To DRIP or Not?

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Aug 14th, 2019 6:21 am

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Aug 12th, 2019 4:28 pm

Bleys007 [OP]: Deal Addict; Jun 8, 2007; 1001 posts; 295 upvotes; Mississauga

Aug 12th, 2019 4:28 pm

To DRIP or Not?

Hi folks,

I recently came into a considerable sum of money that will be substantially increasing my investment portfolio in the near future (Hello retirement way before 65!).

I'm currently couch potato'ing:
VCN 30%
XAW 60%
ZAG 10%

and will be rebalancing to a five-asset mix now that it makes sense to, given the size of the accounts. Will be going to the following (increasing bonds to 20% given that retirement timeline is being moved up five years to about 15ish years in the future from now):

VCN 27%
VTI 27%
XEF 19%
IEMG 7%
ZAG 20%

My question is that now that my contribution room for TFSA and RRSP will be used up (plan is to put VTI and IEMG in the RRSP to avoid some of the US withholding tax, XEF/VCN in TFSA, and everything else including full amount of ZAG into a non-sheltered account):

Does it make sense to enroll the ETFs in a DRIP when they're in an non-sheltered account? I'm with Questrade (yay free ETF purchases!) and the DRIP enrollment paperwork says that since the purchase isn't processed via trade entry, I would need to keep my own monthly statements to calculate/report cap gains or losses.

Is it better to do the ETF purchases manually so that there's a trade entry? Or set up the DRIP and figure out how to do things come tax time?

I haven't had stocks in a non-registered account before, so calculating capital gains/loss for tax reporting is new for me. Typically I just use Studiotax and put in everything from my T4, T5s, etc.

13 replies

Aug 12th, 2019 5:56 pm

yvrbanker: Sr. Member; May 2, 2019; 516 posts; 614 upvotes; Vancouver

Aug 12th, 2019 5:56 pm

I personally don't do DRIP in non-registered accounts. Not worth extra work during tax time. Regular rebalancing twice a year takes fine care of any holdings you need to top up.

Not sure if Questrade calculates ACB correctly. Not all brokers do, you may need to double check. For Canadian stocks, "return of capital" is a tricky part of dividends that affects ACB. For assets in USD or other currencies, the tricky parts are ACB calculation in CAD and any capital gains / losses in currencies. For any stock, there can be additional complications of corporate actions and taking care of the superficial loss rule. You won't find a software that does this all for you correctly.

Bottom line, you don't want to complicate it further with DRIP.

Offtopic, consider swapping VCN and ZAG. Eligible Canadian dividends in non-registered accounts are very tax-efficient and can actually reduce your tax payable for certain lower incomes, certain provinces including Ontario. Bonds have more sense in TFSA than people give them credit for.

+1

Aug 12th, 2019 6:42 pm

Bleys007 [OP]: Deal Addict; Jun 8, 2007; 1001 posts; 295 upvotes; Mississauga

Aug 12th, 2019 6:42 pm

yvrbanker wrote: ↑ Offtopic, consider swapping VCN and ZAG. Eligible Canadian dividends in non-registered accounts are very tax-efficient and can actually reduce your tax payable for certain lower incomes, certain provinces including Ontario. Bonds have more sense in TFSA than people give them credit for.

Thanks for the thoughts. I'll talk to them about ACB calculations. Guess I'll also hold onto my statements from now until retirement as a backup.

To clarify - plan is to have VCN + XEF (cdn equities + intl equities) in TFSA and ZAG (bonds) in non-registered. Idea is that the growth of the equities will outperform bonds over time, and the bond's dividends are taxed favourably. Is your thought to have equities in non-registered and move bonds into the TFSA? Seems like it would end up with a smaller TFSA at the end of 15 years, no?

Aug 12th, 2019 7:03 pm

sunbat: Member; Feb 9, 2018; 463 posts; 347 upvotes

Aug 12th, 2019 7:03 pm

Bleys007 wrote: ↑ Thanks for the thoughts. I'll talk to them about ACB calculations. Guess I'll also hold onto my statements from now until retirement as a backup.

