XEQT Tax Implications: Complete Guide for Canadian Investors

Understanding the tax implications of XEQT is crucial for maximizing your after-tax returns as a Canadian investor.

While XEQT is an excellent investment, the taxes you pay (or save) can significantly impact your long-term wealth accumulation. The good news? With proper account allocation, you can minimize taxes and keep more of your returns.

This guide breaks down everything you need to know about XEQT’s tax treatment in Canada.

Quick Tax Summary: XEQT in Different Accounts

Verdict: RRSP is optimal for XEQT, followed closely by TFSA. Use non-registered accounts as a last resort.

XEQT’s Income Composition

Understanding what income XEQT generates helps you plan for taxes:

Distribution Breakdown (Approximate):

• Canadian eligible dividends: ~25%
• Foreign dividends: ~70%
• Capital gains/ROC: ~5%

Total annual distribution yield: ~2.0-2.2%

This composition affects how you’re taxed, especially in non-registered accounts.

XEQT in a TFSA: Tax Implications

Advantages:

✅ Zero tax on capital gains - All growth is tax-free ✅ Zero tax on dividends - Keep 100% of distributions ✅ No reporting required - Completely tax-free ✅ Withdrawals are tax-free - Access money anytime

Disadvantages:

❌ 15% US withholding tax - Cannot be recovered ❌ Limited contribution room - $7,000/year (2024) ❌ Withholding tax drag - Reduces effective return by ~0.3%

Example: $50,000 XEQT in TFSA

Annual dividend: $1,000 US withholding tax (15% on ~45% US portion): ~$68 Net dividend: $932 Capital gains tax: $0

Effective tax drag: ~0.14% annually (from withholding tax only)

Bottom Line:

TFSA is excellent for XEQT despite the unrecoverable withholding tax. The tax-free growth far outweighs the small withholding tax cost.

XEQT in an RRSP: Tax Implications

Advantages:

✅ Zero US withholding tax - Canada-US tax treaty exemption ✅ Tax-deferred growth - Pay no tax until withdrawal ✅ Immediate tax deduction - Reduce current year income ✅ Higher contribution room - 18% of income (max $31,560 in 2024)

Disadvantages:

❌ Taxed as income on withdrawal - Not capital gains ❌ Locked until retirement - Early withdrawals have penalties ❌ Reduces TFSA strategy - Might prioritize RRSP over TFSA

Example: $50,000 XEQT in RRSP

Annual dividend: $1,000 US withholding tax: $0 (exempt) Tax on dividends: $0 (tax-deferred) Capital gains tax: $0 (tax-deferred)

Effective tax drag: 0% while invested

Bottom Line:

RRSP is the most tax-efficient account for XEQT. Zero foreign withholding tax plus tax-deferred growth make it the optimal choice.

XEQT in Non-Registered Account: Tax Implications

Tax Treatment:

Canadian Eligible Dividends:

• Receive dividend tax credit
• Taxed favorably (~20-30% effective rate depending on province)

Foreign Dividends:

• Taxed as regular income
• 15% withholding tax applied (can claim foreign tax credit)
• Highest marginal tax rate applies

Capital Gains (when selling):

• 50% inclusion rate
• Taxed at marginal rate
• More tax-efficient than dividends

Example: $50,000 XEQT in Non-Registered (Ontario, 50% Tax Bracket)

Annual dividend: $1,000

• Canadian eligible dividends: $250
• Foreign dividends: $700
• Capital gains/ROC: $50

Taxes Owed:

• Canadian dividends: ~$60 (after dividend tax credit)
• Foreign dividends: ~$315 (after foreign tax credit)
• Total annual tax: ~$375

Plus: Tax on capital gains when you eventually sell

Effective tax drag: ~0.75% annually + capital gains tax at sale

Bottom Line:

Non-registered accounts are the least tax-efficient for XEQT. Use only after maxing TFSA and RRSP.

Foreign Withholding Tax: The XEQT Reality

What is Foreign Withholding Tax?

When US companies pay dividends to Canadian investors, the IRS withholds 15% tax before you receive the payment.

XEQT’s Exposure:

• ~45% US equity allocation
• ~2% dividend yield
• 15% withholding tax on US portion

Annual withholding tax drag: ~0.14% of portfolio value

Can You Recover This Tax?

TFSA: ❌ No - Tax is permanently lost RRSP: ✅ Exempt - Canada-US treaty prevents withholding Non-Registered: ⚠️ Partial - Can claim foreign tax credit (but limited)

Example: $100,000 XEQT Portfolio

TFSA: Lose ~$140/year to withholding tax RRSP: Lose $0/year to withholding tax Non-Registered: Lose ~$70/year (after partial credit)

Winner: RRSP saves $140/year compared to TFSA

Capital Gains Tax on XEQT

When Do You Pay Capital Gains Tax?

