Capital Gains Tax and XEQT: What Canadian Investors Need to Know in 2026

I still remember the mild panic I felt the first spring I sold a chunk of my XEQT holdings. I had bought in over a couple of years, the market had cooperated, and I decided to take some profits in my non-registered account to fund a down payment. A few months later, a T5008 slip showed up. I stared at the numbers, opened a spreadsheet, and realized I had absolutely no idea how to figure out what I actually owed. My adjusted cost base was a mess, I had reinvested distributions, and I had made purchases at five different prices. It took me an embarrassing amount of time – and one panicked call to a CPA friend – to sort it all out.

If you hold XEQT (iShares Core Equity ETF Portfolio) in a non-registered account, capital gains tax is something you need to understand before you sell, not after. Even if you hold XEQT entirely in a TFSA or RRSP, understanding capital gains will help you make smarter decisions about account structure.

This guide covers how capital gains tax works in Canada, the current inclusion rate, how XEQT generates capital gains, a worked example of calculating what you owe, and seven strategies to keep your tax bill as low as legally possible.

1. How Capital Gains Tax Works in Canada

Let’s start with the basics. A capital gain occurs when you sell (or “dispose of”) an investment for more than you paid for it. In Canada, capital gains are not taxed at a flat rate the way they are in some countries. Instead, a portion of your gain is added to your taxable income, and you pay tax on that portion at your marginal tax rate.

Here is the key formula:

Capital Gain = Proceeds of Disposition - Adjusted Cost Base (ACB) - Selling Expenses

And the taxable portion:

Taxable Capital Gain = Capital Gain x Inclusion Rate

A few terms to understand:

• Proceeds of Disposition: The amount you received when you sold (or were deemed to have sold) your XEQT units.
• Adjusted Cost Base (ACB): Your average cost per share, adjusted for all purchases, reinvested distributions, and return of capital. More on this in Section 6.
• Selling Expenses: Any commissions or fees you paid to sell. On platforms like Wealthsimple, this is typically zero for Canadian-listed ETFs.
• Inclusion Rate: The percentage of the capital gain that gets added to your taxable income.

The part that trips up most beginners is that you do not pay a fixed “capital gains tax rate.” You pay your regular income tax rate, but only on the included portion of the gain. If you are in a 30% marginal tax bracket and the inclusion rate is 50%, your effective tax rate on a capital gain is 15%. That is one of the reasons capital gains are the most tax-efficient form of investment income in Canada.

2. The Capital Gains Inclusion Rate in 2026

For most of Canadian tax history, the capital gains inclusion rate for individuals has been 50%. This means only half of your capital gain is added to your taxable income.

The current situation is nuanced, and here is what you need to know:

In the 2024 federal budget, the government proposed increasing the inclusion rate from 50% to 66.67% (two-thirds) for the portion of annual capital gains exceeding $250,000 for individuals. For corporations and trusts, the 66.67% rate was proposed to apply to all capital gains. This change was originally scheduled to take effect on June 25, 2024.

However, this measure had a complicated legislative journey. It faced significant political debate, was included in various legislative proposals, and its status shifted multiple times. Because tax law can change rapidly, and the status of this specific provision has been subject to ongoing political and legislative developments, you should verify the current rules directly with the CRA or a qualified tax professional before filing.

For the purposes of this guide, here is how the system works in principle:

For the vast majority of Canadian retail investors, the 50% inclusion rate is the one that matters. Unless you are realizing more than $250,000 in capital gains in a single year – which would require selling a very large position – the standard 50% rate applies.

To put this in perspective: if you bought $500,000 of XEQT and it doubled to $1,000,000, selling the entire position would generate $500,000 in capital gains, and the higher rate (if in effect) would apply to the portion above $250,000. But for most of us contributing a few hundred or a few thousand dollars per month, the 50% rate is what applies.

Bottom line: Verify the current inclusion rate thresholds with the CRA or your accountant before you file. Tax law moves fast, and what was proposed and what is enacted can differ.

3. How XEQT Generates Capital Gains

There are three main ways that holding XEQT can create a capital gains tax event. Understanding all three is essential for accurate tax planning.

Selling Your XEQT Shares

This is the most obvious one. When you sell XEQT units at a higher price than your adjusted cost base, you realize a capital gain. You have complete control over when this happens – you choose when to sell.

Year-End Capital Gains Distributions

This one catches people off guard. Even if you do not sell a single share, XEQT itself may distribute capital gains to you at the end of the year. Here is why: XEQT is a fund of funds. It holds four underlying iShares ETFs. When those underlying funds sell securities at a profit (due to rebalancing or index reconstitution), the capital gains flow through to XEQT, which then distributes them to unitholders.

