How I Built a Tax-Efficient CAD RRSP Portfolio with 0.175% Total Costs in 2025

Introduction

Canadian mutual funds charge 1.5-2.5% in disclosed MER, but their true total cost is higher once you add foreign withholding taxes and trading costs. My portfolio's total all-in cost is just 0.175%, delivering savings of $1,300+ annually on every $100,000 invested.

When I decided to move my RRSP from expensive mutual funds to a self-directed approach, I had three clear objectives:

1). maximize tax efficiency,

2). minimize costs, and

3). avoid currency conversion headaches.

What I discovered was that achieving all three goals simultaneously required some serious number-crunching and a deep dive into Portfolio Visualizer.

This isn't just another "buy VEQT and call it a day" article. I'm going to walk you through my exact process of building a portfolio that delivered 12.89% annual returns with a 0.89 Sharpe ratio, 11.52% volatility, all while keeping costs rock-bottom at 0.175% and avoiding USD currency exposure.

Why I Abandoned Traditional RRSP Advice for a Quantitative Approach

Let me be brutally honest, I used to be one of those investors who just trusted the "professionals." My RRSP was stuffed with mutual funds that my bank advisor recommended, and I thought I was being smart by diversifying across different fund families. I proved myself wrong when I started digging and analysing my own investment data!

The wake-up call came when I actually realized what I was paying in fees. We're talking about funds with MERs ranging from 1.5% to 2.5%, plus foreign withholding taxes on the dividend distributions and trailing commissions that I didn't even know existed. On my $50,000 RRSP, I was paying over $750 - $1,250 annually just in management fees. Fees work like reverse compound interest - every dollar you pay in fees today is a dollar that can't grow and compound for the next 20-30 years.

But here's where it gets really frustrating. When I started researching alternatives, everyone kept saying "just buy XEQT" or "VEQT is all you need." Sure, these are decent options with 0.24% MERs, but I wanted to dig deeper. These MERs also do not include the foreign withholding taxes, for example Vanguard All-Equity ETF Portfolio (VEQT), has a MER of 0.25% and foreign withdrawal tax on dividends of 0.22% if held in RRSP or in TFSA. Why settle for decent when you can optimize?

I realized that if I stop at the first level of cost reduction - switching from mutual funds to all-in-one ETFs (a portfolio of ETFs such as VEQT, you can learn more from my article LINK). That's like saying you've optimized your car's fuel efficiency just by switching from a pickup truck to a sedan. There's so much more you can squeeze out with the right approach!

My three-objective optimization challenge became an obsession. I wanted tax efficiency (minimizing foreign withholding taxes), cost efficiency (lowest possible MER), and currency efficiency (no USD conversion headaches). These objectives do not conflict with each other, and this is where quantitative analysis can shed light.

My RRSP Tax and Currency Efficiency Strategy: Swap ETFs and Foreign Withholding Tax Optimization

This is where it gets really interesting, and frankly, where Canadian investors who don't do not dig deeper are leaving thousands of dollars on the table every year. Foreign withholding tax is like a silent wealth killer, it's eating away at your returns, and you probably don't even realize it's happening.

Here's the foreign withholding tax trade-off I had to navigate: If I bought VTI directly in my RRSP, I'd get 0% foreign withholding tax thanks to the Canada-US tax treaty. The problem? Currency conversion costs and complexity.

Wealthsimple doesn't support Norbert's Gambit, so converting CAD to USD would have cost me around 1.5% each way through their currency exchange. Sure, I could have switched to Questrade where I'd done Norbert's Gambit before, but I wanted to keep things simple and stick with the Wealthsimple platform.

That's where HXS became brilliant. The swap structure gives me S&P 500 exposure with 0% foreign withholding tax (just like VTI would), but I can buy it with CAD on the TSX. No currency conversion, no Norbert's Gambit hassle, no switching brokers.

Meanwhile, Canadian-listed wrappers like VFV (which holds VOO) get hit with 15% withholding tax on the dividends it distributes even in RRSPs because the wrapper structure doesn't qualify for treaty benefits. VOO is covered under the US-Canada treaty, so it is not a subject to withholding tax on the dividends, however, you can only buy it in USD. So HXS gives me the best of both worlds: US exposure without the tax drag or currency headaches.

Enter Horizons swap-based ETFs. I'll admit, I was skeptical at first as the whole "synthetic" approach sounded sketchy. But when I dug into the numbers, it was a game-changer. HXS (Horizons S&P 500 Index ETF) uses total return swaps to replicate S&P 500 performance without actually holding the underlying stocks.

