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I have recently opened up a new taxable investment account with the intent of growing my money set aside for short to medium term financial goals (i.e., 2-5 years with no fixed deadline).

Unlike my retirement savings (maxed out RRSP and TFSA), I do plan to dial back my asset allocation to be less aggressive for this taxable account; I am leaning toward a balanced to semi-conservative allocation (i.e., 60/40 split of stocks/bonds or perhaps slightly conservative at 40/60 or even 30/70). The problem I am facing is that my research is showing that bonds are rather tax inefficient and holding Canadian dividend stocks is often recommended for a taxable account due to the dividend tax credit... The problem with most advice I have read, they always assumes you can place the fixed income portion in your TFSA or RRSP to balance your overall portfolio. As such, I am not sure how to best achieve a balanced portfolio within a single taxable account in a somewhat tax efficient manner.

In summary:

  • I intend to consider this taxable account as a self-contained portfolio and not a part of my overall retirement savings (i.e., I do not want to consider overall portfolio allocation).
  • Although I am planning to use the money for short to medium term financial goals, I have flexibility to wait a few years if the markets are unhappy.
  • I have a cash emergency fund in a HISA so don't want to hold cash in this account..

NOTE: Money may come out early only if the $@*# really hits the fan... but I accept that risk.

My question is, am I over thinking the tax aspect of this account and not worry about it? Are their certain ETFs that are better suited for this type of account based on the requirements mentioned?

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You could use HBB and other similar funds that exchange distributions for capital gains. There's HXT and HXS which is Canada and US equity markets. The swap fee + mer is a little more than some funds except for HXT which is very cheap.

There's a risk for long term holders that this may eventually get banned and you're forced to sell with a gain at the wrong time, but this won't matter much if you're planning on selling in a few years. You have to pay the capital gains tax eventually.

Note, the tax on distributions is really a long term drag on performance and won't make a big difference in the short term.

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