These Tax-Efficient Canadian ETFs are Geared to Keep Taxable Income as Low as Possible

ByDan Kent Published On:

Key takeaways

Low-Cost and Tax-Optimized Growth – These ETFs typically have lower fees than mutual funds, making them cost-effective for long-term, tax-conscious investors.

Swap-Based ETFs for Tax Efficiency – ETFs like HXT, HXS, HXCN, and HXQ use a total return swap structure, allowing investors to defer capital gains and avoid taxable distributions.

Sector-Specific vs. Broad Market Exposure – While XIT provides direct exposure to Canada’s tech sector, the other ETFs offer diversified market exposure to Canadian, U.S., and global equities.

One ETF I like way better than the ones on this list.

Tax-optimized ETFs have been growing in popularity with investors seeking Canadian ETFs. These ETFs are engineered to limit tax implications on investors, employing methods such as following indices with low turnovers and steering clear of investments that yield high levels of taxable income.

In addition, these funds can hold distributions and reinvest them back into securities rather than paying the distributions out and creating a taxable event for investors. In some instances, and this will be one of the funds I go over, they can enter agreements with financial institutions to receive the total returns of an index, which would include appreciation and dividends, as capital gains.

By doing so, investors can keep more of their investment returns and potentially earn higher overall returns in the long run.

One of the main advantages of tax-efficient ETFs is their ability to reduce taxes on dividends. When an investor sells an ETF that has appreciated in value, they are typically subject to capital gains taxes. This is unavoidable in a taxable account most of the time.

However, with the distribution, the fund manager can choose not to pay any distribution out (none of the funds on this list do), and as a result, the investor doesn’t trigger any tax events.

Tax efficiency in ETFs

Tax efficiency is absolutely key for Canadian investors when choosing an ETF. There are several ways in which an ETF can be taxed, some of which can be mitigated, while others cannot:

  • Capital gains: ETFs that minimize capital gains are tax-efficient. When an ETF sells securities for a profit, it generates a capital gain. If the ETF distributes these gains to investors, they will be taxed. ETFs that minimize capital gains can reduce the tax impact on investors.
  • Dividends and distributions: ETFs that distribute eligible dividends and capital gains are more tax-efficient than those that distribute interest income or foreign income. Eligible dividends and capital gains are taxed at a lower rate than interest income or foreign income. In addition, a fund can simply choose not to pay a distribution to the investor, eliminating a personal tax event.
  • Return of capital (ROC): ROC distributions reduce the adjusted cost base (ACB) of an ETF. This can result in higher capital gains when the ETF is sold. ETFs that minimize ROC distributions can be more tax-efficient.
  • Foreign withholding tax: ETFs that invest in foreign securities may be subject to foreign withholding tax. This tax is deducted at the source and reduces the ETF’s return. ETFs that minimize foreign withholding tax can be more tax-efficient.

Tax efficiency can have a significant impact on an investor’s after-tax returns. For example, if two ETFs have the same pre-tax returns, but one is more tax-efficient, the tax-efficient ETF will provide higher after-tax returns.

Investors should consult with a tax professional to determine the tax implications of investing in ETFs, as everyone’s situation is different, then one can determine what ETFs to buy in Canada.

However in this article I will tackle a broad list of ETFs that are at least designed to be tax efficient, and then from there you can see if they fit your portfolio. You will notice that one fund manager dominates this list, primarily because of its creation of corporate class ETFs, which are swap contracts with the banks.

What are the best tax-efficient ETFs in Canada today?

Ultra-low-cost Canadian equity exposure

Global X S&P/TSX 60 Index ETF (TSE:HXT)

HXT tracks the S&P/TSX 60 Index, which includes Canada’s 60 largest publicly traded companies. Unlike traditional ETFs, it does not pay dividends but reinvests them internally through a total return swap structure, improving tax efficiency.

