Ms. Susan Lee, a 60-year-old HNW client in Alberta, has a non-registered investment portfolio of $2,000,000 and an RRSP of $1,000,000. Her portfolio target allocation is 60% equities (Canadian and US) and 40% fixed income. She expects 7% annual returns from equities (50% dividend income, 50% capital appreciation) and 3% from fixed income (interest income). Her marginal tax rate on interest and regular income is 48%, on eligible dividends is effectively 30%, and on capital gains is 24%. Considering optimal asset location, how should Susan strategically allocate her assets to maximize after-tax returns, assuming Canadian equities and fixed income are tax-inefficient and US equities are moderately tax-efficient in registered accounts?

Question: Ms. Susan Lee, a 60-year-old HNW client in Alberta, has a non-registered investment portfolio of $2,000,000 and an RRSP of $1,000,000. Her portfolio target allocation is 60% equities (Canadian and US) and 40% fixed income. She expects 7% annual returns from equities (50% dividend income, 50% capital appreciation) and 3% from fixed income (interest income). Her marginal tax rate on interest and regular income is 48%, on eligible dividends is effectively 30%, and on capital gains is 24%. Considering optimal asset location, how should Susan strategically allocate her assets to maximize after-tax returns, assuming Canadian equities and fixed income are tax-inefficient and US equities are moderately tax-efficient in registered accounts?

Answer options:

• Allocate fixed income to the RRSP, Canadian equities to the non-registered account, and US equities to the RRSP.
• Allocate all equities to the RRSP and all fixed income to the non-registered account.
• Allocate fixed income to the RRSP, and both Canadian and US equities to the non-registered account. ✅ Allocate fixed income and US equities to the RRSP, and Canadian equities to the non-registered account.

Correct answer: Allocate fixed income and US equities to the RRSP, and Canadian equities to the non-registered account.

Explanation: Fixed income (interest income) is most tax-inefficient and benefits most from being held in a tax-sheltered account like an RRSP. US equities incur withholding tax in non-registered accounts but are exempt in RRSPs due to treaty benefits, making them ideal for registered accounts. Canadian equities (eligible dividends and capital gains) are relatively tax-efficient in non-registered accounts compared to interest income and US dividends.