My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, October 16, 2017

Tax Efficient Investing - Part 1

A couple of months ago, Rob Carrick of The Globe and Mail interviewed me for an article he was writing on Tax-Free Savings Accounts (“TFSAs”). Specifically, he was asking me whether Real Estate Investment Trusts (“REITs”) and other Return of Capital (“ROC”) type instruments should be purchased in a TFSA. I will leave you in suspense for a while on the answer to that question… but Rob’s question made me realize I had never written a blog post solely dedicated to the tax efficiency of the four main types of accounts that Canadians hold:


2. Non-registered Account

3. Registered Retirement Savings Plan (“RRSP”)

4. Registered Education Savings Plan (“RESP”)

Today and next week I will discuss this topic.

Overall Conclusion

Once I had completed the initial draft for this post, I reflected upon what I had written and I came to two conclusions:

1. Tax and investment decisions should not be made in isolation

2. Tax efficiency must be considered in context of portfolio risk management and asset allocation

Please keep these in mind as I discuss the individual accounts.


A perfect example of why I say tax efficiency must be considered in context of portfolio risk management and asset allocation is a TFSA.

There are several non-tax considerations one must account for before determining the most tax efficient use of this account. These include:

· Age – with a longer time horizon, you may want a higher exposure to Canadian equities to maximize your investment returns.

· Overall Portfolio Allocation – for all the accounts discussed, you must ensure tax efficiency in the context of your overall portfolio allocation.

For example, let’s say your portfolio allocation for REITs is 4%. If you decide a REIT is the most efficient investment for your TFSA and invest 3% of your overall portfolio in REITs within your TFSA, you must ensure you only have 1% weight to REITs in all your accounts.

· Risk – you may have read one of the articles about Canadians who have already grown their TFSAs to several hundred thousand dollars and how some are being audited by the CRA. Ignoring those who manipulated their TFSAs, many people with high value TFSAs achieved their growth through purchasing speculative or high growth equities within their TFSAs. But you must also consider that high growth equities can also produce large capital losses and those losses are lost within a TFSA.

· Need – where your TFSA is acting in part or whole as an emergency fund or you have a low risk tolerance, you will likely be considering only liquid and low risk options such as money market and maybe bonds.

As can be observed above, your selection of investment type for your TFSA may be subject to multiple non-tax considerations. However, for purposes of this post, let’s assume you just want to know what types of investments are generally the most tax efficient for a TFSA. I discuss these below:

1. High Yield Income – while these investments are far and few between; if you were able to invest in a high-yield mortgage fund or something similar, you would be saving around 53% in tax at the highest marginal rate.

2. Stocks – whether you are willing to take the risk and purchase high growth equity or want more stable Canadian equities that pay dividends, both these investment types would save you up to 26% in tax at the highest marginal tax rate; however, as noted above, any capital losses are wasted. One could argue a TFSA is not the best place for equities since you only save 26% versus 53%. However, equities may provide a return of a significant quantum that has many years to grow and compound the “large” tax-free gain.

3. REIT – technically, there is no correct answer here. You have to review what proportion of your investment return is ROC vs income, dividend or capital gain. If you have a high ROC, you are giving up a tax-free return that can be received elsewhere by holding your REIT in a TFSA (it should be noted that the ROC reduces the adjusted cost base (“ACB”) of the REIT and creates a larger capital gain down the road). So while a REIT is a tax efficient investment within a TFSA, an argument could also be made that a REIT may also be tax effective in a non-registered account. Yet, surprisingly, for many people, the overriding reason they put REITs in their TFSAs is not the tax savings, but the ability to relieve themselves from the tax administration hassle of tracking the ACB of a stock that has a ROC.

You will typically not want to hold a foreign stock (especially a US stock) that pays dividends in a TFSA, since foreign tax will be withheld and you will not be able to take advantage of the foreign tax credit for that tax withheld in your TFSA.

The above in not intended to provide investment advice. Please speak to your investment advisor.

Next week I will conclude this discussion, when I review tax efficiency within non-registered accounts and RRSPs and RESPs.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.