8 Best ETFs for Taxable Accounts in Canada (Apr 2024)

If investing through more tax-favourable accounts like an RRSP and TFSA is no longer an option for you, the regular non-registered investment account is where the remainder of your total portfolio will lie.

When investing through a taxable account, it becomes extremely important to consider what types of investments you are holding. Interest income, dividends, and capital gains are all taxed at different rates.

As an individual investor, you are probably interested in getting the best after-tax return. In order from least-favourable to most-favourable, here are the three types of returns in Canada:

• Interest Income
• Canadian Dividends
• Capital Gains

Are ETFs Good for Taxable Accounts?

ETFs are a great vehicle to include in your taxable accounts. In order to maximize your tax efficiency, you will want to look for ETFs that have a low turnover ratio and that avoid paying dividends or distributions.

Total Return ETFs

One very useful type of ETF for taxable accounts is called a total return ETF. The simplified answer to how these ETFs work is that they invest in derivatives that replicate the return of a basket of securities.

Total return ETFs do not hold the actual basket of securities, meaning that investors will not be receiving potentially all three return types from their investment. Here is an example:

• A basket of securities increases in value by 5% (capital gain) and pays out a 2% dividend over one year
• A total return ETF on the same basket of securities would simply increase in value by 7% over the course of one year

The total return ETF gives you the option to defer tax implications to when you sell the ETF units down the road. This allows you to grow your money faster through the effects of compounding.

When compared to mutual funds, ETFs have certain tax advantages as well.

Foreign Withholding Tax

A second concept to consider is that of foreign withholding tax.

Most countries, including the US, apply foreign withholding taxes to certain income streams. In the US, this applies mainly to dividends from investments. US bonds and other fixed income instruments are generally exempt from foreign withholding tax.

In the US, the first level of foreign withholding tax is applied to Canadian investors that are buying US-listed stock ETFs. Taxes are withheld once dividends are paid by a US-listed ETF to a Canadian investor.

If a Canadian-listed ETF exists that invests into a US-listed ETF, foreign withholding tax again becomes a problem. The Canadian-listed ETF will pay out a dividend net of the US tax.

When investing globally, it is critical to check what each country’s tax laws are. Some countries may apply a foreign withholding tax to fixed-income investments.

We’ll cover some of the best ETFs for taxable accounts in Canada, and outline some of their features below.

Best ETFs for Taxable Accounts in Canada

• Horizons S&P/TSX 60 Index ETF (HXT.TO)
• Horizons Cash Maximizer ETF (HSAV.TO)
• Horizons Canadian Select Universe Bond ETF (HBB.TO)
• Horizons Equal Weight Canadian REIT Index ETF (HCRE.TO)
• Horizons S&P/TSX Capped Composite Index ETF (HXCN.TO)
• Horizons Laddered Canadian Preferred Shares Index ETF (HLPR.TO)
• Horizons S&P/TSX Capped Energy Index ETF (HXE.TO)
• Horizons Canadian High Dividend Index ETF (HXH.TO)

1. Horizons S&P/TSX 60 Index ETF

HXT is an ETF from Horizons designed to passively replicate the total return of the S&P/TSX 60 Index. The ETF tracks the performance of 60 large-cap Canadian stocks.

Since HXT is a total return ETF, as explained above, it does not pay a yield or distribution. This is extremely advantageous for investors, as they can choose to realize capital gains or losses whenever they would like.

If you are working with an advisor, a total return ETF like HXT can help with tax planning over time.

HXT is an extremely large ETF with a very low MER. It has a very long performance track record.

Keep in mind that HXT only offers exposure to large-cap Canadian stocks, so you will need to diversify geographically and across smaller and mid-sized companies through other ETFs.

Given all of the great features offered by HXT, it is a top choice when it comes to ETFs to include in your taxable accounts.

2. Horizons Cash Maximizer ETF

HSAV is a total return ETF offered by Horizons. The ETF gives you tax-efficient exposure to high-interest deposit accounts with Canadian banks.

If you were to have money directly deposited at a bank in a high-interest savings account, you could expect similar returns.

The key differentiating factor is that the growth from this ETF is treated as a capital gain, while interest from your account is taxed as income.

Due to its total return structure, the ETF again does not pay a yield or any regular distributions. HSAV is a very large ETF that comes with a fairly inexpensive MER. It has a very short performance track record.

A bank’s high-interest savings account does not usually come with a fee. In a lot of cases, the change in tax treatment of the gains from HSAV versus regular interest will more than cover the ETF’s MER.

HSAV fits into a portfolio as a very low-risk investment option, within your typical fixed income or cash allocation.

It can also be attractive for investors with an extremely low-risk tolerance, but keep in mind that returns are likely to be very low over time.

Whether you are a more conservative investor, or you’re looking to build a well-diversified portfolio, HSAV is a great option for taxable accounts.

3. Horizons Canadian Select Universe Bond ETF

HBB is another total return ETF offered by Horizons. The ETF looks to replicate the performance of the broad, investment-grade Canadian bond market. It passively follows the Solactive Canadian Select Universe Bond Index (Total Return).

Another low-risk investment option that is great for taxable accounts, HBB transforms the investment return of a bond index into capital gains for investors. This is especially important for bonds that have the worst tax efficiency when investing.

HBB does not pay a dividend or regular distributions. It is another very large ETF that comes at a fairly inexpensive MER. It has a long performance track record.

The ETF fits into a portfolio within its fixed income allocation. Although it doesn’t pay a steady income stream like most bonds, the return of HBB is still affected by the same factors as the broader Canadian bond market.

The coupons or yield that you would be getting by holding the underlying bonds is transformed into an overall gain in the value of your ETF units.

HBB is a great option to consider for tax-efficient fixed income exposure in your taxable accounts.

