Tax efficient retirement income for savings outside registered accounts


April 27, 2023

By Harvest ETFs

Canadians planning for retirement get some advantages using registered retirement savings plans (RRSPs), Registered Retirement Income Funds (RRIFs), as well as other registered accounts like the Tax Free Savings Account (TFSA). These accounts offer different tax incentives to save for the long-term. However, contributions to those accounts are limited and many Canadians need to save more than those annual limits each year to afford their retirement lifestyles.

The answer they often turn to is a non-registered account. These investment accounts have no limits on how much they can hold, but also have no tax incentives or advantages. If an investment in a non-registered account grows and is sold, it’s eligible to be taxed as a capital gain. If an investment pays income from interest, that income is taxed at your marginal rate.

Retirees may be especially concerned about tax exposure in non-registered accounts, because they often live off income from their investments. Limiting tax exposure from that income is a priority for many investors, and while traditional fixed income sources like GICs and Bonds are taxed at marginal rates, one strategy can produce a more tax-efficient form of income.  

Covered Calls for tax efficient income

Many equity income ETFs, such as those offered by Harvest ETFs, earn a significant portion of their cash distributions through the sale of covered call options. This strategy effectively generates premiums by selling another party the option to buy a portion of an ETF’s holdings. The second party pays a premium for that option.

In Canada, options are taxed as capital gains, not as income. Therefore only 50% of the income generated by covered call strategies is actually taxable. This can significantly reduce the tax burden a retiree faces from their retirement income. You can read more about the various tax implications of covered call ETFs here.

It’s worth noting, however, that not all the income paid by equity income ETFs is generated by covered call options. Some of these ETFs also add dividends from their underlying holdings into the income they pay, which have different tax considerations.

Individual tax situations vary from investor to investor, so it’s important for investors to seek tax and investment advice. Nevertheless, for retired and retiring Canadians who use non-registered accounts, limiting tax exposure can be very important. The capital gains portion of the income paid by equity income ETFs can help alleviate some unnecessary tax burden and leave a retiree with more income to finance their retirement goals and lifestyle.  


For Information Purposes Only. All comments, opinions and views expressed are of a general nature and should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies.

You will usually pay brokerage fees to your dealer if you purchase or sell units of the Fund(s) on the TSX. If the units are purchased or sold on the TSX, investors may pay more than the current net asset value when buying units of the Fund(s) and may receive less than the current net asset value when selling them. There are ongoing fees and expenses associated with owning units of an investment fund. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents.

Certain statements in the Harvest Blog are forward looking Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS.

FLS are not guarantees of future performance and are by their nature based on numerous assumptions, which include, amongst other things, that (i) the Fund can attract and maintain investors and have sufficient capital under management to effect their investment strategies, (ii) the investment strategies will produce the results intended by the portfolio managers, and (iii) the markets will react and perform in a manner consistent with the investment strategies. Although the FLS contained herein are based upon what the portfolio manager believe to be reasonable assumptions, the portfolio manager cannot assure that actual results will be consistent with these FLS.

Unless required by applicable law, Harvest Portfolios Group Inc. does not undertake, and specifically disclaim, any intention or obligation to update or revise any FLS, whether as a result of new information, future events or otherwise.