Asset Location: What to Hold in Your TFSA, RRSP, and Non-Registered Accounts
If you have money in a TFSA, an RRSP, and a non-registered account, you have to decide what to hold in each. That is asset location: putting the right investments in the right accounts to minimize tax over time. Many Canadian investors overlook it.
Asset location is not the same as asset allocation (how much in stocks vs bonds). Asset allocation sets your risk. Asset location decides where each piece lives to minimize tax drag. The same portfolio (say, 80% equities and 20% bonds) can cost thousands more or less in tax depending on which account holds what.
The Simple Rule
Put the most tax-inefficient investments in the most tax-sheltered accounts.
The rest of this guide is about applying that rule correctly.
How Each Account Is Taxed
First, how each account is taxed:
TFSA (Tax-Free Savings Account)
The Tax-Free Savings Account is administered by the CRA. Key tax rules:
- Contributions are after-tax (no deduction)
- All growth (interest, dividends, capital gains) is completely tax-free
- Withdrawals are tax-free and do not affect income-tested benefits (OAS, GIS)
- No mandatory withdrawals at any age
Best for: Investments you expect to grow the most, since all growth is permanently tax-free.
RRSP (Registered Retirement Savings Plan)
The Registered Retirement Savings Plan rules are set by the CRA. Key tax treatment:
- Contributions are tax-deductible (reduces current income)
- All growth is tax-deferred — no annual tax on interest, dividends, or gains
- All withdrawals are taxed as ordinary income regardless of what generated the growth
- Must convert to RRIF by age 71 with mandatory minimums
Inside an RRSP, Canadian dividends lose their dividend tax credit advantage and capital gains lose their 50% inclusion rate advantage. Everything comes out as ordinary income, so the RRSP turns all investment returns into the least favorable tax category.
Non-Registered (Taxable)
- No contribution limits, no deduction
- Interest is taxed annually at your full marginal rate
- Canadian dividends receive the dividend tax credit, making them taxed at roughly 15–30% effective rate depending on your province and bracket
- Capital gains are taxed at 50% inclusion (only half is taxable), and only when you sell
- Foreign dividends are taxed at your full marginal rate with no credit (unless you claim the foreign tax credit for withholding)
In a non-registered account, different investments face very different tax rates. That difference is what makes asset location worth doing.
The Priority Framework
In order of importance:
1. RRSP: Hold bonds and fixed income
Bonds and GICs pay interest, which is taxed at your full marginal rate in a non-registered account. Inside an RRSP, this tax is deferred entirely. Since the RRSP turns everything into ordinary income on withdrawal anyway, you lose nothing by holding interest-bearing investments here. They would have been taxed as income regardless.
Hold in RRSP:
- Bond ETFs (e.g., ZAG, XBB, VAB)
- GICs
- High-interest savings ETFs (e.g., CASH, PSA)
- Real estate investment trusts (REITs) that distribute mostly interest income
- US-listed US equity ETFs (e.g., VTI), whose US dividends are exempt from withholding tax in an RRSP (see below). The treaty exemption covers US dividends only, so it doesn’t help international (non-US) funds
2. TFSA: Hold your highest-growth equities
The TFSA shelters all growth permanently. Put the investments with the highest expected long-term returns here, because every dollar of growth inside a TFSA is a dollar you never pay tax on.
Hold in TFSA:
- Canadian equity index ETFs (e.g., XIU, VCN, XIC)
- US equity index ETFs (e.g., VFV, XUU, ZSP)
- Global equity ETFs
- Growth-oriented stocks or ETFs
- Small-cap or emerging market funds (higher expected volatility = higher value of tax shelter)
3. Non-registered: Hold Canadian dividend stocks and tax-efficient equity ETFs
Canadian dividends receive preferential tax treatment via the dividend tax credit. This benefit only exists in a non-registered account. Inside an RRSP or TFSA the credit is irrelevant (the RRSP converts everything to ordinary income, and the TFSA is already tax-free).
Capital gains are also tax-efficient in non-registered accounts because only 50% is included and they are only taxed when you sell, which gives you control over timing.