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  • Broad Exposure to Canada’s Largest Companies – Investors get exposure to 60 blue-chip stocks across various sectors, including financials, energy, and industrials.
  • Tax-Efficient Structure – Since HXT does not distribute dividends, investors can defer taxes until they sell the ETF, avoiding immediate taxation on income.
  • Low Expense Ratio (0.04%) – One of the lowest-cost ETFs in Canada, maximizing long-term returns.
  • Strong Performance in Rising Markets – Large-cap Canadian stocks tend to perform well during commodity booms and economic expansions.
  • Alternative to Traditional Dividend ETFs – Investors seeking Canadian exposure without annual tax liabilities can benefit from HXT’s swap structure.
  • Canadian Bank Strength – The financial sector remains a dominant part of the TSX 60 and benefits from rising interest rates.
  • Commodity Price Trends – Energy and materials play a significant role in the index, meaning oil and mining trends impact HXT’s performance.
  • Inflation’s Impact on Dividends – While high inflation affects real returns, HXT’s structure mitigates the tax impact of dividend income.
  • ETF Fee Wars – More low-cost ETFs could pressure fees further, making HXT even more attractive.
  • Sector Concentration in Financials and Energy – The TSX 60 is heavily weighted toward these sectors, making it less diversified than global indices.
  • Interest Rate Sensitivity – Rate hikes could impact the profitability of financial stocks, which are major holdings in the fund.
  • Regulatory Risks for Swap-Based ETFs – Changes in tax laws could impact the fund’s ability to defer taxes indefinitely.

Tax-efficient access to U.S. large caps

Global X S&P 500 ETF (TSE:HXS)

HXS tracks the S&P 500 but differs from traditional ETFs by using a total return swap, avoiding foreign withholding taxes on dividends. This makes it one of the most tax-efficient ways for Canadian investors to gain U.S. equity exposure.

  • Exposure to the World’s Leading Companies – The S&P 500 provides access to high-quality U.S. companies, including Apple, Microsoft, and Amazon.
  • No U.S. Withholding Tax on Dividends – Traditional U.S. ETFs face a 15% withholding tax on dividends, but HXS avoids this due to its swap structure.
  • CAD-Hedged Option Available – Investors can choose between a currency-hedged (HXS.U) and unhedged (HXS) version.
  • Efficient for Non-Registered Accounts – The swap structure allows for deferral of capital gains tax, making HXS ideal for taxable accounts.
  • Long-Term Growth Potential – Historically, the S&P 500 has outperformed many global benchmarks, making this ETF a strong core holding.
  • Tech and AI Expansion – The S&P 500 is heavily weighted toward tech, benefiting from continued AI and innovation trends.
  • Fed Interest Rate Policy – U.S. equities react strongly to interest rate changes, making Federal Reserve decisions a key factor.
  • Earnings Growth in Large-Cap U.S. Stocks – Corporate earnings drive S&P 500 returns, so monitoring growth rates is essential.
  • U.S.-Canada Exchange Rate Movements – A weakening CAD can boost HXS returns, while a strengthening CAD may reduce gains.
  • Valuation Concerns in the U.S. Market – The S&P 500 trades at high multiples, increasing downside risk in economic downturns.
  • Currency Fluctuations for Unhedged Investors – A strong Canadian dollar can erode U.S. equity returns for unhedged investors.
  • Potential Changes to Swap Regulations – Tax policy changes could impact the tax advantages of swap-based ETFs.

Broadest Canadian equity market exposure

Global X S&P/TSX Capped Composite ETF (TSE:HXCN)

HXCN tracks the S&P/TSX Capped Composite Index, which covers nearly all publicly traded companies in Canada. Like HXT, it uses a swap-based structure to eliminate taxable distributions.

  • Full Canadian Market Exposure – Includes small-, mid-, and large-cap stocks, providing broader diversification than HXT.
  • Tax-Deferral Benefits – Swap structure means no immediate tax burden from dividends or distributions.
  • Better Small-Cap Representation – Unlike HXT, this fund includes smaller growth stocks that can offer higher upside potential.
  • Low Expense Ratio – A cost-efficient way to get diversified exposure to Canadian stocks.
  • Resilient Commodity Exposure – Canada’s economy is resource-heavy, and HXCN offers exposure to energy, mining, and agriculture stocks.
  • Small-Cap Performance in Canada – Economic growth cycles impact small-cap stock returns, influencing HXCN’s performance.
  • Housing and Banking Market Trends – The health of Canada’s financial system directly affects this ETF.
  • Government Policies on Energy and Mining – Regulatory changes can impact resource companies, a key component of the index.
  • Volatility in Small-Cap Stocks – Broader exposure means more risk from less stable, smaller companies.
  • Sector Concentration in Energy and Financials – The Canadian market lacks the tech exposure seen in U.S. indices.

