Holding XEQT in a Non-Registered Account: The Tax Implications
May 4, 2026
If you’re reading this, you’ve done something most Canadians haven’t: you’ve maxed out your registered accounts. Your TFSA is full. Your RRSP is topped up. Maybe you’ve even used your FHSA. Now you have extra money to invest and nowhere sheltered to put it. The next step is a non-registered account, and the next question is: what are the tax implications of holding XEQT there?
The short answer is that it’s manageable, not catastrophic. XEQT in a taxable account is still a reasonable choice, especially compared to the alternatives most Canadians end up defaulting to. But you do need to understand what you’re signing up for. Let’s go through it properly.
What a Non-Registered Account Actually Is
A non-registered account, sometimes called a taxable or open account, is simply an investment account with no government-granted tax shelter. You contribute after-tax dollars, and any income or gains the account generates can be taxable in the year they occur. There are no contribution limits, no withdrawal rules, and no government matching. You can hold anything in it: ETFs, stocks, bonds, GICs.
The upside is flexibility. The downside is that CRA wants a piece of every type of income the account produces. The specific slice CRA takes depends on what kind of income it is, and this is where XEQT gets a little more nuanced than it is inside a TFSA or RRSP.
Account priority reminder: Before opening a non-registered account, confirm you’ve used your TFSA ($7,000/year in 2026), RRSP (18% of prior year earned income), and FHSA ($8,000/year, $40,000 lifetime) if eligible. Every dollar sheltered in those accounts first is a dollar that never faces tax drag in a non-registered account.
The Three Types of Income XEQT Produces
XEQT generates income in three ways, and each is taxed differently in a non-registered account. Understanding this is the foundation of everything else in this article.
The first type is capital gains. When XEQT’s underlying holdings rise in value and units are eventually sold, the gain is a capital gain. In Canada, capital gains are taxed at your marginal rate applied to 50% of the gain. So if you sell XEQT units for a $10,000 profit, only $5,000 is added to your taxable income. This is the most tax-efficient type of income a non-registered account can produce. Most of XEQT’s long-term total return comes from capital appreciation, which is a point in its favour for taxable accounts.
The second type is eligible Canadian dividends. XEQT holds some Canadian equities through its allocation to XIC (iShares Core S&P/TSX Capped Composite ETF). Dividends from Canadian corporations are eligible for the dividend tax credit, which effectively lowers the tax rate on them. These are taxed favourably relative to ordinary income, though still less favourably than capital gains for most investors.
The third type is foreign income and non-eligible dividends. XEQT holds a large allocation to US and international equities. Distributions from these holdings that flow through as foreign income are taxed as ordinary income at your full marginal rate. This is the least tax-efficient part of XEQT in a non-registered context. You can claim a foreign tax credit for taxes already withheld by the US or other countries, which partially offsets this, but it’s still a drag compared to capital gains treatment.
Most of what drives long-term returns in a globally diversified equity ETF is capital appreciation, not distributions. The tax drag from distributions is real but modest relative to the compounding that comes from staying invested.
Foreign Withholding Tax: The Layer Most Canadians Miss
There’s an additional wrinkle specific to holding funds with US and international equities in a non-registered account. When American companies pay dividends, the US government withholds 15% of that dividend before it ever reaches your Canadian account. This is called foreign withholding tax, and it applies at multiple layers for a fund-of-funds structure like XEQT.
XEQT is a wrapper that holds other iShares ETFs, including XUU (US equity) and XEF (international equity). When those underlying ETFs hold US stocks that pay dividends, the withholding happens at the fund level, not directly in your account. Canada has a tax treaty with the US that eliminates this withholding inside an RRSP, but that treaty does not apply to TFSAs, FHSAs, or non-registered accounts.
In a non-registered account, though, you generally receive a foreign tax credit on your T3 slip that offsets some of the withholding. You’re not simply losing that money, you’re reclaiming it through your tax return. The net drag is estimated to be in the range of 0.10% to 0.20% per year based on research from Canadian Portfolio Manager and related sources, depending on the portfolio’s dividend yield and the specific holdings. That’s not trivial, but it’s also not a reason to avoid XEQT in a taxable account altogether.
For US equity held in international ETFs (so-called “international held through a US wrapper”), the first layer of withholding is generally unrecoverable regardless of account type. This exists in XEQT’s structure and also in VEQT’s. It is a feature of almost every all-in-one ETF and not unique to XEQT.
What Actually Shows Up on Your Tax Return
Every year you hold XEQT in a non-registered account, your brokerage will issue a T3 slip (and sometimes a T5) summarizing the distributions the ETF paid out. These distributions get reported on your tax return even if you reinvested them. This is the part that surprises people who are used to the clean simplicity of a TFSA.
Your T3 will break down distributions into categories: capital gains distributions, Canadian dividends, foreign income, return of capital, and other income. Each line item flows to a different place on your T1 General. Capital gains distributions go to Schedule 3. Eligible dividends go to line 12000 and trigger the dividend tax credit calculation. Foreign income goes to line 12100 and you separately claim the foreign tax credit on Schedule T2209.
You also need to track your adjusted cost base (ACB) for every unit you purchase. The ACB is your average cost per unit, and it determines how much of any future sale proceeds are a capital gain versus a return of your original capital. If you buy XEQT regularly over many years across multiple contributions, tracking ACB manually is work. Platforms like Wealthsimple and Questrade display an average cost, but it’s worth cross-referencing with a free tool like adjustedcostbase.ca to make sure it’s accurate, especially if you ever transfer the account between brokerages.
ACB matters at sale time: If you contribute $50,000 to a non-registered account over five years and your XEQT grows to $75,000, only the $25,000 gain is taxable as a capital gain. But you need a clean ACB record to prove that to CRA. Start tracking it from your first purchase.