What does this mean in real dollars? Well, on a typical 2% dividend yield from US stocks, I was losing 0.30% annually to withholding taxes. Over 20 years, that compounds to a massive difference in portfolio value. The swap structure eliminates this drag entirely.

But here's where it gets even better. In March 2023, BlackRock Canada changed the structure of XEC (their emerging markets ETF) to hold stocks directly instead of wrapping a US ETF. This reduced the foreign withholding tax drag from a painful 0.70% annually down to around 0.30%. I timed my portfolio construction perfectly to take advantage of this change.

The key insight? Most investors focus on headline MERs, but the real cost includes foreign withholding taxes on the distributed dividends. Example, A Canadian-listed emerging markets ETF, VEE (Vanguard FTSE Emerging Markets Index ETF) with 0.24% MER + 0.0154% foreign tax drag (total: 0.2554%) is actually cheaper than XEC (iShares Core MSCI Emerging Markets IMI Index ETF) with 0.26% MER + 0.0066% tax drag (total: 0.2666%). Well I still decided to accept this cost difference because XEC has only a small allocation (2%) in my portfolio so the difference in costs (0.0112%) is in the "rounding error" territory, and also XEC has broader market coverage (includes small-cap via IMI index), and has better liquidity than VEE.

Portfolio Visualizer Analysis: How I Tested Multiple Allocation Strategies

Okay, this is where I got completely nerdy, and honestly, it's probably my favorite part of the whole process. I spent nights testing different portfolio allocations using Portfolio Visualizer, and the results completely changed my perspective on "optimal" asset allocation.

[Note: I'll link to my detailed Portfolio Visualizer guide here for readers who want the step-by-step technical process]

My final Option A portfolio allocation looked like this: 49% HXS (S&P 500), 23% XEF (international developed), 16% ZCN (Canadian equity), 10% ZSB (short-term bonds), and 2% XEC (emerging markets). But getting to this allocation required testing dozens of variations.

The results? This portfolio delivered a 12.89% CAGR with 11.52% volatility and a 0.89 Sharpe ratio. Compare that to a minimum variance portfolio that only returned 2.32% annually—barely keeping up with inflation! It really drove home the point that playing it "safe" is actually the riskiest strategy for long-term wealth building.

What surprised me most was how the 10% bond allocation (ZSB) actually improved risk-adjusted returns. I originally thought bonds were just return killers, but the data showed they reduced volatility more than they reduced returns. The worst year for my portfolio was -10.07%, compared to much steeper drawdowns for equity-only strategies.

The Portfolio Visualizer analysis also revealed something crucial about market timing. My portfolio's maximum drawdown was -16.13%, which sounds scary until you realize that's actually quite reasonable for an equity-heavy portfolio, and much lower maximum drawdown compared to the benchmark Vanguard 500 Index Investor ( -23.95%). More importantly, the recovery time from drawdowns was consistently shorter than more volatile alternatives.

The Complete Cost Breakdown: How I Achieved 0.196% Total Expenses

This is where the rubber meets the road, and where I think it is most important to take critical considerations of all costs involved. We need to focus not only on MER (management expense ratio), but also to compute the weighted average of all costs, including foreign withholding taxes.

Let me break down my exact cost calculation:

Total weighted cost: 0.175%

Compare this to XEQT at 0.2155% total cost (0.21% MER + 2.5%*0.22% from 0.22% foreign withholding tax and 2.5% dividend yield, totalling to 0.2155%), and I'm saving $40.5 annually on every $100,000 invested. Over 25 years, assuming 7% real returns, that's an extra $4915.527 just from cost optimization!

But here's what really blew my mind—I compared this to my old mutual fund portfolio, which was costing me 1.5% annually. The difference compounds to around $137088.2 on a $100,000 initial investment over 25 years. That's not just money - that's life-changing wealth that was being siphoned away by unnecessary fees.

If you are interested in the details of the calculations see this.

Here is the formula for approximating the portfolio growth from initial value of $100000 over 25 years, assuming 7% returns over this period. Portfolio value after 25 years = (100000 * (1+ return rate)^25)

Returns over 25 years for XEQT = 7%-0.2155% = 6.7845%, return rate is 0.067845.

Portfolio value after 25 years with XEQT = $516066.3

Returns over 25 years for my portfolio = 7%-0.175% = 6.825%, return rate is 0.06825.

My portfolio value after 25 years: $520981.8

Returns over 25 years for mutual funds portfolio with 1.5% cost portfolio: 7%-1.5% = 5.5%, return rate is 0.055.

Portfolio value in mutual funds after 25 years is $381339.2.

Wealthsimple Execution Strategy: Avoiding Currency Conversion and Timing the Market

Actually implementing this portfolio strategy brought its own set of challenges, and honestly, some humbling moments where I realized theory and practice don't always align perfectly.

