Making smarter asset location decisions

Setting up a portfolio with proper asset allocation is easy. The hard part is maintaining the right balance when you add new money.



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Last week’s posts about tax loss selling prompted some interesting questions about asset location in the comments section. Holding your ETFs and index funds in the most tax-efficient accounts can have a big impact on your long-term returns. But although it’s often easy to set up a portfolio with proper asset location, it can be a challenge to maintain the right balance when you add new money.

Say you’re using the Global Couch Potato portfolio spread across three accounts. Your TFSA and RRSP are maxed out at $25,000 and $125,000, respectively, and you have another $75,000 in a non-registered account. Your optimal asset location would look like this:

Table 1

So far, so good. But now you’ve won second prize in a beauty contest and received a $25,000 windfall. Since you can’t add it to your tax-sheltered savings, you put the money in your non-registered account. Then you enter the new values into your rebalancing spreadsheet and discover your portfolio is now off its target:

Table 2

The naive way to rebalance your portfolio would be to make all the transactions in your non-registered account. You could simply use your new cash to buy $10,000 worth of bonds and $5,000 each of Canadian, US and international equities:

Table 3

Now your portfolio is in balance, but it’s not very tax-efficient because you’re holding bonds in a taxable account. A better solution would be to use the new $25,000 to top up your non-registered holdings in Canadian equities ($5,000) and US equities ($20,000). Then in your RRSP you should sell your $15,000 of US equities and buy more bonds ($10,000) and international equities ($5,000). Now the portfolio looks like this:

Table 4

All the tax-inefficient bonds are now safely in your RRSP, while the US stocks are in your non-registered account, where the foreign withholding taxes on dividends are recoverable and you can benefit from tax-loss harvesting. You’ve not only made your portfolio far more tax-efficient, but also easier to manage as you’re now dealing with just five holdings instead of eight.

You don’t need to worry much about these kinds of decisions when making small monthly contributions. But any time you make a large lump sum contribution it’s worth getting out the spreadsheet and finding the most elegant and tax-efficient way to divide your assets among all your accounts.

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2 comments on “Making smarter asset location decisions

  1. The term ‘tax-efficient’ usually refers to the metric ‘rate of return multiplied by tax rate’ or ‘ the difference between the nominal return and the after-tax return’. But this metric has been shown to NOT maximize the benefits of tax-shelter accounts. It is correct only if the account is closed after one year. After that it is usually the higher return assets that maximize the benefits of the tax shelters.

    Also, the calculation of the Asset Allocation percentages is wrong. It treats a $ in an RRSP as equal to a $ in either a Taxable account or a TFSA. But RRSP are funded with before-tax savings and the others with after-tax savings. RRSP’s account balances include a ‘loan’ from the government which they have you investing for them. It is not all ‘your’ money.

    See discussion at paper and read discussion at two sections starting


  2. I disagree with TABLE 4. I think it would be a better idea to have $100,000 of Canadian bonds in the RRSP and spread the International equities between both TFSA and RRSP with an amount of $25,000 in each. On website you can read: “If you’ve maxed out both your RRSP and your TFSA, keep the highest-growth investments (such as stocks) in the TFSA. That will maximize your tax savings.” You also wrote one of the 3 articles about the same subject (

    The benefit of RRSP is the tax return. Later, we have to pay back taxes on the total amount we take out from the RRSP. I don’t think the withholding tax advantage of RRSP can justify to not put all the bonds in the RRSP when both TFSA and RRSP are full.

    What do you think about it?


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