How’s my TFSA asset allocation?

This reader wants to make sure his TFSA asset allocation fits his risk tolerance and that he’s not running into any tax issues

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Q: My goal is to maximize returns and grow my TFSA over the long term, not necessarily only for retirement, but also as a reserve fund. I have all Canadian ETFs in it to avoid any tax complications as I believe holding anything but Canadian ETFs in a TFSA leads to tax issues.

This is my current allocation:

ZDV.TO 15.3%
ZRE.TO 9.8%
XIU.TO 15.3%
XRE.TO 9.8%
XDV.TO 15.1%
VAB.TO 19.2%
VCN.TO 15.4%

Please lend your expertise and advise if I’m on the right path with this allocation or if it requires tweaking. I’m open to taking risk and would label myself a moderate to liberal risk taker.—Harpaul

A: You’ve asked some good questions. Let’s start with asset allocation and your question about whether it’s appropriate. I’m going to give you one of my favourite answers, “it depends.”

First off, I’m leery about 35-year-olds having TFSAs. More often than not, I think they shouldn’t have them. When I diagnose most 35-year-olds’ finances, they tend to suffer from conditions like RRSP room, debt, kids who are going to go to university, a lack of proper insurance coverage, no wills or powers of attorney and so on. Some of these options may be better places to invest than in your TFSA. TFSAs are good in the right situations, but to be frank, they’re overrated for the average Canadian.

You’ve got 81% in Canadian equities and 19% in fixed income. I’d consider this a growth portfolio best suited to a long-term investor. So, given that you are contemplating using this as a reserve fund, I think you need to be cautious about how aggressively you invest in equities.

As you mentioned, your equity exposure is entirely Canadian. Depending upon the rest of your investment portfolio, you might be missing out on 97% of global equities by focusing on Canada. In particular, the Canadian markets are notoriously lacking exposure to sectors like health care and technology.

You own four broad Canadian equity ETFs that invest in similar large Canadian stocks and then two more that focus specifically on Canadian REITs. I think do-it-yourself investors have to be careful about getting too fancy and buying lots of investments just for the sake of it, or because it only costs $4.99 to buy and sell them. I’d prefer to see one Canadian equity ETF and then, if you really want to focus in on REITs, buy one REIT ETF as well.

It’s also important that you understand the difference between the different styles of ETFs you own. I’m not going to go into all the differences here, but whether you’re a professional money manager or a DIY investor, strategy is important.

The bond ETF you own is forced to hold long-term bonds because it replicates a broad bond index. Forty-three per cent of the holdings mature in under 5 years, but the balance are 5 years and over. A whopping 22% of the holdings mature in 20+ years. Bonds can go down when interest rates go up and long-term bonds are even more susceptible to this inverse relationship. So if you’re holding this ETF for safety, know that it may be less safe than you might otherwise think.

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Ask a Planner

Leave your question for Jason Heath in the comment section below or email and he may answer it in an upcoming column.

Next, let’s tackle your tax question. Holding foreign equities in a TFSA can result in a bit of tax leakage since foreign dividends are generally subject to a 15% withholding tax before they hit your TFSA, so your yield is slightly lower than it might otherwise be.

This applies to both foreign ETFs as well as Canadian ETFs that invest in foreign stocks, as well as foreign stocks.

It doesn’t mean you shouldn’t hold foreign investments in your TFSA ever—it just means that if you’re going to hold foreign investments, you should look for the best account to hold them in and often it’s going to be an account other than your TFSA.

I think your primary concern here needs to be if you should have a TFSA in the first place. Trying to figure out how to invest your TFSA savings may be putting the cart before the horse.

READ: The savings struggle: RRSP vs. TFSA »

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products. 

11 comments on “How’s my TFSA asset allocation?

  1. Before you assume he shouldn’t invest in a TFSA because of RRSP room, shouldn’t you know what his income is? If someone is making a relatively modest income there is no need to invest in an RRSP (perhaps their after retirement income will be higher than now at 35) and a TFSA is a much better option.


    • I agree with Natasha. Choosing whether to invest in an RRSP vs TFSA should also take into account whether your retirement income will be higher or lower than your pre-retirement income, though admittedly, assessing that at age 35 might be more of an educated guess than anything. However, all of Jason’s points make sense and should be considered, esp since there are no details from Harpaul about income, family, debt, etc.


  2. Or maybe he has good company pension plan.Anyone who thinks TFSA’s are overrated at any age needs to rethink their “advice”. But this financial planner has an agenda and that’s to promote products and services. I’d be willing to bet some fee only advisors have back room deals with the people who do sell these services. Do you even comprehend that tax free compounding that will take place and not generate an OAS clawback?


  3. Great information I didn’t know – regarding the tax implications, so there is a withholding aspect to investing outside of Canada(so lower return), which I hadn’t thought of. I am a senior(81) & have been putting anything I can spare into my TFSA, currently about 50/50 Canadian/Foreign Equity & have $10,000. still to put in. I have to take my RRIF annual payment out soon(about $2700.)& would like to transfer some investment directly into my TFSA, thus saving some costs. My problem is, my Financial Advisor says he can’t do that, so I have to sell something & rebuy it or something else(costly), yet I read in Money sense that these transfers can be done????
    Hope you can clear this up.
    B. Harris


    • I do not understand why your advisor can not transfer from a RRIF IN KIND the $2700 or your yearly amount as part of your yearly withdrawl directly to your TFSA I have done it before with TD Waterhouse which holds my RIFF & TFSA but maybe he can not & maybe he wants to make a commission Ask around at your TFSA holder


  4. I don’t think the withholding tax should be a barrier as long as you select the right stock or ETF. It is a small price to pay to get diversified. If you have both RRSP and TFSA then you of course you can hold your US investments in RRSP and tilt your TFSA more towards CDN. I agree with other readers that there are too much important details missing to give good advice for this particular case.


  5. As far as I am aware the 15% withholding tax on foreign dividends applies to all dividends – not just dividends in TFSAs. So the choice of account does not matter.


    • Except outside a FDA there is a tax credit for foreign tax paid.


      • Oops…tfsa. Sorry spellcheck at it again


  6. Though tax implications are correct but advisor looked inexperienced, How many 35 years olds have kids going to university or kids around 18 years old…also tax implications are on dividend not on capital gain which a growth oriented portfolio is geared towards? Now how much dividend your forign equities pay…Analyze that and you have the pros and cons.


  7. I keep it really simple and easy for my TFSA. Weekly auto purchases in the Mawer Balanced Fund and reinvest dividends. Thats it, no checking newspapers or watching what the market does.


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