Tax-efficient access to U.S. tech leaders

Global X NASDAQ-100® ETF (TSE:HXQ)

HXQ tracks the NASDAQ-100 Index, which includes 100 of the largest non-financial companies listed on the NASDAQ stock exchange. It provides exposure to industry giants like Apple, Microsoft, NVIDIA, Amazon, and Tesla. Unlike traditional ETFs, HXQ uses a total return swap structure, allowing investors to avoid foreign withholding taxes on dividends while deferring capital gains tax.

  • Direct Exposure to U.S. Tech Giants – The NASDAQ-100 is dominated by world-leading companies in technology, AI, e-commerce, and semiconductors. These companies have strong revenue growth and high margins, making them attractive for long-term investors.
  • Tax Efficiency Through a Swap-Based Structure – Since HXQ does not distribute dividends, investors do not pay taxes on reinvested income annually. This structure is especially beneficial for non-registered accounts, as tax liabilities are deferred until the fund is sold.
  • A Cost-Effective Alternative to U.S.-Listed NASDAQ ETFs – With a management fee of 0.25%, HXQ offers a competitive, Canadian-listed alternative to popular U.S. NASDAQ ETFs like QQQ, without the complexity of currency conversion or U.S. estate tax concerns.
  • Benefiting from Secular Growth Trends – The NASDAQ-100 includes companies at the forefront of AI, cloud computing, cybersecurity, and electric vehicles. These long-term trends continue to drive strong revenue and stock performance.
  • Hedge Against Canadian Market Limitations – The Canadian stock market is heavily weighted toward financials, energy, and materials. HXQ provides much-needed diversification by adding U.S. tech exposure, which has historically outperformed Canadian equities.
  • Artificial Intelligence Boom – AI-related stocks like NVIDIA, Microsoft, and Alphabet are driving massive capital investments and reshaping multiple industries.
  • Tech Sector Earnings Growth – With high margins and scalable business models, leading NASDAQ-100 companies continue to generate strong earnings, supporting long-term stock price appreciation.
  • Interest Rate Sensitivity in Growth Stocks – Tech stocks often react sharply to changes in interest rates, as higher rates increase borrowing costs and impact valuations. Monitoring the Federal Reserve’s policy will be crucial.
  • U.S. Dollar and Currency Exchange Movements – A strong U.S. dollar can enhance returns for Canadian investors holding HXQ, while a weak USD could slightly dampen performance.
  • High Valuations and Market Cycles – Many NASDAQ-100 companies trade at premium valuations, making them more vulnerable to market corrections or economic slowdowns.
  • Regulatory and Antitrust Scrutiny – Governments worldwide are increasing regulations on big tech companies, particularly around data privacy, monopolistic behavior, and AI development.
  • Sector Concentration in Technology – While the NASDAQ-100 includes consumer discretionary and healthcare companies, technology remains the dominant sector, exposing the ETF to sector-specific risks.
  • Volatility in High-Growth Stocks – Companies in this index tend to be more volatile than the broader market, which may not suit risk-averse investors.

Canada’s tech sector in one fund

iShares S&P/TSX Capped Info Tech ETF (TSE:XIT)

XIT provides exposure to Canada’s technology sector, primarily composed of software, IT services, and fintech companies. Its top holdings include Shopify, Constellation Software, CGI, and OpenText. Unlike HXQ, which provides global tech exposure, XIT focuses specifically on Canadian-listed tech firms.

