Maximize Your RRSP Return Through Asset Location

Do you know the real rate of return on your investments? Generally, Canadians measure the success of their investments based only on the rate of return. While it provides a good snapshot of whether an investment is doing well or not, it is not the only criterion for a true picture of success. A good portfolio is based not only on the return, but also by the tax implications of the investments.

Investors can optimize their real rate of return by utilizing effective asset location strategies to reduce tax exposure. Carefully dividing your investments between registered and non-registered portfolios will help to maximize your overall return. Keep in mind, investments inside your RRSP are tax deferred and a TFSA (Tax Free Savings Account) is not taxable. But everything outside of these investments will have a tax implication.

Understanding how your investments are taxed goes a long way in determining where to invest your money.

Investment income has three main types. Each has different tax levels when held outside your registered investments.

  • Interest income has the highest tax rate of the three regardless of your income. Whether you receive the interest or decide to reinvest it, it is fully taxable and accrued annually.
  • Income from Canadian dividends are taxed more favourably than interest income but it is important to remember that there are exclusions in the form of income from rent, royalties and foreign dividends which are taxed at the same rate of interest income.
  • Capital gains income is taxed on only 50 percent of the total and the gains are included in your income when the gains are realized.

Although every province varies, an Ontario resident who sits at the highest marginal income tax bracket would pay over 53 percent* tax on interest income, over 39 percent* on eligible dividends and over 26 percent* on capital gains if these investments are in a non-registered account.

If these three incomes are within a registered portfolio such as RRSP or RRIF (Registered Retirement Income Fund), the taxes are deferred until you begin to make withdrawals. The withdrawals are then considered income' and the entire amount is taxed at your marginal rate of tax.

It would be great to funnel your entire portfolio into an RRSP or TFSA but each carries certain limits of contribution. If your portfolio includes fixed income securities, you should take maximum advantage of keeping these within an RRSP or TFSA for tax shelter purposes. If you have reached the limits of your tax-sheltered investments, any equity investments that produce 'tax-preferred' income (capital gains and dividends) would be suitable to include in a non-registered account.

Don't let the tax implications be your sole motivating factor when choosing your investments. Try to gear your investments such that they are suitable for your specific situation and risk implications. Once you have accomplished this, you can then focus on the best tax efficiency.

* CRA Income Tax Rates for 2019


Questions about tax planning?

Contact our office!

Copyright © 2019 AdvisorNet Communications Inc. All rights reserved. This article is provided for informational purposes only and is not intended to provide specific financial advice. It is strongly recommended that the reader seek qualified professional advice before making any financial decisions based on anything discussed in this article. This article is not to be copied or republished in any format for any reason without the written permission of the AdvisorNet Communications. The publisher does not guarantee the accuracy of the information and is not liable in any way for any error or omission.

What our clients are saying...

  • We valued receiving a detailed report and explanation of our finances. When working with a financial planner, we expect to have our questions answered with adequate detail and to have a plan developed to help grow our money. Our expectations were clearly met and we would be happy to recommend Anthony to anyone looking for a Financial Plan.

  • We valued the fact that you sat down with us, heard what we wanted to say, asked for clarification and offered suggestions, and then came up with a detailed and well-reasoned plan in a short period of time and communicated that back to us so that we knew what we needed to do moving forward. Thanks!

    Our expectations for a financial planner are several fold: (1) Does the planner communicate well, in that they both listen but also offer suggestions and ideas in a clear easy-to-understand way, (2) Are they able to meet their client at the same energy/level and meet their specific needs? In our case we needed a tax minimization strategy within a short turn around time. (3) Did the planner actually do their job, in that were they able to provide ideas and suggestions that helped address the client's asks?

    We came to see you because we realised that we hadn't looked at how to minimize the taxes related to my Father’s estate planning and my mother’s future financial planning, and you were able to tell us things that we didn't know about, and offered us solutions that helped us with our future financial planning.

    You definitely met our expectations! In some ways, you actually exceeded our expectations. We were hoping that you could respond quickly, and you came up with a detailed and well-reasoned plan faster than we expected!

    Our only area of improvement we could think of was, given that the plan was very detailed, if we had an explicitly spelled out action plan with a timeline for completion.

    We are very happy and would definitely recommend you to our family and friends and in fact have already done so!

  • Anthony made the process very clear and explained each step along the way. He was very honest and straight forward. My expectation from a financial planner is that they are honest and transparent. Anthony definitely met my expectations and I would be happy to recommend him to my family and friends.

  • When working with a financial planner our expectations are to maximize our investments and have a solid plan for retirement. We now have a greater awareness of our current portfolio and options to best protect our estate. We were provided with good information to use in order to make better investment and estate planning decisions. We would gladly recommend Anthony to our family and friends.

  • We value the personal service and detailed explanations we receive from Anthony on an ongoing basis. We feel comfortable recommending Anthony to our family and friends as he is someone who we can trust and has our best interests in mind. He has been great at helping us work towards a comfortable and manageable retirement.

  • The financial planning process we went through was clearly outlined and explained to me. I wanted to have a better understanding of my financial position and to know whether I could retire early or not.

    I am happy to recommend Anthony to my family and friends.