Asset allocation and tax efficiency

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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Springbok
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Asset allocation and tax efficiency

Post by Springbok » 17 Mar 2014 11:07

The FIE thread was getting off subject, so thought I would start another one. One of the best summaries I have read of how to best allocate investments across account types is this one by Preet Bannerjee: http://www.moneysense.ca/invest/asset-o ... -its-place

Nothing is simple and each case is different, but that does seem a good general guide. It doesn't cover those of us who are well into the RRIF withdrawal stage where taxation on both income and capital is imminent. That is where my own plan is to preferentially withdraw high yielders and move them to most tax efficient account. As well as selling some to help pay the substantial taxes!

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Re: Asset allocation and tax efficiency

Post by SQRT » 17 Mar 2014 11:15

Good, simple, easy to understand article. Would be very useful reading for many investors. Thanks for posting.

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Re: Asset allocation and tax efficiency

Post by Peculiar_Investor » 17 Mar 2014 11:50

Any thoughts on how the article compares with our own wiki article Tax-efficient investing? How could the wiki article be improved?
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Re: Asset allocation and tax efficiency

Post by adrian2 » 17 Mar 2014 13:37

Springbok wrote:It doesn't cover those of us who are well into the RRIF withdrawal stage where taxation on both income and capital is imminent. That is where my own plan is to preferentially withdraw high yielders and move them to most tax efficient account. As well as selling some to help pay the substantial taxes!
Once again, you are mistaken, for the same reasons I've articulated here.
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Re: Asset allocation and tax efficiency

Post by adrian2 » 18 Mar 2014 09:10

Peculiar_Investor wrote:Any thoughts on how the article compares with our own wiki article Tax-efficient investing? How could the wiki article be improved?
I did not find anything new in the article that was not already in our wiki.
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Re: Asset allocation and tax efficiency

Post by gsp_ » 18 Mar 2014 21:15

adrian2 wrote:
Peculiar_Investor wrote:Any thoughts on how the article compares with our own wiki article Tax-efficient investing? How could the wiki article be improved?
I did not find anything new in the article that was not already in our wiki.
One difference is the article(correctly IMO) suggests US equity funds should come out of registered accounts before international ones.

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Re: Asset allocation and tax efficiency

Post by Springbok » 18 Mar 2014 22:11

gsp_ wrote: One difference is the article(correctly IMO) suggests US equity funds should come out of registered accounts before international ones.
I found the article more reader friendly. But Preet is a professional communicator.

One thing the wiki addressed, was the tax on RRiF withdrawal. And in particular, that securities with ROC in distributions, like REITS are best not held in registered accounts.

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Re: Asset allocation and tax efficiency

Post by adrian2 » 18 Mar 2014 22:47

Springbok wrote:One thing the wiki addressed, was the tax on RRiF withdrawal. And in particular, that securities with ROC in distributions, like REITS are best not held in registered accounts.
That's the third time you make this assertion, and for the third time, you are wrong.
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Re: Asset allocation and tax efficiency

Post by parvus » 18 Mar 2014 23:02

Springbok wrote:I found the article more reader friendly. But Preet is a professional communicator.
Actually, he is/was an investment advisor.
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Re: Asset allocation and tax efficiency

Post by Springbok » 18 Mar 2014 23:06

parvus wrote:
Springbok wrote:I found the article more reader friendly. But Preet is a professional communicator.
Actually, he is/was an investment advisor.
Yes of course, that too.

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Re: Asset allocation and tax efficiency

Post by parvus » 18 Mar 2014 23:11

Nice guy. I met him a couple of times when he was still an advisor.
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Re: Asset allocation and tax efficiency

Post by bucejos » 13 Apr 2014 20:27

If I was going to hold a Canadian ETF like VUN (for my US allocation), does it matter if I keep it in my TFSA or my RRSP since either way I will lose the 15% withholding tax?

And does the same go for International equities? Like holding XEF vs something like EFA? Is it preferable to put my XEF in a certain account?

Thanks

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Re: Asset allocation and tax efficiency

Post by gsp_ » 13 Apr 2014 23:25

bucejos wrote:If I was going to hold a Canadian ETF like VUN (for my US allocation), does it matter if I keep it in my TFSA or my RRSP since either way I will lose the 15% withholding tax?
No difference. If you chose to purchase a US listed ETF then it would favour the RRSP.
And does the same go for International equities? Like holding XEF vs something like EFA? Is it preferable to put my XEF in a certain account?
No difference between RRSP and TFSA for XEF and other Canadian clone versions of US ETFs.

EFA would avoid US withholding in an RSSP but not in a TFSA. VEA and IEFA would be better(cheaper) alternatives.

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Re: Asset allocation and tax efficiency

Post by 2 yen » 22 May 2014 14:04

For portfolio planning purposes, has anyone created a separate asset class for renewable energy stocks - separate from utilities? Or do wind, solar and such just belong lumped in with stocks like Fortis and Canadian Utilities?

Thanks.

2 yen

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Re: Asset allocation and tax efficiency

Post by parvus » 22 May 2014 23:58

I'd put them in your small-cap energy/mining group.
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Re: Asset allocation and tax efficiency

Post by cashinstinct » 31 Aug 2014 06:29

Interesting, XEF will start investing in the stocks directly instead of holding a US ETF starting Sept 12, 2014 :

http://www.marketwired.com/press-releas ... 940864.htm

Extract:
"As a result of this change in investment strategy implementation, XEF will generally no longer be subject to U.S. withholding taxes. While foreign withholding taxes will continue to apply to dividends paid on certain international equity securities included in the XEF Index, it is expected that the change in investment strategy implementation will reduce the overall amount of withholding taxes borne directly or indirectly by XEF."