  • Canada’s Leading Tech Stocks in One ETF – The Canadian technology sector is smaller than the U.S., but it includes high-growth companies with strong fundamentals. XIT allows investors to gain diversified exposure to the top players in this space.
  • Heavy Allocation to a Few High-Performing Stocks – The ETF is highly concentrated, with Shopify and Constellation Software making up a significant portion of the fund. This can lead to outsized returns during tech rallies but also greater volatility.
  • Strong Demand for Software and IT Services – Companies like CGI and OpenText provide essential software and cloud-based solutions to businesses worldwide, ensuring steady revenue growth.
  • Potential for Domestic and Global Expansion – Canadian tech firms are increasingly expanding into global markets, diversifying their revenue streams and increasing their competitiveness.
  • No Foreign Withholding Tax Considerations – Since XIT holds Canadian-listed stocks, investors do not have to worry about U.S. withholding taxes, making it a more tax-efficient choice for domestic investors.
  • Canadian Tech Sector Growth – While smaller than Silicon Valley, Canada’s tech industry is expanding, with increased venture capital investments and government support for innovation.
  • E-Commerce and Fintech Expansion – Shopify and Lightspeed Commerce are leading Canada’s push into global e-commerce and fintech, benefiting from rising online retail trends.
  • Corporate IT Spending and Cloud Services – As businesses continue to digitize, demand for enterprise software, cybersecurity, and AI solutions is increasing, benefiting companies like CGI and OpenText.
  • Interest Rate Impact on Tech Valuations – Higher rates tend to pressure growth stocks, particularly those with high price-to-earnings ratios, making rate decisions a key factor for XIT’s performance.
  • High Concentration in a Few Stocks – Unlike U.S. tech ETFs, which are more diversified, XIT is dominated by just a handful of companies. If one or two major holdings underperform, the entire ETF can suffer.
  • Lack of Hardware or Semiconductor Exposure – Unlike the NASDAQ-100, which includes chipmakers like NVIDIA and AMD, XIT is focused primarily on software. This limits its ability to benefit from broader semiconductor growth.
  • High Volatility Compared to Broader Markets – Canadian tech stocks can be more volatile than the overall S&P/TSX Composite Index, making XIT riskier for conservative investors.
  • Competition from U.S. Tech Giants – Many Canadian tech firms compete directly with larger U.S. companies, which may limit their long-term growth potential.

Choosing the right ETF for your investment Goals

Investors in Canada have a wide range of options when it comes to choosing the ETF for their investment goals. Risk tolerance, management fees, expenses, and commissions can all play a role in the decision-making process.

In addition to this, different accounts like the Tax-Free Savings Account (TFSA), of which there are various ETFs that are best for TFSA, Registered Retirement Savings Plan (RRSP), and non-registered accounts have various tax implications, especially once we start looking at Real Estate Investment Trusts, REIT ETFs, or U.S. stocks for our portfolios.

One of the first things to consider is the type of equity the ETF invests in. Canadian investors may want to consider ETFs that focus on Canadian corporations for the tax-friendly Canadian dividends, while those looking for more diversification may prefer ETFs that invest in a mix of U.S. and international equities.

Another important factor to consider is the management fee. While ETFs tend to have lower management fees than mutual funds, comparing fees between different ETF options is still important. 

Some ETFs may have higher management fees due to more active management or specialized investment strategies. We’ve gone over a few even on this list (XIT and HXQ).

Investors should also consider the tax implications on the distributions, even in an RRSP, of owning a Canadian-domiciled ETF that holds U.S. stocks or ETFs.

Ultimately, the right ETF for an investor will depend on their investment goals and risk tolerance. There are many different types of ETFs such as covered call ETFs, ETFs that focus on particular industries like gold ETFs, or other ETFs that offer broader diversification and exposure to several markets in all-in-one ETFs.

Those with a higher risk tolerance may prefer ETFs that invest in more volatile equities. In contrast, those with a lower risk tolerance may choose more stable options.

Finally, it’s essential for unitholders to regularly review their ETF holdings to ensure that they are still aligned with their investment goals. As the market and economic conditions change, some ETFs may become less suitable for an investor’s needs.

When choosing the right ETF, it’s critical to research, determine your risk tolerance, plan out your asset allocation, and consider all other relevant factors.

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