Global X (formerly Horizons) swap-based corporate class ETFs may have a role in a personal taxable account. Their structure functionally avoids taxable eligible dividend income and instead the ETF accrues that amount as a capital gain. Sounds great, and it could be. However, that depends on multiple factors. Learn more about that in the context of HXCN vs a convention ETF (like ZCN, XIC, or VCN) for Canadian All-Cap Equity coverage held in a personal taxable account.
Corp Class ETF Basics
Mutual Fund Corporation vs Trust Investment Income
A corporate class ETF has a different structure than conventional ETFs. The corp class ETF is one share class in a mutual fund corporation. So, the income from that ETF can be offset by expenses in other ETFs in the corporate family. If the net income across the MF corporation family of funds is zero, there is no tax. The value of each ETF unit value rises by the amount of income minus its expenses. So, for the HXCN ETF, eligible dividend income effectively becomes a capital gain rather than a taxable dividend. Capital gains are generally taxed at half the usual income tax rate and only when the ETF units are sold.
In contrast, conventional ETFs are a trust structure. So, income received must be paid out and taxed in the hands of the unit holders each year and taxed at the usual personal rates. That means there is tax on the eligible dividend distributions every year.
Mutual Fund Corporation Tax Risk
The other feature of a MF corp is that the losses from previous years can be carried forward and used to offset future income. In the case of Global X, they booked a large loss pool during the 2020 market swoon. Since then, they have had more income than expenses each year. That has caused the loss pool to shrink, but they have still not had net income.

The trouble occurs if there is net income inside the MF corp. If that happens, it is taxed at the business tax rate which is 39.5% in the case of Global X. That tax paid within the corporation would be assigned to the ETFs that contributed to the net income and reduce their share value. When you sell, the total of that hidden tax plus your personal tax on a capital gain is higher than interest or foreign dividend income. It is much higher than eligible dividends would be.
Is there a tax-berg looming?

So far, there looks to be significant open water before hitting the tax berg. However, you can only see the loss pool update for a year the following spring when Global X issues its year end report for the ETFs. That said, Global X has made some changes this year that may help.
Global X changed up their all-in-one ETFs (HEQT and friends) to use more conventional ETFs instead of the corporate class ones. That may decrease income growth (but also decreases ETF return). They have also increased their swap fees as of Jan 1st, 2025. That increases expenses.
I suspect that Global X would initiate a roll-over into a conventional structure if they saw the tax berg coming. However, there is always a risk of pilot error. There would also be the management question of how to handle all of the unsettled swap income.
HXCN & ZCN ETF Characteristics
ETFs are a simple way to gain exposure to the Canadian stock market. That could be as a Canadian market ETF embedded within an all-in-one ETF that rebalances to maintain that exposure, or as an individual ETF.
One of the main reasons to use an individual ETF is because you want to select one with specific characteristics like market coverage, fees, or tax efficiency. I will review the market coverage and costs of HXCN and ZCN in this section. Tax efficiency is more complex and will follow later.
S&P/TSX Canadian Capped Composite Index
HXCN and ZCN both track the S&P/TSX Canadian Capped Composite Index. That index tracks the largest Canadian companies, but caps any single stock at 10%. That translates to about 225 companies that make up 95% of the Canadian equity market. That means more diversification and also less of a large cap factor weighting than other popular indexes like the S&P/TSX 60.
Blackrock’s XIC also tracks the S&P/TSX Capped Composite Index. The very similar VCN ETF tracks the FTSE Canadian All-Cap Index. So, this comparison should hold up amongst those ETFs as well.
Dividend Yield, Capital Gains, & Fees
The gross eligible dividend yield is the dividend paid per share divided by the share price. It may decrease when equity prices rise more than dividend payments and vice versa. So, it is constantly changing as stock prices and dividend amounts change. However, over the long term, it is usually more in the 2.8%/yr range.
So, I will use a yield of 2.8%/yr. This may also differ from the distributions you see as an investor because distributions are made after fees and costs of the ETF are deducted. For example, ZCN has an MER of 0.06%. With a gross yield of 2.8%/yr, you would expect to get a 2.74% distribution as eligible dividends each year. That would be captured as an increase in share price for the corp class ETF, although further blunted by the higher embedded costs. The MER for HXCN is 0.05%, but there are also trading costs from the swap fees of up to 0.20%/yr. While the swap fees may come in lower, I will assume 0.2%/yr for the model.
I have arbitrarily set the capital gains at 5%/yr. So, for ZCN that would be 5% capital gain plus a 2.74% dividend for a total return of 7.74%. For HXCN, it would be a total return of 7.55%, all as a capital gain.
Tax Efficiency of HXCN vs ZCN ETFs
Passing Through All Gains Annually
Generally, a capital gain is attractive because it is taxed at half the usual tax rate. That is the simplified appeal of corporate class ETFs. However, the eligible dividends that ZCN pays out also come with the enhanced dividend tax credit. When you factor that in, the net tax rate is lower than even a capital gain for many people.
For example, in Ontario the credit is actually higher than the tax in the <$52K tax bracket for an effective tax rate of -6.86%. It isn’t until tax brackets over $115K in Ontario that capital gains have a lower tax rate than eligible dividends. That is with a 50% inclusion rate. If the proposed capital gains tax increase legislation passes, capital gains over $250K/yr don’t stand much of a chance. In the chart below, you can see the income level below which eligible gains are more tax efficient by province.