These distributions show up on your T3 tax slip and are taxable in the year distributed, even if reinvested. The good news is that XEQT’s capital gains distributions have historically been small, because the underlying index ETFs do not trade frequently.

Reinvested Distributions (DRIP)

If you have DRIP (Dividend Reinvestment Plan) enabled, your distributions automatically buy more XEQT units. Those reinvested distributions are still taxable income in the year received. They also increase your share count and affect your adjusted cost base.

Failing to account for DRIP purchases in your ACB is one of the most common tax mistakes. If you ignore them, you will overstate your capital gain and overpay tax.

4. Capital Gains in Registered vs. Non-Registered Accounts

Where you hold your XEQT makes an enormous difference to your tax bill. Here is the comparison:

TFSA: The Gold Standard for XEQT

In a TFSA, all investment growth – including capital gains – is completely and permanently tax-free. Buy XEQT at $30, sell at $60, keep every penny. No T3 slips, no ACB tracking, no capital gains tax. Period.

If you have TFSA room available, it should almost always be your first priority for XEQT. For a deeper dive, see our guide on XEQT in TFSA vs RRSP.

RRSP / RRIF: Tax-Deferred, Not Tax-Free

In an RRSP, your XEQT grows tax-free while it stays in the account. You do not pay capital gains tax when XEQT goes up, and you do not pay tax on distributions. However, when you withdraw money from your RRSP (or RRIF after conversion), the entire withdrawal is taxed as ordinary income – not as a capital gain. You lose the preferential capital gains tax treatment.

This is an important distinction. If you withdraw $50,000 from your RRSP, you pay tax on the full $50,000 at your marginal rate, even if most of that growth came from capital gains that would have been only 50% taxable in a non-registered account. For high-income earners expecting a lower tax bracket in retirement, the RRSP math still works. But it is not as clean as a TFSA.

FHSA: The Newest Tool

The First Home Savings Account combines the best of both worlds: tax-deductible contributions (like an RRSP) and tax-free withdrawals for a qualifying home purchase (like a TFSA). If you are a first-time home buyer, holding XEQT in an FHSA shelters all capital gains from tax entirely.

Non-Registered Accounts: Where Capital Gains Tax Hits

If you have maxed out your registered accounts and still want to invest, a non-registered (taxable) account is where capital gains tax becomes your reality. Every sale, every capital gains distribution, every deemed disposition – all of it is taxable. This is where the rest of this guide becomes critically important.

5. Understanding and Calculating Your Adjusted Cost Base (ACB)

The adjusted cost base is the single most important number for calculating your capital gains tax, and it is the one most investors get wrong.

What Is ACB?

Your ACB is the average cost per share of all the XEQT units you own. It is not simply the price you paid for your last purchase – it is a weighted average across every single purchase you have made, adjusted for certain events.

How to Calculate ACB

The formula after each purchase:

New ACB per share = (Previous Total ACB + Cost of New Shares + Commissions) / Total Number of Shares Owned

What Affects Your ACB

Several events change your ACB. Here are the most common for XEQT investors:

• New purchases: Each time you buy more XEQT, your ACB is recalculated as a weighted average.
• DRIP purchases: Reinvested distributions buy new shares at the market price on the distribution date. These shares get added to your ACB calculation.
• Return of capital (ROC) distributions: XEQT occasionally distributes return of capital, which reduces your ACB. This does not create an immediate tax event, but it increases your future capital gain when you sell. Check your T3 slip for ROC amounts.
• Commissions: Buying commissions increase your ACB. On Wealthsimple, this is zero for Canadian ETFs, so it simplifies things.

Why Tracking ACB Matters

If you do not track your ACB accurately, two bad things can happen:

1. You overpay taxes: If your ACB is actually higher than you think (because you forgot to include DRIP purchases), you will report a larger capital gain than you actually realized.
2. You underpay taxes: If you fail to account for return of capital reducing your ACB, you will report a smaller capital gain, which could trigger a reassessment from CRA.

Pro tip: Use a spreadsheet or a tool like AdjustedCostBase.ca to track your ACB. Update it every time you buy, sell, or receive a distribution. Your future self will thank you at tax time.

6. Practical Example: Calculating Capital Gains on XEQT

Let’s walk through a realistic scenario step by step.

The Setup

Imagine you have been buying XEQT in your non-registered account over the past two years:

Step 1: Calculate Your ACB

ACB per share = Total Cost / Total Shares = $15,025.00 / 500 = $30.05 per share

Step 2: Sell Some Shares

In May 2026, you decide to sell 200 shares at $38.00 per share.

• Proceeds of disposition: 200 x $38.00 = $7,600.00
• ACB of shares sold: 200 x $30.05 = $6,010.00
• Capital gain: $7,600.00 - $6,010.00 = $1,590.00

Step 3: Calculate Taxable Capital Gain

Using the 50% inclusion rate:

• Taxable capital gain: $1,590.00 x 50% = $795.00

This $795.00 gets added to your other income for the year. If your marginal tax rate is 30%, you would owe approximately $238.50 in additional tax on this sale.