To clarify - plan is to have VCN + XEF (cdn equities + intl equities) in TFSA and ZAG (bonds) in non-registered. Idea is that the growth of the equities will outperform bonds over time, and Canadian dividends are taxed more favourably. Is your thought to have equities in non-registered and move bonds into the TFSA? Seems like it would end up with a smaller TFSA at the end of 15 years, no?

Questrade has no discount for dripping and they buy securities at market price. Since buying ETFs is free with questrade, dripping hardly makes sense considering it complicates taxes in non-reg plus you will have more control in asset allocation and re-balancing if you are deploying distributions yourself. I never rely on brokerages to calculate ACB. Its always better if you keep track of it yourself. I use www.adjustedcostbase.ca to keep track. Studio tax has the option for reporting dividends/distributions from stocks. But its manual. You have to add a form for it. I have only done it for individual stocks though. Cap gains and losses only need to be reported when you sell.

+1

Aug 12th, 2019 10:34 pm

yvrbanker: Sr. Member; May 2, 2019; 516 posts; 614 upvotes; Vancouver

Aug 12th, 2019 10:34 pm

Bleys007 wrote: ↑ Idea is that the growth of the equities will outperform bonds over time, and the bond's dividends are taxed favourably. Is your thought to have equities in non-registered and move bonds into the TFSA? Seems like it would end up with a smaller TFSA at the end of 15 years, no?

Well yes, and I had the same thinking originally. But a larger TFSA shouldn't be a goal by itself. It does not guarantee you pay less tax in your lifetime / end up with more net assets.
Complex topic, I'll touch it a little.

The full income tax on bonds income will eat into your wealth. It's payable the next tax season. Meanwhile, Canadian equities in a taxable account would be treated favourably both on eligible dividends and capital gains. While you are working (+investment income), you can try to hold your investments longer and defer capital gain taxes. So you end up paying less tax this period if bonds are in TFSA.

If you get to an early retirement on investment income, congratulations. That's the happiest period tax-wise. Decent income can come with little tax. Simpletax calculator 2019, Ontario:
52K/year in eligible dividends: total tax $600, average tax rate 1.15 %.
50K/year in a more realistic mix (20K capital gains, 20K eligible dividends, 10K other income): total tax $1,634, average tax rate 3.27 %.

This is without any TFSA benefits, so frankly you don't miss much with a smaller TFSA space. Curiously, if eligible dividends in the last example were in TFSA, there would be more tax payable ($1665 for 20K capital gains + 10K other income).

The actual retirement age with CPP / OAS puts a tax burden back on you. All of CPP, OAS, and any RRSP/RRIF withdrawals are taxed at the full rate. So it's good to use your early retirement for preparation: gradually withdraw all RRSPs, realize all capital gains before starting pensions. Yes, it would be great to have a bigger TFSA space by then, but it won't be so bad with the annual TFSA increases for all those years.

Edit: didn't notice you said "bond's dividends are taxed favourably" - that's not true. "Dividends" from bonds are typically taxed at the full tax rate, same as your employment income or other income. There might be years when bond ETF dividends are more tax-friendly with the "return of capital" component - those are exceptional cases.

+3

Aug 12th, 2019 11:45 pm

Deepwater: Deal Addict; Feb 1, 2012; 1616 posts; 2432 upvotes; Thunder Bay, ON

Aug 12th, 2019 11:45 pm

I don't drip ETFs in registered or non-reg accounts. I prefer to invest cash from distributions myself. Plus since ETFs an only be purchased in full shares, unlike mutual funds, you will always have some cash building up in the account even with dripping.

Tracking ACB with drips is not that hard, you will just have to track somewhere between 2 and 12 share purchases per year per fund (since a drip is really purchasing new shares). ETFs also can have return of capital and reinvested capital gains distributions that decrease or increase the ACB respectively. CRA requires you to track ACB in order to properly report capital gains or losses when shares are sold. CRA has a paper on it here: https://www.canada.ca/en/revenue-agency ... duals.html

I use www.adjustedcostbase.ca to track my ACB.