If one were to realize the capital gains and pass all income through each year, HXCN would obviously underperform ZCN after-tax in the lower tax brackets. Below is how it changes at different income levels for Ontario.

Tax Deferred Growth
Except in the very highest tax brackets, the potential advantage of the HXCN ETF is not in passing income through. The advantage is that you would hopefully not sell and realize the capital gains every year. So, HXCN would have more tax deferred growth.
In contrast, with the ZCN ETF you’d have to pay tax each year on the eligible dividends paid out. In the lowest tax brackets of BC, NB, NS, ON, PE, and SK that is a bonus due to the tax credit exceeding the tax rates. However, outside of that, it is tax paid each year rather than kept invested and compounding.
In the slideshow below, I show the tax deferred growth advantage for HXCN vs ZCN at different income levels. You can “flick” the slides to see different provinces. That is the extra % growth per year due to deferred taxes.
After-Tax Value In The Future
After-Tax Value When You Do Sell
The taxes on tax-deferred growth do eventually come due. In the case of HXCN, it would be when eventually sold. At that point the extra capital gains that accrued (instead of eligible dividends if you had used ZCN) will have tax due. One of the risks with HXCN is that you may be forced to realize the capital gain earlier than you’d planned if the ETF gets liquidated. That could conceivably happen due to ETF closure by Global X if there is a problem with the corporate class income management.
Either way, how much more money would you have after tax if you sell at different points in the future? That depends on the balance of several factors. The higher your tax bracket now, the more of an advantage HXCN would have (as mentioned). For the tax deferral component, it depends on how far into the future the tax is deferral.
The chart below shows the amount more you’d have due to HXCN vs ZCN ETFs over time. The illustration below uses a taxable income of $150K in Ontario. An income level where HXCN could make sense. Tax on eligible dividends is removed annually for ZCN. The value at each time point is after capital gains tax from liquidating the ETF. As you can see, there is a small increase in the amount of after-tax money that grows over time. If the capital gain is taxed at a higher inclusion rate, like 66.67%, then HXCN trails ZCN for about 13 years. After that, the tax deferral provides a minor advantage.

That was at an income level where HXCN has a very slight tax deferral advantage. In the top Ontario tax bracket, the advantage is more pronounced. HXCN has an advantage right away due to the heavy taxation of eligible dividends at Ontario’s highest rates. The after-tax advantage grows over time.

