The Canadian asset allocation ETFs changed the investment landscape in Canada. In a single ETF you can own a well-diversifed managed global portfolio with fees in the area of 0.20%. This is a wonderful (life-changing) upgrade over high-fee Canadian mutual funds. Canadians pay some of the highest investment fees in the world. High fees are almost always a wealth destroyer. The asset allocation ETFs have become the investment choice for many Canadians who are in the accumulation stage. They can just “XEQT and chill”. Fortunately, we can also use the asset allocation ETFs in retirement. We can even create monthy income with Canadian asset allocation ETFs.
Before we get going, be sure to start with the Canadian asset allocation ETF page. You’ll find the performance history of the leading AA ETF providers, and you’ll also see the performance comparisons at the 5 risk levels.
Creating reitrement income by selling shares
Last week we looked at creating retirement income with iShares asset allocation ETFs.
With that option you would sell shares to create the desired retirement income. Of course the amount of income created would follow the marching orders set out by the optimized retirement cash flow plan.
Have a read of – The simple strategies that set you up for retirement success.
Asset allocation ETF income on auto pilot
But there’s an easier way, you can use a special series BMO’s asset allocation ETFs that will allow you to create retirement income on auto pilot. ZBAL.T and ZGRO.T and ZEQT.T are designed for investors looking for a consistent cash flow of 6%. Note, the 6% is a target.
The fees are super-low at 0.15%.
You can ‘set it and forget it’. Well, at least you might be able to forget it for a year or three. You’ll certainly need to revist your retirement plan and cash flow plan with regularity.
The funds will target a 6% income rate. Meaning a $100,000 holding would deliver about $6,000 in annual income delivered as $500 monthly. The 6% is based on the value of the fund, so the payments will fluctuate. The payments will be dictated by the markets and the fund performance.
It’s the same for the first AA ETF income fund, check out –
Vanguard’s VRIF for monthly income that is designed to deliver 4% annual income.
Here’s a distribution example using ZBAL.T for 2025.
You can use the T-series asset allocation ETFs in your RRSP/RRIF/TFSA/Taxable accounts. Confirm with your discount brokerage.
Taxable account ‘bewares’
1. High Tax Drag from “T6” Structure
- What it is: ZBAL.T is designed for a high, fixed monthly income (targeting 6% annually). It achieves this by often paying out “Return of Capital” (ROC).
- The Issue: In a taxable account, you are taxed on the dividends and distributions received each year. These payments are often heavily taxed as income.
- Alternative: People often prefer the standard ZBAL for growth, as it has a lower yield and higher capital gains, which are taxed more favorably.
2. Return of Capital (ROC) Complications
- If the fund does not produce the high 6% distribution through dividends/interest, it pays out your own money back to you (Return of Capital).
- While ROC is not immediately taxable, it lowers your Adjusted Cost Base (ACB), resulting in a higher capital gain when you sell.
3. Tax-Efficient Alternatives
According to Canadian Portfolio Manager and discussions on r/CanadianInvestor, if you are investing in a taxable account, you are better off using:
- ZDB (BMO Discount Bond ETF): This holds bonds with lower coupons, resulting in more capital gains and less interest income.
- Swap-based ETFs (e.g., HXS, HXT): These generate almost no taxable distributions until you sell.
That said, the T-series are now using the BMO Discount Bond ETF. Be sure to understand all tax implications and consult a tax professional.
Send the income directly to your chequing account
Confirm with your brokerage that you have everything set up correctly, but you can arrange to have the monthly income deposited to your linked chequing account.
Many retirees don’t want the ‘hassle’ of selling shares and this feature adds an additional convenience.
There’s no greater risk in selling shares
There is the perception among some investors and retirees that there is additional safety in creating retirement income from dividends. Fortunately, that’s not the case. Other than tax treatment (in a taxable account) a share sale and a dividend of equal value are the same. They are both a removal of value from a holding. The sequence of return risk is the same.
Given that truth, combining share sales with dividends and bond income should be superior as you can create a higher quality portfolio. Retirement income success from your investment assets comes down to total return and risk level – that’s it.
You should be able to ‘do better’ if you are dividend agnostic. You are then free to build the superior portfolio for retirement.
Taking advantage of the Canadian dividend tax credit
That said, here’s one move that Canadian retirees often consider. You can create monthly income and take advantage of the Canadian dividend tax credit. Up to a certain income threshold Canadian dividends are very tax efficient in taxable accounts. There is no benefit in a registered account such as RRSPs, RRIFs and TFSAs.
Here’s an overview of the Canadian dividend tax credit.
You can use a personal tax calculator such as this one from Turbo Tax to discover just how tax efficient are Canadian dividends at income levels.
The above is a hypothetical example where an Ontario resident has $22,000 in CPP and OAS income and $40,000 in qualified Canadian dividends. Their total tax haul is $2,504 at a crazy low tax rate of 4.04%. A couple with that income ‘strategy’ would be generating almost $120,000 in after tax income at that ridiculously low tax rate.
Of course it would be rare to use government benefits and move next to taxable accounts. When we create an optimized retirement cash flow plan we will usually harvest a significant amount of RRSPs / RRIF / LIF funds first, often followed by taxable and then TFSA.
Monthly Income Canadian Dividend ETFs
I am partial to Vanguard’s VDY-T. We used that in my wife’s RRSP from inception up until about 2 years ago. It outperformed the market by about 1% annual.
We then sold VDY to build a Canadian blue chip stock portfolio.
Given the massive price appreciation, the yield on VDY is now just above 3.0%.
Another solid choice is the energy-heavy iShares XEI-T. The XEI-T yield is currently 3.7%.
You can also look to the Canadian Utilities stocks and ETFs.
Don’t let tax perfection drive the bus
Another way to frame it is …
Don’t let the tax tail wag the investment dog.
Greater geographic diversification and investing within your risk tolerance level is key, and should come first IMHO. And keep in mind that tax efficiency is found by way of running the numbers when you create your optimized retirement cash flow plan.
At MayRetire you can explore the effect of increasing your dividends and Canadian allocation in taxable accounts. You might look for modest moves in that dividend direction – think of it as portfolio shading.
Use ‘Contact Dale’ at the top of the page if you’d like to sign up for the how to use MayRetire Zoom Sessions.
The biggest TSX 60 dividends
If you’re looking to make use of the tax credit you might look to the The Beat The TSX Portfolio. The yields were from the beginning of 2026.
While the Beat The TSX Portfolio has a long history of outperformance vs the TSX Composite, keep in mind that the portfolio comes with much greater volatility, including much larger drawdowns in major market corrections.
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