Capital Gains Tax on XEQT in a Non-Registered Account

How Capital Gains Tax Works in Canada

When you sell XEQT in a non-registered account for more than you paid for it, the profit is a capital gain. Canada taxes only a portion of that gain, known as the inclusion rate. As of March 2026, the capital gains inclusion rate is 50% for individuals, following the cancellation of the proposed increase to 66.67% by Prime Minister Mark Carney on March 21, 2025.^[1]

The mechanics work as follows: your capital gain is your proceeds of disposition (the sale price) minus your adjusted cost base (ACB) and any selling costs. Fifty percent of the resulting figure is added to your income for the year and taxed at your marginal rate. The other 50% is permanently tax-free.

Capital gains must be reported on Schedule 3 of your T1 income tax return for the year in which you sell. The CRA requires you to report both the proceeds and the adjusted cost base. Your brokerage will issue a T5008 slip showing transactions, but the ACB calculation is your responsibility, not your broker's.

Calculating Your XEQT Adjusted Cost Base

The adjusted cost base is the foundation of any capital gains calculation. For XEQT, the ACB is the total of all amounts you paid to acquire your units, averaged across all purchases. Canada uses a weighted average ACB methodology for identical securities: every time you buy more XEQT, you recalculate a new average cost per unit across your entire holding.

ACB/Unit after Buy 3 = ($2,750 + $1,920 + $1,800) / 240 = $27.00. Capital gain on full sale = $9,840 proceeds - (240 x $27.00 ACB) = $3,360.

Every brokerage commission paid on a purchase increases your ACB. On Wealthsimple, commissions are $0, so no adjustment is needed. On platforms like TD Direct Investing, each $9.99 commission paid on a purchase adds $9.99 to your ACB for that lot.

How XEQT Distributions Affect Your ACB

XEQT pays quarterly cash distributions. The tax treatment of those distributions in a non-registered account is covered in detail in our companion article on how XEQT distributions are taxed. But distributions also affect your ACB in a way that many investors miss.

XEQT's December distribution typically contains a reinvested distribution component (sometimes called a phantom or notional distribution). This is a capital gain or return of capital that the fund allocates to unitholders for tax purposes but does not pay out in cash. Instead, the notional amount is automatically reinvested in new XEQT units on your behalf. You receive units but no cash.

The notional distribution is taxable to you in the year it is allocated, even though you received no cash. To avoid being taxed again when you eventually sell those units, you must add the notional amount to your ACB. BlackRock publishes this information annually in January for the prior tax year on their tax information page. Failure to adjust your ACB for reinvested distributions results in double taxation at the time of sale.

Return of capital (ROC) distributions work in the opposite direction: they reduce your ACB. ROC is not taxable when received but creates a larger capital gain when you eventually sell. XEQT has historically paid very little ROC, but it is worth checking the annual T3 slip breakdown each year.

What You Actually Pay at Different Income Levels

Capital gains tax in Canada is not a flat rate. It depends on your total income in the year of the sale, your province, and any capital losses available to offset gains. The following table shows the effective tax rate on a $10,000 capital gain (50% inclusion = $5,000 added to income) at different income levels in Ontario and British Columbia for 2025.

Effective tax on the gain = 50% of marginal rate. Rates are 2025 combined federal/provincial. Source: PwC Canada Tax Summaries, Canada.ca marginal tax brackets. Verify current rates with a tax advisor.

The most important takeaway from this table is that timing a large XEQT sale matters. Selling in a year when your other income is low (early retirement before CPP and OAS begin, a sabbatical year, or a year with significant RRSP deductions) can dramatically reduce the tax on the capital gain. Spreading large XEQT dispositions across multiple calendar years prevents the gain from pushing you into a higher bracket.

Strategies to Reduce Capital Gains Tax on XEQT

1. Maximize TFSA first

The single most powerful capital gains tax strategy is not to have XEQT in a non-registered account at all. Every dollar of XEQT held in a TFSA generates zero capital gains tax, ever. If you have unused TFSA room, moving XEQT there (or contributing cash to the TFSA and buying XEQT inside it) should be the priority. See our TFSA vs RRSP guide for the full sequencing strategy.

2. Use your RRSP deduction to offset the gain

An RRSP contribution generates a deduction that reduces your total taxable income for the year. If you make a large RRSP contribution in the same year you realise a significant capital gain from selling XEQT, the deduction can partially or fully offset the gain's tax impact by pushing you into a lower bracket.

3. Spread dispositions across tax years

If you plan to sell a large XEQT position in a non-registered account (for a home purchase, retirement transition, or rebalancing), consider spreading the sales across two or three calendar years. Each year gets a separate $250,000 threshold at the 50% inclusion rate for individuals. For most Canadians, the more significant benefit is keeping income below bracket thresholds.

4. Sell in low-income years

Capital gains are taxed at your marginal rate in the year of sale. Early retirement, a leave of absence, a gap year, or a year before CPP and OAS begin are all potentially low-income years where capital gains tax on XEQT is significantly lower than during peak earning years.

5. Use an RRSP for the XEQT proceeds

If you sell XEQT in a non-registered account and have RRSP room, contributing the after-tax proceeds to an RRSP can partially shelter the gain through the deduction. The mechanics: sell XEQT, report the gain, and simultaneously contribute the proceeds (or the cash from selling) to your RRSP. The deduction reduces the net tax impact.

Capital Loss Harvesting With XEQT

If you hold XEQT in a non-registered account and it has declined in value since you purchased, you can sell to realise a capital loss. That loss can be used to offset capital gains from other investments in the current year or carried back three years to recover taxes paid on prior gains. Losses can also be carried forward indefinitely to offset future gains.

Should You Hold XEQT in a Non-Registered Account at All?

For most Canadian XEQT investors who have not yet maximised their TFSA and RRSP contribution room, holding XEQT in a non-registered account is suboptimal. The tax drag from capital gains and distributions is a permanent headwind on returns that registered accounts eliminate entirely.

The case for a non-registered XEQT position arises when all registered room is exhausted. At that point, XEQT is still a reasonable choice for a non-registered account because its capital gain is only 50% taxable (not 100% like interest income), and its Canadian dividend component receives the dividend tax credit, making it more tax-efficient than bond or GIC alternatives in non-registered accounts.

For a complete comparison of account types and which investments belong in which accounts, see our TFSA vs RRSP guide and our detailed piece on the XEQT withdrawal strategy in retirement, which covers how to sequence drawdowns from each account type to minimise lifetime tax.