Is XEQT Actually a Good Choice for a Taxable Account?
Here’s the honest answer: XEQT is not the most tax-optimized choice for a non-registered account, but it is still a very good one for most people. The purist optimization would involve holding individual equity ETFs separately, placing bonds in your RRSP, holding Canadian equities in your non-registered account, and holding US equities in your RRSP to take advantage of the Canada-US tax treaty. This approach, sometimes called asset location, can shave some tax drag over decades.
But asset location requires you to give up the simplicity that makes XEQT so valuable. You’d be managing multiple ETFs across multiple accounts, rebalancing between them, and accepting tracking error from the fact that different accounts grow at different rates. For most Canadians, the tax savings from perfect asset location amount to a rounding error compared to the behavioural risks introduced by a more complex system.
The investor who sticks with XEQT in a taxable account for 20 years will almost certainly outperform the investor who builds a perfectly optimized multi-ETF asset location strategy but tinkers with it when markets get scary.
The research context from Canadian Portfolio Manager notes that foreign withholding tax on an all-in-one equity ETF held in a taxable account creates a drag of roughly 0.01% to 0.02% per year on the equity portions from unrecoverable withholding. The recoverable portion gets addressed through the foreign tax credit at tax filing. That’s a small number relative to XEQT’s 0.20% MER and an even smaller number relative to the 1.5% to 2.5% most Canadians are paying on actively managed mutual funds.
XEQT in a non-registered account also benefits from the fact that it is a low-turnover, passive index fund. It doesn’t generate large unexpected capital gains distributions from active trading inside the fund. Passive funds tend to be more tax-efficient inside their structure than active ones, even in taxable accounts.
What to Do at Tax Time
The process is not as complicated as the theory makes it sound. When you receive your T3 slip from iShares (usually in March or April for the prior tax year), you enter the numbers into your tax software under the appropriate income categories. Wealthsimple Tax handles this well, and the slip tells you exactly what goes where.
Claim your foreign tax credits. People miss this more often than you’d expect, and it directly reduces your federal tax owing. If you paid $80 in foreign withholding tax on your US equity distributions, you can claim that back against your Canadian federal tax. Your T3 will include a box for “foreign tax paid” that feeds directly into the Schedule T2209 calculation.
If you sold any XEQT units during the year, calculate the capital gain or loss using your ACB and report it on Schedule 3. If you had a loss, you can carry it back three years or forward indefinitely to offset future capital gains. This is one of the few genuine tax planning tools available in a non-registered account.
Keep all of your trade confirmations and annual account statements. If CRA ever asks you to verify your ACB, you’ll need a paper trail going back to your first purchase. Most brokerages retain this digitally, but having your own copy is good discipline.
The Bigger Picture: Non-Registered Is Still Investing
There’s a tendency among some Canadian investors to treat non-registered accounts as somehow inferior or not worth optimizing. That framing is backwards. Once your registered accounts are maxed, a non-registered account with a low-cost globally diversified equity ETF is one of the best things you can do with savings beyond what fits in a TFSA or RRSP.
The alternative is usually worse: cash sitting in a savings account earning 3.5% that is fully taxed as interest income at your marginal rate, or GICs with the same interest income treatment, or doing nothing because the tax situation “feels complicated.” XEQT in a taxable account, with capital gains treatment on the bulk of your returns and partial recovery of foreign withholding through credits, beats all of those options for most long-term investors.
If you are in a high income bracket and your non-registered account is growing to a size where tax optimization genuinely matters in dollar terms, that is the point to consider whether building a separate asset location strategy makes sense for you. For most people who are just starting to invest beyond their registered accounts, XEQT in a non-registered account is the right call. The simplicity dividend is real.
Bottom line: XEQT in a non-registered account produces three types of income taxed at different rates. Capital gains (the most favourable) make up most of long-term returns. Foreign withholding tax creates a small drag, partly recoverable at tax time via the foreign tax credit. The complexity is real but manageable, and the outcome beats most alternatives available to Canadian investors.
Frequently Asked Questions
Do I have to report XEQT distributions even if I reinvested them? Yes. If distributions from XEQT in your non-registered account are paid out and automatically reinvested, they are still considered received for tax purposes. You report them using the T3 slip your brokerage provides. You also add the reinvested amount to your ACB so you’re not taxed twice when you eventually sell.
Is there a better ETF than XEQT for a non-registered account? For pure tax efficiency, some investors prefer holding separate equity ETFs and excluding bonds entirely from non-registered accounts, since bond interest is fully taxable. XEQT holds no bonds, which is already a point in its favour for taxable accounts compared to balanced ETFs like XBAL or VBAL. If you want marginal improvements, you could hold XIC (Canadian equity) in non-registered, XUU (US equity) in RRSP, and XEF (international) split across accounts. But most people are better served by the simplicity of XEQT everywhere than by optimizing imperfectly.
Does holding XEQT in a non-registered account affect my OAS or CPP? Capital gains and dividends from a non-registered account count as income in the year they are realized or received. If your total income in a given year exceeds the OAS clawback threshold (approximately $90,997 in 2025), OAS repayment begins. This is worth planning around if you are near retirement, particularly if you plan to sell a large position in a single year. Spreading large dispositions across multiple calendar years can reduce the impact.
What happens if I transfer XEQT from a non-registered account to my TFSA? You cannot simply move shares in kind to a TFSA without triggering a deemed disposition. CRA treats the transfer as a sale at fair market value on the date of transfer. Any capital gain is taxable in that year. Any capital loss, however, is denied under the superficial loss rules if you transfer to a TFSA (since you still effectively hold the shares). This is an important distinction: transfers from non-registered to RRSP or TFSA are treated as a sale, not a gift.