And PWL capital has a good explanation of how to track your ACB here: https://www.pwlcapital.com/resources/as ... with-etfs/

You will get a T3 annually from your broker that lists taxable distributions within the year, such as dividends, interest, capital gains within the fund that year. But you still need to track and report capital gains / losses on a schedule 3 when you sell. Better to keep a running log of it, rather than stash away your statements for years then have to dig through them years later when you sell.

I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.

+2

Aug 13th, 2019 7:22 am

Bleys007 [OP]: Deal Addict; Jun 8, 2007; 1001 posts; 295 upvotes; Mississauga

Aug 13th, 2019 7:22 am

yvrbanker wrote: ↑ Well yes, and I had the same thinking originally. But a larger TFSA shouldn't be a goal by itself. It does not guarantee you pay less tax in your lifetime / end up with more net assets.
Complex topic, I'll touch it a little.

The full income tax on bonds income will eat into your wealth. It's payable the next tax season. Meanwhile, Canadian equities in a taxable account would be treated favourably both on eligible dividends and capital gains. While you are working (+investment income), you can try to hold your investments longer and defer capital gain taxes. So you end up paying less tax this period if bonds are in TFSA.

If you get to an early retirement on investment income, congratulations. That's the happiest period tax-wise. Decent income can come with little tax. Simpletax calculator 2019, Ontario:
52K/year in eligible dividends: total tax $600, average tax rate 1.15 %.
50K/year in a more realistic mix (20K capital gains, 20K eligible dividends, 10K other income): total tax $1,634, average tax rate 3.27 %.

This is without any TFSA benefits, so frankly you don't miss much with a smaller TFSA space. Curiously, if eligible dividends in the last example were in TFSA, there would be more tax payable ($1665 for 20K capital gains + 10K other income).

The actual retirement age with CPP / OAS puts a tax burden back on you. All of CPP, OAS, and any RRSP/RRIF withdrawals are taxed at the full rate. So it's good to use your early retirement for preparation: gradually withdraw all RRSPs, realize all capital gains before starting pensions. Yes, it would be great to have a bigger TFSA space by then, but it won't be so bad with the annual TFSA increases for all those years.

Edit: didn't notice you said "bond's dividends are taxed favourably" - that's not true. "Dividends" from bonds are typically taxed at the full tax rate, same as your employment income or other income. There might be years when bond ETF dividends are more tax-friendly with the "return of capital" component - those are exceptional cases.

Huge, huge thanks to you for your time and insight. I was woefully misinformed about bond dividends being tax-favourable. Read about dividends being tax-favourable and thought process was "Bond ETFs produce dividends, so they're tax-favourable."

I also hadn't considered how efficient income could be at retirement. Blowing my mind that at retirement average tax rate could be that low. Makes sense that bonds could very well be a better choice for the TFSA given (relatively) overwhelmingly higher tax rates now vs retirement.

Also - concept of +20K in eligibile dividends REDUCING your overall taxes vs only capital gains + other income? How can our tax system be structured this way? Craziness!

While this took a bit of a tangent from my initial question in the first post, thank you VERY much. This DIYer just became a bit more knowledgeable!

Aug 13th, 2019 10:01 am

Deepwater: Deal Addict; Feb 1, 2012; 1616 posts; 2432 upvotes; Thunder Bay, ON

Aug 13th, 2019 10:01 am

Educational update: ETFs do not pay dividends. They pay distributions. Those distributions consist of various types of earnings within the fund. Most equity ETFs distributions will primarily consist of dividends. Bond ETF distributions will primarily consist of interest payments from the bonds. Distributions may also include capital gains and return of capital. There may be reinvested capital gains distributions which are taxable to the ETF holder.

Mutual funds are sometimes referred to as Flow Through Shares, because any income in the fund is paid to (flows through to) the unit holders to be taxed at the investor's tax rates.

Another subtlety is that dividends from most publicly trades Canadian shares will get preferential dividend tax rates, whereas dividends from US or foreign shares get taxed as other income at the same tax rate as interest or salary income.