XEF was on my radar for International ETFS in RRSP and TFSA (switch from International Index e-funds with TD to ETFS)... this news is interesting.

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Re: Asset allocation and tax efficiency

Post by parvus » 04 Sep 2014 01:10

Interesting. But I doubt it will change much of anything because the tax treaties are still with the U.S. entity, not the Canadian entity, as far as I can see.
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Re: Asset allocation and tax efficiency

Post by cardhu » 04 Sep 2014 14:48

parvus wrote:I doubt it will change much of anything …
It will eliminate US withholdings on non-US-source income (dividends) … virtually all of the fund’s distributions are non-US-source, so distributions can be expected to rise by ~17%.

Tax treaties have no bearing.

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Re: Asset allocation and tax efficiency

Post by newguy » 04 Sep 2014 19:00

cardhu wrote:
parvus wrote:I doubt it will change much of anything …
It will eliminate US withholdings on non-US-source income (dividends) … virtually all of the fund’s distributions are non-US-source, so distributions can be expected to rise by ~17%.

Tax treaties have no bearing.
Well.... I've noticed frn->us withholding around 7% and it seems to be around 12% for frn->can. Maybe they have better negotiators in the US.

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Re: Asset allocation and tax efficiency

Post by cardhu » 05 Sep 2014 15:35

newguy wrote:Well.... I've noticed frn->us withholding around 7% and it seems to be around 12% for frn->can. Maybe they have better negotiators in the US.
I wasn’t aware of that quirk … the point, however, is that regardless of whether the applicable treaty is the one with the US (as in the case of ADRs) or the one with Canada (as in the case of securities purchased directly from other foreign exchanges), the US withholdings will end ... As for FRN, 12% is still less than 22%

The elimination of US withholdings should not only increase the distribution yield, but should also improve their tax treatment (foreign tax credit is preferable to deduction) … of course, that only applies to those unfortunate enough to hold XEF in their taxable accounts … as we all know, a non-reg account is the worst type of account to hold foreign dividend payers.

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Re: Asset allocation and tax efficiency

Post by parvus » 10 Sep 2014 00:41

Interesting Cardhu, but I'm not sure I follow.

XEF invests in a security held in the U.S. Yes, U.S. withholding may cease. But XEF's foreign withholdings are between the countries concerned and the U.S. investor.

Are you suggesting that whatever favourable tax treatment is afforded to the holder of the underlying in XEF is transferable to holders of XEF?

I may be missing the obvious here (and not for the first time) so if you could help me through this, I'd appreciate it.
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Re: Asset allocation and tax efficiency

Post by cardhu » 22 Sep 2014 14:59

parvus wrote:Are you suggesting that whatever favourable tax treatment is afforded to the holder of the underlying in XEF is transferable to holders of XEF?
XEF is the holder of the underlying.

XEF(old) held units of EFA, and EFA in turn held a portfolio of international (ex-US) equities ... under that structure, there were two layers of withholdings ... the ex-US withholdings that are taken off of dividend income flowing into EFA , and the US withholdings taken off of distributions flowing out of EFA to non-resident aliens (such as XEF).

XEF(new) holds the portfolio of international (ex-US) equities directly ... so the second layer (US withholdings) will be eliminated ... this will be true regardless of whether the assets are held in the form of an ADR (in which case the governing treaty will continue to be the one with the US, as you say) or in the form of directly held shares on some foreign ex-US exchange (in which case the governing treaty will be the one with Canada).

As far as tax treatment goes, its not really a matter of passing through a favourable tax treatment, its more a matter of ending the unfavourable treatment ... that first layer of withholding will now be eligible for the foreign tax credit, which under the old structure it wasn’t ... this is also true regardless of which tax treaty applies ... and a foreign tax credit is preferable to deduction ... of course, it was not a deduction in the literal sense, but the net effect of not reporting that portion of the income in the first place, is identical to having reported the income then deducted the tax withheld.

Of course, the tax treatment in a non-reg account is a bit of a moot point, because it would only be held in a non-reg account as a last resort, if for some reason it couldn’t be held in TFSA or RRSP.

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Re: Asset allocation and tax efficiency

Post by agraham » 14 Oct 2014 20:22

adrian2 wrote:
Peculiar_Investor wrote:Any thoughts on how the article compares with our own wiki article Tax-efficient investing? How could the wiki article be improved?
I did not find anything new in the article that was not already in our wiki.
I have a small suggestion. The article ends with a great "action item": once you're out of contribution room, these are the investment types you should put in non-registered accounts in descending order of preference.

The table on the finiki page could serve the same purpose if it was sorted by the "Non-Registered account" column descending from Always to Never

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Re: Asset allocation and tax efficiency

Post by BRIAN5000 » 31 Oct 2014 15:18

Outside of a registered account if you have a W8 on file with your broker dividends will be withheld at a 15% rate and can be used as a credit towards tax payable.

If you hold a US GIC outside of a registered account is there any withholding tax on interest income?
If you hold a US ETF say VCSH should there be withholding tax?
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Re: Asset allocation and tax efficiency

Post by AltaRed » 31 Oct 2014 16:07

How it worked for me for a number of years was:
- Bank account, money market and CDs were all defined as 'interest bearing' and not subject to any withholding
- Held a NYSE traded corporate bond income fund for several years until circa 2008 and there was 15% withholding

The tax treaty may have changed since that time but the dividing point at that time seemed to be.... if it was a non-money market mutual fund (or ETF I suppose), tax was withheld.
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