Step 4: Update Your ACB for Remaining Shares

After selling 200 shares, you still own 300 shares. Your ACB does not change per share – it remains $30.05 per share. Your total ACB for the remaining position is:

• Remaining ACB: 300 x $30.05 = $9,015.00

This is the number you start with for any future sales.

Key Takeaway

On a $7,600 sale that generated a $1,590 capital gain, the actual tax hit was only about $238.50 (at a 30% marginal rate). Capital gains are taxed favourably compared to regular income or even eligible dividends at lower income levels. This is one of the reasons XEQT’s growth-oriented approach is tax-efficient – most of your returns come as capital gains rather than distributions.

7. Seven Strategies to Minimize Capital Gains Tax on XEQT

Strategy 1: Maximize Registered Accounts First

This is the single most impactful thing you can do. Every dollar of XEQT you hold in a TFSA or FHSA is permanently shielded from capital gains tax. Every dollar in an RRSP is at least deferred. Only after your TFSA, RRSP, and FHSA are maxed should you be buying XEQT in a non-registered account.

The priority order for most Canadians:

1. TFSA – tax-free forever
2. FHSA – if you are a first-time home buyer
3. RRSP – tax-deferred, beneficial if your current tax rate is higher than your expected retirement rate
4. Non-registered – only after all the above are full

Strategy 2: Hold XEQT Long-Term and Defer Gains

You do not pay capital gains tax until you sell. If you buy and hold XEQT for 20 or 30 years, your investment compounds without any drag from capital gains tax. Every time you sell and rebuy, you realize gains and owe tax. By holding long-term, your gains compound on top of gains that have not yet been taxed.

Strategy 3: Tax-Loss Harvesting

If you hold other investments that have declined in value, you can sell them to realize a capital loss. Capital losses can be used to offset capital gains in the current year, carried back three years, or carried forward indefinitely.

For example, if you sell XEQT for a $5,000 capital gain and you also sell another investment for a $3,000 capital loss, your net capital gain is only $2,000. The taxable amount drops from $2,500 to $1,000 (at a 50% inclusion rate).

Important: Be aware of the superficial loss rule (see Strategy 6) if you plan to repurchase a similar investment.

Strategy 4: Donate Appreciated Shares to Charity

If you donate publicly traded securities like XEQT directly to a registered charity, you pay zero capital gains tax on the appreciation and receive a donation tax credit for the full fair market value. Instead of selling XEQT, paying tax, and donating the after-tax cash, you donate the shares directly and avoid the tax entirely.

Strategy 5: Sell Strategically in Low-Income Years

Because capital gains are taxed at your marginal rate, the timing of when you sell matters. Consider realizing capital gains in years when your income is lower – during a sabbatical, parental leave, a gap between jobs, or early retirement before CPP and OAS kick in. In a low-income year, you might pay little or no tax on capital gains thanks to the basic personal amount and lower brackets.

Strategy 6: Know the Superficial Loss Rule

The CRA’s superficial loss rule prevents you from claiming a capital loss if you (or an affiliated person) repurchase the same or identical security within 30 calendar days before or after the sale (a 61-day window total).

If you sell XEQT at a loss and buy it back within this window, the capital loss is denied. The denied loss gets added to the ACB of the repurchased shares, so it is not lost forever – but you cannot use it to offset gains now.

If you sell XEQT at a loss, wait at least 31 days before repurchasing, or buy a similar but not identical ETF (like VEQT) during the waiting period. Note that CRA has not published definitive guidance on whether XEQT and VEQT are “identical” for this purpose – consult a tax professional if using this strategy.

Strategy 7: Plan for Your Estate

When you pass away, CRA considers you to have sold all your investments at fair market value immediately before death – a deemed disposition that can create a significant tax bill for your estate. Ways to mitigate this:

• Hold XEQT in a TFSA: No deemed disposition tax, and the TFSA can pass to a successor holder tax-free.
• Name your spouse as beneficiary on your RRSP: The funds roll over to their RRSP tax-free.
• Consider spousal rollovers for non-registered accounts: Transfers to a spouse at death can occur at ACB rather than fair market value.
• Plan ahead with a tax-aware estate plan: An accountant and estate lawyer can help structure things to minimize the final tax bill.

For more on this topic, see our guide on XEQT estate planning and beneficiary designations.

8. Common Mistakes Investors Make with Capital Gains

Here are the mistakes I see come up again and again:

1. Not tracking ACB at all. If you do not keep records, you are guessing at tax time. CRA can reassess you. Track every purchase, every DRIP, every return of capital distribution.

