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Justin Bender and Dan Bortolotti of PWL Capital explain how to estimate the impact of taxes on ETF performance.


If clients hold ETF investments outside registered accounts, taxes can take a big bite out of returns. Unfortunately, comparing the tax-efficiency of similar ETFs is difficult, because there is no standard method for estimating after-tax returns. In Canada, fund returns are reported on a pre-tax basis, but this can be misleading. As we will see, two funds with similar pre-tax returns can perform very differently when you account for the tax investors would pay on the distributions.


In 2001, the Securities and Exchange Commission made it mandatory for U.S. fund companies to supply after-tax return calculations. This standardized reporting helped investors better understand the impact taxes have on the performance of their mutual funds and ETFs. For example, here’s how the Vanguard Total Stock Market ETF (VTI) reports performance on its website:

Source: The Vanguard Group

Two years later, Amin Mawani, Moshe Milevsky, and Kamphol Panyagometh published a paper in the Canadian Tax Journal called The Impact of Personal Income Taxes on Returns and Rankings of Canadian Equity Mutual Funds. The authors calculated the after-tax returns of 343 Canadian mutual funds with at least 10 years of performance data. They discovered that ranking funds based on before-tax and after-tax return produced very different results.

For example, the best-performing fund before taxes dropped to 16th place when its after-tax return was compared to others. The authors also found that investors in the highest marginal tax bracket lost about 1.35 percentage points per year to taxes on fund distributions.

More than a decade later, Canadian funds are still not required to publish after-tax returns. Morningstar Canada, a fund data provider, does calculate after-tax returns for a number of mutual funds and ETFs, but only if the fund companies provide the necessary data, and not all of them do.


In this course we share our methodology for calculating after-tax returns, which we have applied to several popular Canadian ETFs. It will not satisfy all critics, but we believe it is a useful starting point, especially since there is no standardized methodology required by Canadian securities regulators.

Our method for calculating the pre-liquidation after-tax return for an ETF is adapted from the Morningstar After-Tax Return Methodology, which was designed for U.S. investors. We have made changes where we felt they were appropriate for Canadian investors.

Pre- and Post-Liquidation After-Tax Returns

A pre-liquidation after-tax return accounts for taxes paid on distributions before the after-tax proceeds are reinvested in additional units. The investor has little control over these distributions, as they are the result of the fund manager’s selections and trading.

A post-liquidation after-tax return includes the capital gain or loss realized when investors actually sell their shares. Because investors can usually choose when to sell their shares, post-liquidation after-tax returns will vary greatly among individuals.

Throughout this course we have limited the discussion to pre-liquidation after-tax returns.

To make our calculations, we created a spreadsheet that allowed us to input the date, amount and character of each distribution paid by the ETF. We also entered the net asset value (NAV) per share on the ex-dividend date of each distribution. The spreadsheet then calculated the before-tax return (both reported and adjusted, as explained below), after-tax return, and tax cost ratio for the ETF over periods of one to 10 years.

We have made our PWL 2013 After-Tax Rate of Return Calculator for Canadian ETFs available for download (an up-to-date version of Excel is necessary to use the spreadsheet). The spreadsheet is protected so the formulas cannot be altered. However, we have included detailed descriptions of these formulas in the appendix. (For the 2014 version of the calculator, click here. Note: the 2013 version is required to complete the exam for this course).

How to use the spreadsheet

To help you understand and use our downloadable spreadsheet, we’ll work through a calculation using the iShares Core S&P/TSX Composite High Dividend Index ETF (XEI).

1. Note the ex-dividend date of each distribution.

Start by visiting the ETF’s web page and clicking the “Distributions” tab to view the dates and amounts of each distribution. Record the ex-dividend date for each distribution in 2013, as you will need to enter these into the spreadsheet.

2013 Ex-Dividend Dates: XEI

XEI Distributions

Source: BlackRock Canada

The spreadsheet assumes all distributions are reinvested on the ex-dividend date. In reality an investor would not be able to reinvest the distributions until the payment date; however, most before-tax performance calculations assume dividends are reinvested on the ex-dividend date, so this allows our before and after-tax comparisons to remain consistent.

See all comments Recent Comments


John, I disagree whole-heartdly! I need a reason to advise a client to choose an investment. A broad understanding of tax consequences is the reason clients come to me. Yes there is more technical detail than I will share with the client, however I have now learned the basic tax concepts of the ETF world. I can use this to better advise my clients.

Wednesday, Feb 28, 2018 at 11:30 am Reply


The ETF topic of net after tax return and calculations are a contradiction of our role. We are not here to give tax advice and we are specifically not to engage in a tax advice discussion with clients, however you make the entire ETF course related to the discussion of tax consequence. As far as I am concerned the client should seek tax advice from a tax specialist and this course is non relevant for the purpose of continuing education credits. This should be a course for accountants and tax specialist not an IA.

Monday, Dec 4, 2017 at 10:35 pm Reply

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