What should I hold in a non-registered account?

Focus on dividend tax credit and capital gains treatment

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From the April 2016 issue of the magazine.

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Q: I’m wondering what type of securities you would recommend to hold within a non-registered account: stocks, ETFs, mutual funds, GICs?

—Dianne B.

A: It goes without saying, but I’m going to say it anyway: Regardless of where your investments are held, you need to ensure that you have a diversified portfolio, and a clear asset allocation. You want a mix between equity and fixed income that takes into account your risk tolerance and retirement plans. Now, with that public service announcement delivered, I’ll address your asset “location” question. Assuming your RRSP is maxed out, there is one overarching principle to keep in mind when deciding where to hold securities, says Matthew Ardrey, vice-president at Toronto-based wealth management firm T.E. Wealth:  “Place the asset class that generates the most tax-efficient income in the non-registered account first, due to the dividend tax credit and capital gains treatment.” Essentially, that means placing equities in your non-registered account and fixed income in your RRSP because the latter is taxed at a higher rate. For instance, a Canadian equity ETF would be best in a non-registered account, and a fixed-income ETF would be best in your RRSP.

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One comment on “What should I hold in a non-registered account?

  1. I keep seeing this recommendation (fixed income securities inside the RRSP, dividend and capital gains-generating securities in the non-registered account) and I have a strong feeling that this is a wrong advice in many cases, especially in today’s low interest rate environment. In reality, it is the absolute amount of tax attracted by the interest or dividends, or capital gains, that matters, not the tax rate. For example, if I expect a 5% return on my equity portfolio and a 2% interest on my fixed income portfolio, it is actually better to hold my equities inside the RRSP/TFSA and fixed income in the non-registered account. And, of course, for those who qualify for OAS, holding dividend-generating portfolio in a non-registered account increases the likelihood of OAS claw-back due to the dividend gross up.

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