Accounts and Taxes: A Beginner Guide for Canada and the U.S.
Beginner Taxes Canada US Asset Allocation 2026-02-13
Where you invest can matter almost as much as what you invest in. If you understand account types and tax rules, you can legally keep more of your return without taking extra risk.
TL;DR
- Canada: Use TFSA for flexibility, RRSP for tax deferral, FHSA for first-home goals, then taxable accounts.
- U.S.: Use 401(k)/IRA for tax advantages, and taxable brokerage strategically.
- Interest is usually taxed least favorably; capital gains and eligible/qualified dividends are often more efficient.
- Asset location matters: tax-inefficient assets in sheltered accounts, tax-efficient assets in taxable or flexible accounts.
- Cross-border dividends can face withholding tax depending on account type.
Canada: Account Basics
TFSA
- Contributions are after-tax.
- Growth and withdrawals are tax-free.
- Withdrawn room returns in the following calendar year.
- Good fit: long-term growth assets and flexible access.
RRSP
- Contributions reduce taxable income now.
- Growth is tax-deferred.
- Withdrawals are taxed as income later.
- Good fit: higher income years today, lower expected tax rate in retirement.
FHSA
- Contributions are tax-deductible.
- Eligible first-home withdrawals are tax-free.
- Intended for first-time home buyers with a limited account life.
Taxable Account
- No contribution limit.
- Tax applies to dividends, interest, and realized gains.
- Most flexible, but often least tax-efficient.
Canada: How Income Is Taxed
Interest
Fully taxed at your marginal rate. This is usually the least efficient category.
Example: if your marginal rate is 40%, then $1,000 interest leaves about $600 after tax.
Capital Gains
Only part of the gain is included in taxable income, making gains often more efficient than interest for many investors.
Canadian Eligible Dividends
Eligible dividends receive favorable treatment via dividend tax rules compared with interest income.
U.S. Dividends for Canadian Investors
- Can face U.S. withholding tax.
- Treatment differs by account and security structure.
- Many investors use RRSP placement for U.S. equity exposure, while understanding tradeoffs by account type.
Asset Location (What to Hold Where)
Simple idea: place tax-inefficient income in sheltered accounts when possible.
| Asset Type | Common Placement Idea |
|---|---|
| Bonds / fixed income | RRSP or other tax-sheltered accounts |
| Canadian equities | TFSA or taxable |
| U.S. equities | Often RRSP placement is considered for withholding efficiency |
| International equities | TFSA or RRSP depending on fund structure and tax context |
Currency Risk
With U.S. or global ETFs, your return can reflect both market movement and exchange-rate movement. This adds volatility, but also supports global diversification.
United States: Similar Concepts
Main Account Types
- 401(k): Employer plan, often traditional or Roth options.
- IRA (Traditional/Roth): Individual retirement accounts with different tax timing.
- Taxable brokerage: Flexible account with tax on dividends and realized gains.
Tax Treatment Basics
- Interest is taxed as ordinary income.
- Qualified dividends and long-term gains often receive lower rates than ordinary income.
- Short-term gains are commonly taxed at ordinary rates.
U.S. Asset Location Ideas
| Asset Type | Common Placement Idea |
|---|---|
| Bonds / REITs | Tax-deferred accounts |
| Broad equity ETFs | Taxable or Roth depending on plan |
| High-growth equities | Often considered for Roth space when available |
Common Mistakes
- Holding bond-heavy allocations in taxable accounts without checking tax drag.
- Ignoring cross-border withholding considerations.
- Over-contributing to one account type without tax-bracket planning.
- Forgetting realized gains impact when rebalancing.
- Taking currency risk without understanding the effect.
Try It on SimpleReturns
Even small annual tax drag differences can compound into large long-term gaps.
FAQ
Is TFSA always better than RRSP?
Not always. It depends on your current tax bracket and expected future withdrawal bracket.
Should I avoid foreign ETFs in TFSA?
Not necessarily. Just understand withholding and account-structure tradeoffs before deciding.
Are taxable accounts bad?
No. They are flexible and useful, especially after registered room is used.
Does currency risk matter long-term?
Yes. It can add volatility, while global diversification can still improve portfolio resilience.
Final Thoughts
Taxes are one of the biggest controllable factors in investing. You cannot control markets, but you can control account choice, asset location, and tax-trigger decisions.
Build the structure once, then let it compound over decades.