As I mentioned upthread, you will receive a T3 from the fund provider detailing these items. The PWL Capital paper explains many of these items well.

I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.

+1

Aug 13th, 2019 10:58 am

Bleys007 [OP]: Deal Addict; Jun 8, 2007; 1001 posts; 295 upvotes; Mississauga

Aug 13th, 2019 10:58 am

Deepwater wrote: ↑ Educational update: ETFs do not pay dividends. They pay distributions. Those distributions consist of various types of earnings within the fund. Most equity ETFs distributions will primarily consist of dividends. Bond ETF distributions will primarily consist of interest payments from the bonds. Distributions may also include capital gains and return of capital. There may be reinvested capital gains distributions which are taxable to the ETF holder.

Mutual funds are sometimes referred to as Flow Through Shares, because any income in the fund is paid to (flows through to) the unit holders to be taxed at the investor's tax rates.

Another subtlety is that dividends from most publicly trades Canadian shares will get preferential dividend tax rates, whereas dividends from US or foreign shares get taxed as other income at the same tax rate as interest or salary income.

As I mentioned upthread, you will receive a T3 from the fund provider detailing these items. The PWL Capital paper explains many of these items well.

Thanks for the clarification and free education. Loving the quality of the info in this thread!

Aug 13th, 2019 11:22 am

Scote64: Deal Addict; Jan 21, 2018; 4895 posts; 4969 upvotes; Vancouver

Aug 13th, 2019 11:22 am

Is it possible to cancel the DRIP without selling the underlying investment, i.e., just revert to dividend payouts that are not re-invested? Can I instruct TD Direct Investing to do that for existing DRIPs?

Assuming that's possible, the timing of canceling the DRIP wouldn't have any effect on the dividend payout, right? The dividend that would have been re-invested under the DRIP would just go to a cash payout instead on the dividend date?

Aug 13th, 2019 2:04 pm

yvrbanker: Sr. Member; May 2, 2019; 516 posts; 614 upvotes; Vancouver

Aug 13th, 2019 2:04 pm

Bleys007 wrote: ↑Also - concept of +20K in eligibile dividends REDUCING your overall taxes vs only capital gains + other income? How can our tax system be structured this way? Craziness!

There is a reason behind this, believe it or not. Eligible dividends come from a Canadian company's profit after corporate tax. CRA here simply allows Canadian residents to avoid double taxation of that amount.

They do tax you on your portion of those profits, but credit you the relevant corporate tax already paid on that amount. If you are not rather rich, your tax rate can be less than corporate tax rate (in some provinces), and you get this weirdly looking "refund".

Aug 13th, 2019 2:35 pm

S5: Deal Addict; Oct 4, 2009; 2753 posts; 1636 upvotes; Montreal

Aug 13th, 2019 2:35 pm

Scote64 wrote: ↑ Is it possible to cancel the DRIP without selling the underlying investment, i.e., just revert to dividend payouts that are not re-invested? Can I instruct TD Direct Investing to do that for existing DRIPs?

Assuming that's possible, the timing of canceling the DRIP wouldn't have any effect on the dividend payout, right? The dividend that would have been re-invested under the DRIP would just go to a cash payout instead on the dividend date?

Yes.
Yes.
No.
Yes.

+1

Aug 14th, 2019 6:04 am

HyperTech: Deal Addict; Dec 4, 2007; 4084 posts; 1743 upvotes; Quebec

Aug 14th, 2019 6:04 am

last year a received a negligible amount of dividend (less than 1$ CAD) from cineplex stock.

i had no idea if it was an eligible dividend or not, but this year i have received many dividend from different stock / etf.

how to determine if the received dividend is eligible or not? or where it is stated?

Aug 14th, 2019 6:21 am

Deepwater: Deal Addict; Feb 1, 2012; 1616 posts; 2432 upvotes; Thunder Bay, ON

Aug 14th, 2019 6:21 am

The issuing company determines that based on tax rules and should state it when it announces the dividend. Most publicly traded companies will issue eligible dividends. The T5 or T3 will indicate.

https://www.canada.ca/en/revenue-agency ... dends.html

I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.

+1

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