Canadian Investing & Tax Strategy

This is not financial, tax, legal, or investment advice. It’s a description of my personal strategy, the risks I accept, and the tradeoffs I’m considering. Tax rules are complex and can change, so talk to a qualified professional before applying any of this to your own situation.

Once I’ve decided what to invest in, most of the remaining decisions are about tax. Which account should hold the investment? When will the income be taxed? Whose tax return will it land on? Can the interest on borrowed money be deducted?

I mostly buy the same investment in each account. The tax treatment is what changes.

Portfolio foundations

The ideas underneath this strategy are covered in Portfolio Foundations. The short version is that I own a globally diversified stock fund and accept the market return. If I want to take on more risk for more expected return, I prefer leverage over concentration.

Those decisions come before the account strategy. If I wasn’t comfortable with a 100% equity portfolio, I wouldn’t consider borrowing money to increase that exposure.

Account strategy

Each account creates a different opportunity:

• An RRSP moves taxable income from high-income years into lower-income years.
• A Spousal RRSP can move taxable income between years and between spouses.
• A TFSA removes future tax on investment growth.
• An RESP combines tax-deferred growth with government grants and withdrawals taxed in the student’s hands.
• The Smith Manoeuvre can make interest on investment debt tax-deductible.
• A non-registered account provides flexibility after the registered accounts are funded, but without a tax shelter.

I don’t think there is one correct order for everyone. My order is:

1. Max the RRSP, splitting contributions between my RRSP and the Spousal RRSP.
2. Max the TFSA.
3. Max the RESP.
4. Run any additional investing through the Smith Manoeuvre.

I prioritize maxing the first two every year. Whether I fully fund the RESP and make additional investments through the Smith Manoeuvre depends on how much capacity I have left.

RRSP & Spousal RRSP

The RRSP is a tax-deferral account. I contribute while my marginal tax rate is high and expect to withdraw in years where it is lower. If the withdrawal happens in a lower tax bracket, the strategy worked.

The Spousal RRSP adds another option by allowing future withdrawals to be taxed in a spouse’s hands, subject to the attribution rules. This can be useful for retirement income splitting or when a household can plan ahead for years where one spouse will have little or no income.

I cover both accounts in RRSP & Spousal RRSP.

TFSA

Compared with the RRSP, the TFSA is simple. Contributions are made with after-tax dollars, but the investment growth and withdrawals are tax-free. I max it each year in January.

Withdrawals also create an equal amount of new contribution room in the following calendar year, which makes the account more flexible than an RRSP.

RESP

I have kids and expect that at least some of them will pursue higher education, so the RESP is an account I prioritize. The government grant provides a 20% match on eligible contributions, while the grants and investment growth are eventually taxed in the student’s hands.

There are some interesting choices around front-loading contributions and some important withdrawal rules. I cover those in RESP Strategy.

Smith Manoeuvre

The Smith Manoeuvre uses a readvanceable mortgage to gradually replace non-deductible mortgage debt with investment debt whose interest may be tax-deductible. It fits my preference for leverage over concentration, but it adds meaningful risk and requires careful tracking.

I explain the mechanics and how I measure the leverage in The Smith Manoeuvre.

Non-registered

The investments purchased through the Smith Manoeuvre live in a dedicated non-registered account. I keep that account separate from any discretionary investing so the borrowed money remains easy to trace.

I also use a separate non-registered account for discretionary investing. This is where I’m a little looser with my investment philosophy. I may dabble with concentration strategies here, where a loss won’t affect my long-term plan. I’m still human and subject to FOMO when I see posts about call options generating hundreds of thousands of dollars. The posts about losing hundreds of thousands are enough to keep me from doing anything too risky.

Putting it together

These accounts look separate, but the decisions affect each other. RRSP contributions affect future taxable income. Spousal RRSP contributions affect whose income it becomes. RESP and TFSA contributions compete for cash flow. The Smith Manoeuvre creates non-registered investments and debt that the household needs to carry through market downturns.

Thinking about them as one strategy, rather than a collection of unrelated accounts, is the main idea I want to capture here.