Vanguard Bond ETFs to Skip 2025 Capital Gains Payouts

TORONTO, ON – December 17, 2025 – Vanguard Investments Canada Inc. has delivered welcome news for many Canadian investors ahead of the tax season, announcing that three of its prominent bond exchange-traded funds (ETFs) are not expected to issue any annual capital gains distributions for the 2025 tax year.

In an updated press release today, the investment giant confirmed its estimates for Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) (VBU), Vanguard Global ex-U.S. Aggregate Bond Index ETF (CAD-hedged) (VBG), and Vanguard Global Aggregate Bond Index ETF (CAD-hedged) (VGAB). For all three, the estimated annual capital gain per unit was listed as a dash, signifying a zero distribution.

This development provides a notable tax simplification for individuals holding these funds in non-registered accounts and offers a window into the performance dynamics of the fixed-income market over the past year.

A Welcome Tax Reprieve for Canadian Investors

The absence of capital gains distributions is a significant event for year-end tax planning. ETF distributions come in two primary forms: regular income (from interest or dividends) and capital gains. Capital gains distributions occur when the fund manager sells underlying securities at a profit, passing those gains on to unitholders. In Canada, these distributions are taxable events in non-registered accounts, even when they are not paid out in cash.

Vanguard, like many ETF providers, uses a mechanism where capital gains are automatically reinvested in the fund, and the units are immediately consolidated. This means an investor's unit count doesn't change, and no cash lands in their account. However, this “phantom distribution” is still reported on a T3 slip and creates a tax liability for the investor. For 2025, holders of VBU, VBG, and VGAB will sidestep this specific taxable event.

This is particularly relevant given Canada's tax rules. Typically, 50% of a capital gain is included in an individual’s taxable income. However, for investors with annual investment profits exceeding CAD $250,000, as well as for corporations and trusts, the capital gains inclusion rate was increased to two-thirds (66.7%) as of June 2024. The zero distribution from these Vanguard ETFs means investors avoid this liability entirely for these holdings.

Furthermore, the lack of a reinvested distribution simplifies tax record-keeping. When a capital gain is reinvested, it increases an investor’s Adjusted Cost Base (ACB) for the ETF. Tracking these adjustments is crucial for accurately calculating capital gains or losses when the ETF units are eventually sold. With no distribution to account for from these funds, investors have one less adjustment to make for the 2025 tax year. It is critical to remember, however, that this announcement only pertains to year-end capital gains. These bond ETFs will still pay their regular monthly or quarterly interest income, which remains fully taxable as ordinary income in non-registered accounts.

Decoding the Bond Market Signals

The zero-distribution estimate for these diversified bond funds is not just a tax story; it also reflects the broader narrative of the 2025 fixed-income market. For a bond ETF to realize significant capital gains, the price of its underlying bonds must appreciate considerably, typically driven by falling interest rates. While the year had its positive moments for bonds, the dominant theme was income generation rather than dramatic price appreciation.

Investors entered 2025 with fixed-income yields at attractive levels not seen in decades, positioning bonds for healthy returns primarily through interest payments. The market narrative was centered on a potential "soft landing" for the U.S. economy, with moderating inflation and the prospect of central bank rate cuts. While this environment is generally supportive of bond prices, the year was also marked by volatility and a normalization of the yield curve, as the "term premium"—the extra yield demanded by investors for holding longer-term bonds—returned.

Throughout the year, the number of anticipated rate cuts from the U.S. Federal Reserve was a subject of intense debate, and fewer cuts materialized than some had initially hoped. This tempered the potential for a major rally in bond prices. In this context, the primary return driver for many bond investors was the steady stream of income from high-quality debt. For a broadly diversified fund tracking an aggregate bond index, the conditions were likely not conducive to realizing large, widespread capital gains across the portfolio, aligning with Vanguard's estimate of zero distributions.

Vanguard's Approach in a Competitive Landscape

Vanguard's announcement stands out when compared to notices from other major Canadian ETF providers. Competitors, including BlackRock's iShares and BMO Asset Management, have released their own 2025 estimates indicating that various equity and fixed-income ETFs in their lineups are expected to pay capital gains distributions. This contrast underscores that the zero-gain scenario for VBU, VBG, and VGAB is a result of their specific portfolio activity and index-tracking strategy, not a universal trend across all bond ETFs in Canada.

The firm has been transparent in its communication, first releasing estimates on November 18 and providing today's update as the year-end approaches. In its release, Vanguard was careful to note that these are "estimated amounts only, as of December 15, 2025, and could change if the Vanguard ETFs experience subscriptions or redemptions prior to the ex-dividend date." This standard disclaimer highlights the dynamic nature of fund flows and their potential impact on final calculations.

This client-centric communication aligns with the company's unique mutual structure, where its U.S.-domiciled funds and ETFs are owned by the firm's investors. This model, the company states, aligns its interests with those of its clients, driving a focus on transparency and low-cost investing that benefits its Canadian unitholders.

What Investors Need to Know Next

For investors holding these ETFs, the key dates are approaching quickly. The ex-dividend date and record date for the 2025 year-end distributions are both set for December 23, 2025. Any distributions would be payable on January 2, 2026.

While the current estimate is zero, investors should wait for the final numbers. According to Vanguard, "The actual taxable amounts of reinvested capital gains distributions for 2025, including the tax characteristics of the distributions, will be reported to brokers (through CDS Clearing and Depository Services Inc.) in early-2026."

This final confirmation, which will appear on T3 tax slips issued to investors, will be the definitive record for tax filing purposes. For now, the estimate provides a valuable piece of information for year-end portfolio reviews and preliminary tax assessments, offering a clear and positive signal for holders of these three Vanguard bond funds.