A financial advisor is discussing tax-efficient investing strategies with a new client, Mr. Lee, who is in a high tax bracket and has a long-term investment horizon. Which of the following recommendations best aligns with the principles of tax-efficient investing for Mr. Lee's non-registered portfolio, assuming he has already maximized his registered accounts?

Question: A financial advisor is discussing tax-efficient investing strategies with a new client, Mr. Lee, who is in a high tax bracket and has a long-term investment horizon. Which of the following recommendations best aligns with the principles of tax-efficient investing for Mr. Lee's non-registered portfolio, assuming he has already maximized his registered accounts?

Answer options:

• Primarily investing in mutual funds that distribute a high proportion of interest income, as it is predictable and stable. ✅ Focusing on mutual funds that generate eligible dividends and capital gains, as these are taxed more favourably than interest income.
• Minimizing all investment income in non-registered accounts by holding only GICs to avoid income volatility.
• Investing heavily in foreign dividend-paying mutual funds to avoid Canadian withholding taxes at the source.

Correct answer: Focusing on mutual funds that generate eligible dividends and capital gains, as these are taxed more favourably than interest income.

Explanation: For high-income earners in non-registered accounts, eligible dividends benefit from the dividend tax credit, and capital gains are only 50% taxable. This makes them generally more tax-efficient than fully taxed interest income. Maximizing these types of income is a key strategy for tax-efficient investing in non-registered portfolios.