2. Forgetting about DRIP shares in ACB calculations. Reinvested distributions create new shares at a specific price. Those shares increase your ACB. If you forget them, you overstate your gain and overpay tax.

3. Ignoring capital gains distributions. Even if you did not sell, XEQT may distribute capital gains to you. These are taxable. Check your T3 slip every year.

4. Selling in a non-registered account when you could have sold from a TFSA. If you need cash, consider whether selling from your TFSA (where there is no tax consequence) makes more sense than selling from your taxable account.

5. Triggering the superficial loss rule accidentally. You sell at a loss, then buy back within 30 days because XEQT dropped further and you wanted to “buy the dip.” Congratulations – your capital loss is now denied.

6. Not considering the tax impact of large one-time sales. Selling a large XEQT position all at once can push you into a higher tax bracket. Sometimes it is better to sell over two or more calendar years to keep each year’s gains in a lower bracket.

7. Assuming RRSP withdrawals are taxed as capital gains. They are not. RRSP withdrawals are taxed as ordinary income, regardless of how the money grew inside the account. This is a critical distinction.

9. The Verdict

Capital gains tax is one of those things that feels intimidating until you understand the mechanics. And the mechanics, at their core, are straightforward: you pay tax on a portion of your profit when you sell, and the rate depends on your income and the inclusion rate.

For most Canadian investors holding XEQT, here is the action plan:

• Hold XEQT in a TFSA first. Capital gains are completely tax-free. No tracking, no slips, no stress.
• Use your RRSP and FHSA next. Tax-deferred or tax-free growth, depending on the account.
• In a non-registered account, track your ACB religiously. Every purchase, every DRIP, every return of capital.
• Hold for the long term. The longer you hold, the longer your gains compound without being eroded by tax.
• Sell strategically. Time your sales for low-income years when possible, harvest losses when opportunities arise, and avoid the superficial loss trap.

XEQT is already one of the most tax-efficient investments available to Canadians – most returns come as capital gains, distributions are modest, and low turnover means minimal annual distributions from the fund itself. Pair that with the right account structure, and you can keep the CRA’s share of your returns to an absolute minimum.

The decisions you make today about where to hold XEQT and how to manage your capital gains will compound over decades – just like your investments themselves.

10. FAQ: Capital Gains Tax and XEQT

Do I pay capital gains tax on XEQT in my TFSA?

No. All growth inside a TFSA – including capital gains – is completely tax-free. You will never owe capital gains tax on XEQT held in a TFSA, regardless of how much it grows.

Do I pay capital gains tax on XEQT in my RRSP?

Not directly. Growth inside an RRSP is tax-deferred. However, when you withdraw from your RRSP, the entire withdrawal is taxed as ordinary income – not as a capital gain. You lose the preferential capital gains treatment.

What is the capital gains inclusion rate in Canada in 2026?

The standard inclusion rate for individuals is 50% on the first $250,000 of annual capital gains. A higher inclusion rate of 66.67% was proposed for gains exceeding $250,000, but this measure has had a complex legislative history. Check with CRA or a tax professional for the current rules that apply to your situation.

How do I report capital gains from selling XEQT?

You report capital gains on Schedule 3 of your T1 income tax return. You will need your adjusted cost base, proceeds of disposition, and any outlays or expenses related to the sale. Your brokerage may provide a T5008 slip with some of this information, but you are responsible for calculating your own ACB.

Does XEQT distribute capital gains?

Yes, XEQT may make year-end capital gains distributions when its underlying ETFs realize gains through rebalancing or index changes. These are reported on a T3 slip and are taxable in your non-registered account, even if reinvested.

What happens to capital gains on XEQT when I die?

CRA treats you as having sold all your non-registered investments at fair market value immediately before death (deemed disposition). This can trigger a capital gains tax bill for your estate. XEQT held in a TFSA with a named successor holder avoids this entirely.

Can I use capital losses from other investments to offset XEQT capital gains?

Absolutely. Capital losses can offset capital gains dollar for dollar. If your losses exceed your gains, the net loss can be carried back three years or carried forward indefinitely to offset future gains.

Is XEQT tax-efficient compared to other investments?

Yes. Most of XEQT’s returns come as capital gains (taxed preferentially), the fund has low turnover (minimal annual distributions), and as a Canadian-listed ETF it avoids the additional foreign withholding tax layers that come with holding US-listed ETFs in taxable accounts. For more details, see our guide on XEQT tax implications.

Related Reading

• What is XEQT? A Comprehensive Guide
• XEQT in TFSA vs RRSP: Where Should You Hold It?
• XEQT Tax Implications: Complete Guide for Canadian Investors
• XEQT Estate Planning and Beneficiary Designations
• Does XEQT Pay a Dividend?
• Why Wealthsimple is the Best Platform to Buy XEQT