Your argument ignores the rates of return. The conventional wisdom used to be that you should always shelter your fixed income because dividends and capital gains get preferential tax treatment. That conventional wisdom went out the window when interest rates dropped to historical lows. The dollar amounts subject to tax should be part of your analysis.Hyperborea wrote: ↑29 Oct 2017 19:27 Ok, I was thinking it would be the other way around. The GIC interest is fully taxable and so in a TFSA he won't pay tax on it. The dividends from the equity fund will get special treatment for the part that is for a Canadian company (so maybe 20-30% of his funds). The dividends on the other funds will have tax deducted in the country of origin and will give a tax credit/deduction against the dividends. He won't get either of those from within the TFSA. Finally, the capital gains from selling the equity funds will get special tax treatment (only 50% taxable) that he won't get from within the TFSA. That seems to suggest to me to go the other way - GICs in the TFSA.
It's been over 20 years since I filed a Canadian tax return and there were no TFSAs back then. Am I wrong? Thanks.
I will use Ontario tax bracket between $74K and $84K in my example.
http://taxtips.ca/taxrates/on.htm
Marginal rates on the full amounts received, 2017 tax year:
Other Income: 31.48%
Capital Gains: 15.74%
Eligible Dividends: 8.92%
Invest $1,000 for one year.
GIC rate: 2.5%
Interest earned: $25
Tax: $25 * 31.48% = $7.87
Equities: 4% capital gain, 2% dividend yield
Tax on capital gains: $40 * 15.74% = $6.30
Tax on dividends: $20 * 8.92% = $1.78
Total tax: $8.08
In this example, you would be better off sheltering equities and exposing GICs. The difference becomes more pronounced if you assume a higher rate of return on equities or/and a higher tax bracket.