Only when you sell XEQT for a profit in a non-registered account.

TFSA/RRSP: No capital gains tax

How Much is Capital Gains Tax?

50% inclusion rate × Your marginal tax rate

Example (Ontario, 50% Tax Bracket):

• Buy XEQT: $50,000
• Sell XEQT: $100,000
• Capital gain: $50,000
• Taxable amount: $25,000 (50%)
• Tax owed: $12,500 (50% of taxable amount)

Deferring Capital Gains:

The longer you hold XEQT in a non-registered account, the longer you defer capital gains tax. This tax-deferral is valuable.

Strategy: Buy and hold XEQT for decades to maximize tax deferral.

Best Account Strategy for XEQT

Priority 1: Max Your RRSP

Why first?

• Zero foreign withholding tax
• Immediate tax deduction
• Tax-deferred growth

Recommendation: Hold XEQT in RRSP before other accounts

Priority 2: Max Your TFSA

Why second?

• Tax-free growth and withdrawals
• Flexibility to access funds
• Small withholding tax drag is acceptable

Recommendation: Hold XEQT in TFSA after maxing RRSP

Priority 3: Non-Registered (if needed)

Why last?

• Higher tax drag
• Less tax-efficient
• Capital gains tax on sale

Recommendation: Only use for XEQT if RRSP and TFSA are maxed

Advanced Tax Strategies

1. Tax Loss Harvesting

If XEQT drops in a non-registered account:

• Sell at a loss to realize capital loss
• Wait 30 days (superficial loss rule)
• Buy back XEQT or similar ETF (VEQT)
• Use capital loss to offset other gains

2. Asset Location Optimization

If holding multiple investments:

• RRSP: XEQT (avoid US withholding tax)
• TFSA: Growth stocks or other equities
• Non-Registered: Canadian dividend stocks (dividend tax credit)

3. Dividend Reinvestment (DRIP)

In non-registered accounts:

• Enable DRIP to avoid cash distributions
• Still pay tax on dividends (no cash to pay tax with)
• May need to sell shares to cover tax bill

Recommendation: DRIP works better in TFSA/RRSP

Common Tax Questions

“Do I need to report XEQT on my tax return?”

TFSA/RRSP: No reporting required (unless contributing/withdrawing) Non-Registered: Yes - Report dividends and capital gains/losses

“Can I claim the dividend tax credit on XEQT?”

Only on the Canadian portion of dividends (~25%). The foreign portion (75%) is taxed as regular income.

“What about return of capital (ROC)?”

XEQT rarely distributes ROC, but when it does:

• Not taxed immediately
• Reduces your adjusted cost base (ACB)
• Increases capital gains when you sell

“Should I hold XEQT or VEQT for better tax treatment?”

Both are nearly identical for tax purposes. XEQT (iShares) vs VEQT (Vanguard) have similar structures and tax characteristics.

Tax Efficiency Comparison

Annual Tax Drag by Account (on $100,000)

RRSP:

• Foreign withholding tax: $0
• Tax on distributions: $0
• Total drag: 0%

TFSA:

• Foreign withholding tax: ~$140
• Tax on distributions: $0
• Total drag: 0.14%

Non-Registered (50% bracket):

• Foreign withholding tax: ~$70
• Tax on distributions: ~$750
• Total drag: 0.82%

Difference over 30 years: The 0.82% drag in non-registered accounts costs tens of thousands in lost returns compared to RRSP.

The Bottom Line

XEQT is highly tax-efficient when held in the right account:

1. RRSP = Best (0% tax drag, zero withholding tax)
2. TFSA = Excellent (0.14% tax drag, tax-free growth)
3. Non-Registered = Acceptable (0.82% tax drag, still better than many alternatives)

Action Steps:

1. Max your RRSP first - hold XEQT here
2. Max your TFSA second - hold XEQT here
3. Use non-registered only after maxing tax-advantaged accounts
4. Hold XEQT long-term to minimize capital gains tax

Remember: Tax efficiency matters, but it shouldn’t stop you from investing. An XEQT investment in a non-registered account is still better than not investing at all.

Ready to Start Investing Tax-Efficiently?

Open a TFSA or RRSP on Wealthsimple Trade and start building your tax-efficient XEQT portfolio today. Every year you delay costs you valuable tax-sheltered growth.

Disclosure: This post contains referral links. I may receive compensation if you sign up. This article is for informational purposes only and should not be considered tax advice. Consult with a qualified tax professional for your specific situation.