A Canadian client holds a non-registered investment portfolio consisting of Canadian dividend-paying equities and US growth equities. To optimize their tax position, which of the following is the most advisable strategy for allocating these investments between a Tax-Free Savings Account (TFSA) and a non-registered account?

Question: A Canadian client holds a non-registered investment portfolio consisting of Canadian dividend-paying equities and US growth equities. To optimize their tax position, which of the following is the most advisable strategy for allocating these investments between a Tax-Free Savings Account (TFSA) and a non-registered account?

Answer options:

• Hold all Canadian dividend-paying equities in the non-registered account to benefit from the dividend tax credit.
• Hold all US growth equities in the non-registered account to avoid foreign withholding tax on dividends.
• Prioritize holding US growth equities within the TFSA to avoid Canadian taxes on capital gains and US withholding tax on dividends (if applicable) where the withholding tax cannot be recovered through a foreign tax credit. ✅ Hold all Canadian dividend-paying equities in the TFSA to fully avoid Canadian taxes on qualified dividends.

Correct answer: Hold all Canadian dividend-paying equities in the TFSA to fully avoid Canadian taxes on qualified dividends.

Explanation: While Canadian dividend-paying equities benefit from the dividend tax credit in a non-registered account, holding them in a TFSA avoids Canadian tax entirely on both dividends and capital gains, which is a greater advantage for most investors. Furthermore, US dividends in a TFSA are subject to a 15% withholding tax, which cannot be recovered, making TFSAs less ideal for US dividend stocks than RRSPs.