The beauty of my CAD-denominated approach became crystal clear during execution. Every single ETF in my portfolio trades on the TSX in Canadian dollars. No Norbert's Gambit, no currency conversion fees, no trying to time USD/CAD exchange rates. Just straightforward buying with my Canadian dollars.

But here's where I learned a valuable lesson about liquidity. Most of my ETFs (HXS, XEF, ZCN) had excellent liquidity with tight bid-ask spreads. Then I got to ZSB, my short-term bond ETF, and discovered it only trades about 900 shares per day. That's like trying to buy a house in a town where only one house sells per month!

My solution? I split my ZSB purchases across multiple transactions. Instead of buying 60 shares at once, I started with just 6 shares to test the waters. The bid-ask spread was reasonable ($48.62/$48.65), but I learned to be patient and use limit orders exclusively.

This brings up a crucial point about limit vs market orders. When I saw HXS trading with a bid of $90.16 and ask of $90.20, I almost made the rookie mistake of placing a market order. A $0.04 spread might not seem like much, but on larger positions, these execution costs add up. I set my limit at $90.17 (slightly higher than the lowest bid price) and got filled immediately.

For dollar-cost averaging, Wealthsimple's fractional share feature was a game-changer. Instead of buying round lots and having leftover cash, I could invest exactly $XXXX in XEF and get 14.4 shares. Every dollar gets put to work immediately.

Portfolio Performance Deep Dive: Risk-Adjusted Returns That Actually Matter

The performance results still give me goosebumps when I look at them. But here's the thing—raw returns only tell part of the story. What really matters for long-term wealth building is risk-adjusted performance, and that's where my portfolio really shined.

That 12.89% CAGR sounds impressive, but the 0.89 Sharpe ratio is what gets me excited. This means I'm getting excellent compensation for every unit of risk I'm taking. Compare that to a minimum variance portfolio with a 0.01 Sharpe ratio - basically getting no compensation for risk at all.

But the metric that really matters for real-world investing is the Sortino ratio of 1.42. This focuses specifically on downside risk, which is what actually keeps you up at night during market crashes. A high Sortino ratio means the portfolio delivers returns while minimizing those gut-wrenching negative months that make investors panic-sell at the worst possible times.

The maximum drawdown of -15.95% tells the story of what happens during the worst-case scenario. Yes, there will be periods where my portfolio loses 16% of its value. But historically, these drawdowns recover relatively quickly, and the long-term upward trajectory more than compensates for temporary setbacks.

What really drives home the power of this approach is the compound effect over time. That 0.175% total cost versus a typical 1.5% mutual fund cost means I keep an extra 1.325% of returns every single year. Compound that over 25 years, and we're talking about the difference between a comfortable retirement and a truly wealthy one.

The best part? This isn't some get-rich-quick scheme or market timing strategy. It's just intelligent application of quantitative principles to portfolio construction.

Conclusion

Building a truly optimized RRSP portfolio isn't about following cookie-cutter advice, it's about understanding the quantitative details that drive long-term wealth creation. My 0.175% total cost structure, combined with tax optimization and currency efficiency, created a portfolio that outperformed while minimizing unnecessary risks.

The key lesson here isn't to copy my exact allocation, but to understand the analytical process behind these decisions. Every Canadian investor's situation is different, and what works for my risk tolerance and time horizon might need tweaking for yours.

Remember, the financial industry profits when you don't ask these hard questions about costs and tax efficiency. Take control of your RRSP, run the numbers yourself, and build something that actually serves your wealth-building goals.

Disclaimer

This article is for educational and informational purposes only and does not constitute financial, investment, or tax advice. The content shared represents my personal investment journey and analysis, not recommendations for your specific financial situation.

Important considerations:

• Past performance does not guarantee future results. Investment returns and portfolio performance can vary significantly based on market conditions, timing, and individual circumstances.

• Every investor's situation is unique. Your risk tolerance, time horizon, tax situation, and financial goals may require a completely different investment approach than what I've described.

• Tax rules are complex and change frequently. Foreign withholding tax rates, MER calculations, and RRSP regulations may differ from what's presented here or may have changed since publication.

• Do your own research. Verify all cost calculations, tax implications, and ETF details independently before making investment decisions.

• Consider professional advice. For personalized investment guidance, consult with a qualified financial advisor, tax professional, or investment counselor who understands your complete financial picture.

I am not a licensed financial advisor, tax professional, or investment counselor. This content reflects my personal research and decision-making process, shared for educational purposes to help other DIY investors understand the analytical approach behind portfolio optimization.

Please invest responsibly and never invest more than you can afford to lose.