Hold in non-registered:
- Canadian dividend ETFs (e.g., XDV, VDY, CDZ)
- Individual Canadian dividend stocks (banks, utilities, pipelines)
- Broad Canadian equity ETFs
- Tax-managed or low-turnover equity index funds
- Stocks you plan to hold long-term (defer capital gains)
Avoid in non-registered:
- Bond ETFs (interest taxed at full rate annually)
- REITs (distributions mostly taxed as income)
- High-turnover actively managed funds (frequent taxable distributions)
- Foreign dividend payers without tax treaty benefits
The Foreign Withholding Tax Wrinkle
US-listed ETFs and US stocks pay dividends subject to a 15% US withholding tax (under the Canada-US tax treaty). How this plays out depends on the account:
| Account | US withholding tax | Can you recover it? |
|---|---|---|
| RRSP | Exempt — no withholding under the treaty | N/A |
| TFSA | 15% withheld, not recoverable | No |
| Non-registered | 15% withheld, recoverable via foreign tax credit | Yes |
This means holding US-listed ETFs (like VTI, VOO, ITOT) directly in your RRSP avoids the withholding tax entirely. In a TFSA, you permanently lose 15% of US dividends. For someone with a large US equity allocation this can matter: about $400/year on a $200,000 US equity position at a 1.3% dividend yield.
Practical implication: If you hold a significant US equity position, consider holding the US-listed version (e.g., VTI instead of VUN) in your RRSP to avoid withholding. In your TFSA, you can hold the Canadian-listed version and accept the small drag, or prioritize Canadian equities there instead. A Canadian-listed fund that holds US-listed ETFs (like VFV, which holds VOO) loses the 15% inside the fund in any account, including the RRSP.
Putting It All Together
Here is a complete example for a Canadian investor with $200,000 across three accounts:
Target allocation: 60% equities (30% Canadian, 20% US, 10% international), 40% bonds
| Account | Balance | Holdings | Why |
|---|---|---|---|
| RRSP | $80,000 | $80,000 bonds (ZAG) | Shields interest from annual tax; bonds would be taxed at full rate in non-reg |
| TFSA | $70,000 | $40,000 US equity (VFV) + $20,000 international (XEF) + $10,000 Canadian equity (XIC) | Highest-growth assets sheltered permanently; the RRSP is full of bonds, so the US equity accepts the small withholding drag here |
| Non-reg | $50,000 | $50,000 Canadian dividend equity (VDY) | Canadian dividends get the dividend tax credit; capital gains deferred until sale |
This is the same 60/40 portfolio as holding everything in one account, with much better tax treatment.
When It Doesn’t Matter Much
Asset location matters most when:
- You have large balances across multiple account types
- You hold a mix of fixed income and equities
- Your marginal rate is high (30%+ combined)
- Your time horizon is long (10+ years for compounding to magnify the difference)
It matters less when:
- Your balances are small (under $50,000 total)
- You hold 100% equities with no fixed income
- You’re in a low tax bracket
- You’re close to retirement and the compounding period is short
For most Canadians with $100,000+ across accounts and a 15+ year horizon, proper asset location can add $10,000–$50,000+ in after-tax wealth over a lifetime. It costs nothing and adds no risk.
Common Mistakes
Holding bonds in a TFSA. This wastes the TFSA’s best feature, permanent tax-free growth. Bonds have lower expected returns than equities. Put the high-growth assets in the TFSA and the bonds in the RRSP.
Holding Canadian dividend stocks in an RRSP. The dividend tax credit is only available in non-registered accounts. Inside an RRSP, those dividends are taxed as ordinary income when withdrawn, so the preferential treatment is lost.
Ignoring the US withholding tax. Holding US-listed ETFs in a TFSA costs you 15% of dividends permanently. For large US equity positions, this adds up. Use the RRSP for US-listed ETFs when possible.
Over-optimizing at the expense of simplicity. If tracking different holdings across three accounts makes you delay investing or make errors, a simple all-in-one ETF in each account beats a perfectly located portfolio you never build. Asset location is an optimization; investing comes first.
How cinder.fi Helps
cinder.fi models your TFSA, RRSP, and non-registered accounts with full tax treatment, including the dividend tax credit, capital gains inclusion rate, and RRIF mandatory withdrawals. The projection shows how different account compositions affect your after-tax retirement income year by year across all 13 provinces and territories. You can compare scenarios to see the long-term effect of asset location on your retirement plan.
Start with your situation to model your asset location strategy alongside your full retirement projection.