How can Paul and his wife save tax on their $2-million portfolio?

If your goal is reducing your annual tax bill, you may benefit from a strategy that uses asset location to guide asset allocation, experts say. Photo by Getty Images/iStockphoto

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Q. My wife and I are recently retired and have a portfolio of about $2 million in dividend paying stocks, pipelines, utilities and some exchange-traded funds (ETFs) tracking Canadian and U.S. high dividends stocks as well as S&P 500 and world equity shares. We also have $900,000 in guaranteed investment certificates (GICs) and high-interest savings accounts (HISAs). We are also fortunate to have defined benefit pension plans and annuities producing about $100,000 in income per year. My question is, what should I be doing with our investments at this point? We won’t likely ever spend all this money. We have two very successful sons and five grandchildren. We’d like to pay less tax but who wouldn’t? Any thoughts would be helpful. —Thanks, Paul

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FP Answers: If your goal is reducing your annual tax bill, Paul, you may benefit from a strategy that uses asset location to guide asset allocation. Asset location refers to holding investments in different types of accounts based on how they are taxed to shelter certain types of income.

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In your case, however, you did not mention holding registered retirement savings plan (RRSP) assets, which is not uncommon for retirees with large defined benefit pension plans. Without registered accounts, traditional asset location strategies become somewhat less relevant if most of your investments are in taxable accounts. Generally speaking, asset location tends to favour the following structure:

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Based on these dynamics, your GIC holdings are likely the least tax-efficient part of your portfolio. That said, this is somewhat by design. Generally speaking, the more certainty an investment provides, in terms of income or capital, the more likely its income will be fully taxable. Pension income is a good example. While pension income is less tax efficient than Canadian dividend income, the trade-off is the security and predictability that comes from decades of contributions and deferred tax savings during your working years.

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With approximately $2 million invested in global stocks and $900,000 in cash equivalents, your overall portfolio allocation is roughly 70 per cent stocks and 30 per cent cash or cash equivalents. Portfolios in this range are typically considered balanced growth or growth-oriented portfolios.

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Because we should not let the tax tail wag the dog, it may not make sense to shift GICs into stocks solely for tax advantages if taking on additional risk is unnecessary. In fact, holding a meaningful cash allocation has become increasingly popular in recent years. Many investors have preferred cash over traditional bonds, particularly after global bond markets experienced double-digit declines in 2022. HISAs and GICs also have interest rates that are comparable to bond yields currently.