4. Horizons Equal Weight Canadian REIT Index ETF

Next on the list is another total return ETF from Horizons. HCRE is a Canadian REIT total return ETF that looks to add Canadian real estate exposure to your portfolio. It follows the Solactive Equal Weight Canada REIT Index (Total Return).

Real estate investment trusts (REITs) typically have a large yield that is paid out on a regular basis. By avoiding these regular distributions, you can add real estate exposure to your taxable account in a much more tax-friendly manner.

HCRE is a much smaller ETF than the others on our list. It also comes with a short performance track record and a significantly higher MER.

Real estate typically falls between stocks and bonds on the risk spectrum.

As a way to add tax-efficient and diversified real estate exposure to your overall portfolio, HCRE is a good ETF to consider for your taxable account.

5. Horizons S&P/TSX Capped Composite Index ETF

HXCN is another broad Canadian equity total return ETF from Horizons. When compared to HXT, HXCN goes beyond the 60 largest Canadian public companies and focuses on the broad Canadian equity market as a whole.

The ETF passively follows the S&P/TSX Capped Composite Index (Total Return).

HXCN has a very short performance track record. It comes at a very inexpensive MER and is a very large ETF in terms of assets under management.

As a total return ETF, it again does not pay any distributions or dividends.

HXCN allows you to avoid the large-cap bias that HXT offers, while also increasing diversification across more holdings among Canadian stocks.

Given its features, HXCN is another great ETF for taxable accounts.

6. Horizons Laddered Canadian Preferred Shares Index ETF

If you are looking to add Canadian preferred shares exposure to your portfolio, Horizon offers this through a total return ETF. Trading under the ticker HLPR, the ETF tracks the Solactive Laddered Canadian Preferred Shares Index (Total Return).

HLPR has a short performance track record. It comes with a relatively higher MER than most ETFs covered so far and is also relatively smaller in size.

HLPR does not pay any dividends or distributions. When investing in preferred shares, they typically pay a sizable dividend to investors. The total return mechanic makes it a very tax-efficient way to add preferred shares to your portfolio.

Preferred shares typically fall between equities and bonds on the risk spectrum.

If you are looking to add Canadian preferred shares to your taxable account, HLPR is a great way to do it.

7. Horizons S&P/TSX Capped Energy Index ETF

Energy is a key part of the Canadian equity market. Energy companies are typically mature and pay sizable dividends, which makes them less tax-efficient in taxable accounts. HXE is a way to access the Canadian energy sector and avoid this issue.

HXE tracks the S&P/TSX Capped Energy Index (Total Return).

The ETF has a long performance track record and comes with a relatively higher MER than most ETFs on our list. It is also among the smaller ETFs covered here.

As a sector-focused total return ETF, this is a great addition to your taxable account if you are feeling optimistic about the Canadian energy sector going forward. Since HXE’s mandate is so focused, it is best included along with other ETFs for optimal diversification.

HXE is a great energy sector ETF to consider for taxable accounts.

8. Horizons Canadian High Dividend Index ETF

The last ETF on our list is a high dividend ETF also offered by HXCN. Although it may sound counterintuitive, the ETF tracks a high dividend index but does not pay a dividend or distribution. Trading under HXH, the ETF tracks the Solactive Canadian High Dividend Yield Index (Total Return).

Dividend-paying companies tend to have specific features. These companies are more mature, tend to be viewed as being relatively safer than other stocks, and tend to be concentrated in sectors such as utilities, financials, and energy.

Some investors may be looking to gain exposure to these companies without needing the actual dividend income stream from them. HXCN includes this dividend yield in its total return.

The ETF has a decent-length performance track record. It’s offered at a low MER and is on the smaller end of Horizon’s total return ETFs in terms of assets.

If you are looking to access dividend-paying Canadian companies in a taxable account but don’t necessarily need an income stream from them, HXCN is a great ETF to consider.

Asset Allocation and Rebalancing

Asset allocation is the process of dividing your investment among various asset classes, such as stocks, bonds, real estate, and more. The goal is to maximize returns while keeping in line with one’s risk tolerance.

1. Determining Allocation: Start by assessing your financial goals, risk tolerance, and investment horizon. For instance, younger investors might opt for a higher percentage of stocks given their longer investment horizon and potentially higher risk tolerance.
2. Regular Monitoring: The value of your investments will change over time. As a result, your actual asset allocation might drift away from your intended allocation.
3. Rebalancing: This is the process of adjusting your portfolio back to your desired asset allocation. This might involve selling investments that have done well and buying those that have underperformed. Regular rebalancing ensures that your portfolio doesn’t become overly concentrated in a particular asset class.
4. Tax Considerations: In taxable accounts, frequent rebalancing might generate taxable events. It’s crucial to weigh the benefits of rebalancing against potential tax consequences.
5. Automatic Rebalancing: Some investment platforms offer automatic rebalancing, ensuring that your asset allocation remains consistent without manual intervention.

How to Buy the Best ETFs for Taxable Accounts in Canada

The cheapest way to buy ETFs is from discount brokers. My top choices in Canada are:

To learn more, check out my full breakdown of the best trading platforms in Canada.

Conclusion

If you have exhausted the room in your tax-advantaged investment accounts, make sure to consider taxation before investing in your taxable accounts.

The difference in after-tax returns between a tax-efficient and tax-inefficient investment that has the same pre-tax returns can be massive.

By focusing on total return ETFs in taxable accounts, you can give yourself a sizable tax advantage. Aside from the tax advantages of capital gains, any taxes that can be deferred to a later date can lead to large differences over time due to compounding.

Aside from picking smart investments in your taxable accounts, there are several other things to consider if you are looking to minimize the taxes that you pay in Canada.