Deferring Tax To A Low Income Year
Tax deferral may also be a tax reduction if you defer from a high current tax rate to a lower future one. That is when tax deferral is especially powerful. A common example would be contributing to an RRSP and getting a refund at the highest tax rate of 54%. Then, taking it out later in retirement or during a low income year and paying tax at a low rate. With tax deferred growth in between. The same principle applies here.
Below is an example of someone holding HXCN vs VCN ETFs while in the highest Ontario tax bracket ($>253K)and selling it at different time points in the future while in the $100K tax bracket. That is about an 11% absolute decrease in the tax rate with a 50% capital gains inclusion rate and 15% for a 67% inclusion rate. This tax reduction added to the tax deferral makes for a much larger advantage. Even with a higher inclusion rate.

The Other Edge of the Sword
Tax deferral can cut the other way if you defer from a low current tax rate to a higher future one. That is not inconceivable. For example, if you are forced to liquidate a ETF with a large capital gain, that would bump you up tax brackets. That could happen if you need the money unexpectedly, die, or the ETF gets closed down. Your future income could also be higher if you earn, invest, and grow a big nest egg. With the exception of a TFSA, it all gets taxed eventually.
Below is the post-tax value if liquidated at different future time points. This Ontario investor has a usual income of $150K. The HXCN ETF has a tax deferral advantage in that tax bracket. In the future, they either have a large capital gain or higher income in general and get taxed in the top tax bracket. Ouch! At a 50% capital gain inclusion, they break even as long as it is more than 8 years into the future. However, if the future capital gain inclusion rate is 67%, they would be worse off no matter what.

