There is a difference between asset allocation — how much you hold in stocks versus bonds — and asset location, which is which account each holding sits in. The first gets all the attention. The second is where a quiet, permanent tax advantage hides.
If you hold only one account, this does not apply to you. If you hold a TFSA and an RRSP, or either alongside a non-registered account, it does.
The principle
Different types of investment income are taxed differently in Canada, and each registered account shelters income differently. Match them badly and you pay tax you did not need to. Match them well and the same portfolio produces a better after-tax result — without changing a single holding.
The US dividend trap in a TFSA
This is the one that surprises people who have otherwise done everything right.
The Canada–US tax treaty exempts US dividend withholding tax inside an RRSP, because the RRSP is recognised as a retirement account. The TFSA is not recognised, so US dividends paid into a TFSA generally face 15% withholding at source.
In a taxable account you could claim a foreign tax credit to recover that. In a TFSA you cannot, because there is no Canadian tax to claim it against. The money is simply gone.
So a US dividend-paying holding generally does better in an RRSP than in a TFSA, all else equal.
A working order of preference
What follows is a framework. The right answer for you depends on your marginal rate, your account balances, your timeline and what you actually own. Treat it as a starting point for a conversation, not instructions.
RRSP — suits US dividend payers, because of the treaty exemption, and interest-bearing investments like bonds and GICs, which are taxed at full rates in a taxable account and so benefit most from shelter.
TFSA — suits your highest-growth expected holdings. All that growth comes out entirely tax-free, and critically, TFSA withdrawals do not count toward the OAS clawback in retirement. Sheltering the biggest expected gain here is where the shelter is worth most.
Non-registered — suits Canadian dividends, which attract the dividend tax credit, and holdings you expect to generate capital gains, where only half is taxable and you control the timing of realisation.
Why the TFSA point matters more than it looks
The OAS clawback reduces your Old Age Security by 15 cents for every dollar of net income above a threshold. RRIF withdrawals count in full toward that. TFSA withdrawals do not count at all.
So a retiree drawing $30,000 a year from a TFSA has $30,000 of spending power and zero effect on their OAS. The same $30,000 from a RRIF counts entirely. Over a long retirement that difference compounds into real money — which is why building TFSA balance during your working years, and sheltering your highest-growth holdings there, has consequences decades later.
Three practical cautions
Do not let tax tail wag investment dog. Asset location optimises the tax on a portfolio you already believe in. It is not a reason to hold something unsuitable. Get the allocation right first.
Rebalancing gets more complicated. If your bonds live in one account and your equities in another, rebalancing across accounts takes more thought. For smaller portfolios the added complexity may outweigh the gain — a single balanced fund held everywhere is a perfectly reasonable choice.
Foreign withholding rules have layers. The treatment can differ depending on whether you hold a US-listed fund directly or a Canadian-listed fund that holds US assets. If a meaningful part of your portfolio is US-exposed, this is worth checking properly rather than assuming.
Worth reviewing once
This is not something to fiddle with quarterly. It is worth setting up thoughtfully once, and revisiting when your accounts change materially — a large RRSP contribution, an inheritance, or approaching retirement.
If you hold several accounts and have never looked at how your holdings are distributed across them, that review is usually worth the half hour.