr
VCN current distribution yield @ 2.8% has BT cash flow of $2820/yr.
Assume the taxpayer has a 31% combined Fed+BC MTR. Per Tax Tips, Other Income is taxed at 31%, Eligible divdends at about 8.25%

Case 1 - VCN in TFSA, XAW in non-reg.
Only XAW is taxed, but at full rate. Taxes paid =$533 assuming full FTC recovery

Case 2 - XAW in TFSA, VCN in non-reg
XAW withholding tax is lost.... Taxes not recovered $258/yr.
VCN dividends taxed @ 8.25%... Taxes paid $232.65
Total taxes paid $490.65

In this middle class example for taxpayers in taxable income range of $78-$90k, it is better to have XAW in the TFSA and forego the lost withholding tax. At some higher MTRs, the situation will switch around when the DTC is not worth as much percentage wise in a non-reg account. In reality though, it does not likely matter much which way the decision goes. The difference is 'noise'.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom

longinvest
Gold Ring
Gold Ring
Posts: 1374
Joined: 10 Sep 2012 17:26
Location: QC

Re: XAW vs VCN in TFSA

Post by longinvest » 06 Aug 2017 13:50

AltaRed wrote:
06 Aug 2017 13:10
In reality though, it does not likely matter much which way the decision goes. The difference is 'noise'.
I agree. The difference in returns, unknowable in advance, will be the dominant factor to determine the winner. I would pick either option and forget about it.
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

Post Reply