Balancing Risk & Reward
Whether to use HXCN or a conventional ETF is a personal decision. I cannot give specific investing advice. Hopefully, this post will help you to make a more informed one as part of your own due diligence. It is a balance of potential risk and reward. The risk-reward balance is more marginal with this ETF than some of the others that I will also review.
Potential Reward
Because eligible dividends are taxed favorably and HXCN has higher costs due to its swap fees, it doesn’t really offer much of an advantage over its conventional alternatives at lower tax brackets. In high tax brackets, the capital gains of HXCN may be taxed at a lower rate than eligible dividends enough to make up for HXCN’s costs.
The other potential advantage of HXCN is tax deferral on the capital gain instead of annual taxation of the dividends. That is questionable in lower tax brackets, but in the mid to high tax brackets it is larger. Particularly, if you defer from a high current tax bracket and sell in a lower future tax bracket. Also, the further into the future, the larger the advantage.
Potential Risks
The unknown future is where another layer of risk enters in on top of the usual investing risks. This analysis assumes that HXCN has no net corporate income assigned to it from the corporate class structure. If it does, then it quickly becomes inefficient. Global X might able to manage a conversion to a conventional ETF if they see that coming, but I am not sure how that would play out.
If the ETF were closed, a large realized capital gain could bump you up tax brackets. That could make tax deferral detrimental depending on the time frame and inclusion rate. It is less of an issue in the highest tax brackets where the advantage is largest and you can’t get bumped much higher.
The potential good news is that while the recent swap fee increase has made HXCN and the other corporate class ETFs less attractive than before, the increased costs may also make the corporate structure more sustainable. However, it also highlights that there are additional risks to these ETFs and the most important risks are the ones you didn’t see coming.
Disclosures: We currently hold HXCN in one of our kid’s informal trust because I am too lazy to track income. We hold ZCN some of our other accounts.
Hi LD,
Thanks for another detailed analysis of X vs Y (others are RRSP vs TFSA, Asset location etc.). I enjoy reading these kind of material for knowledge and as a brain exercise. However what I have come to the conclusion is that, there are way too many variables involved in such situation and some of the variables requires looking into the crystal ball (eg what will be my future tax bracket especially if the retirement is 10+ years out). I have come to the conclusion thar unless one has sophisticated software tools to draw out various scenarios and a reasonable idea about their future conditions, these analysis are not practical to apply. Also over optimization takes lots of time and mental bandwidth so unless this is my full time job, it is not worth pursuing these strategies. Am I on the right track?
Thanks
I think when it comes to asset location and long-term planning, that is usually the case. It is best to pick an effective and easy to execute strategy. You can intermittently get guidance as required from a fee-only advisor who uses software to simulate and (importantly) can discuss what it means in practical terms.
For this analysis, this is a single account type and specific ETFs. Fees can change (we just saw that with HXCN). Taxes can change too (capital gains is an example). The utility in something like this is to give people a critical look at potential risk/benefit for whether to use this type of ETF (I get asked about it frequently). It is easy for people to go: capital gains vs taxable income = HXCN better. I see or hear that frequently also. However, it often is not the case. When it is, you need to be aware that it is not a large margin in this case and small changes to fees or taxes in the future (like we’ve glimpsed already) could make it sub-optimal.
My general feeling is that for this ETF, what was once a slight advantage has now become only an advantage in the highest tax brackets and is vulnerable to risks from corp class structure, fee changes, or tax changes. Probably not worth it for many people (I cannot give specific advice, but can give analysis). That is pretty practical to keep people out of trouble from a superficial look. I always try to put numbers to my opinions. Recognizing the limitations of modeling, a close guess is probably better than no guess if you are thinking of taking on complexity. People are constantly looking to do that because in other parts of our professional lives being clever and working harder usually does better. It is equally fine, to ignore it, take no guess and go with the simplest option. Like an all-in-one ETF. That is still the best option (I think) for the average investor, but those with high incomes still wonder if they are missing out on something. In this case, they can likely rest easy that they are not.
-LD
Thanks LD for the response.
Thanks for the great article. This is really in depth analysis.
I imagine some future articles about HXS or HXEM or HXDM vs their similar Vanguard/iShares/BMO vanilla ETFs are in the works. I am looking forward to those.
As I was wondering about the taxation of the dividend portion of some ETFs; I noted that morningstar was reporting the CAD dividend amounts to be lower than I expected. I wondered if the MER discrepancy, plus the withholding taxes (15%) would fully (or mostly explain) this difference, and this almost looks true. But if we consider the exchange rate, wouldn’t VOO dividend (1.24% USD) be about 1.4x higher. Am I missing something here? I thought I remember that in previous years, the Canadian ETFs had higher dividends than the US denominated ETFs (as one might expect).
S&PP500 ETFs:
VOO – 1.24% (note: USD). MER=0.03%
VFV – 0.99% (note: CAD). MER=0.09%
ZSP – 0.91% (note: CAD). MER=0.09%
ZSP.U – 1.00% (note: USD). MER=0.09%
International Markets:
IEFA – 3.47% (note: USD)
XEF – 2.7% (note: CAD)
Emerging Market ETFs:
IEMG – 3.19% yield (note: USD)
XEC – 2.03% (Note: CAD)
HXEM – 0%
Will you plan an article that shows HXS vs something like VOO/VFV/ZSP in a Prof Corp?
Other than exchanging money (Norbert’s Gambit), do you see any other advantages that spring from the fact that HXS and HXS.U have the same CUSIP?
Yep – they are in the works. It is quite interesting actually. These will be in personal taxable accounts. I did them all in corporate accounts a year or so ago. I will update those with the higher swap fees once the fate of the capital gains tax increase is confirmed.
The reported ETF distributions are lower because they first subtract MER and then FWT is applied. You can get the FWT back when you pay taxes, but it is separate from what is reported on the ETF info. I go through that next week when I do HXS, HULC vs ZSP/VFV/XUS.
For HXS and HXS.U – just Norberts Gambit. The USD version usually has USD brokerage fees and a low trading volume – so not great compared to DLR/DLR.U but it maintains stock market exposure.
-LD
Despite the increase in fees, is there still benefit to holding these to avoid hitting the passive income limit in a corp?
I think in a corporation, it will be dicey for HXCN/HXT. Eligible dividends pass through so well. There could potentially be a use when haveing RDTOH trapping or over the passive income limit. I am waiting to see whether the capital gains tax increase actually dies and then will update those articles.
-LD