DRIPs in non-reg accounts?

Some good info ... but it's a bit disjointed and could easily result in beginners confusing separate concepts.

To return to the OP's question,

Kaitlyn said:

The "problem" is, doesn't DRIP'ing these in my non-reg account create a tax nightmare?

Click to expand...

In my experience ... it is rare that a DRIP will result in a taxable event beyond the cash that was paid.
What is added by the DRIP is bookkeeping to apply the DRIP purchase price/units bought to the adjusted cost base (ACB).

To use the simple example of a stock that pays eligible dividends, the taxable event is reporting the dividend income on one's yearly tax return.
This will have to be done, DRIP or no DRIP.

If there is a DRIP, then for each dividend amount paid that exceeds the DRIP share price, one or more shares will be added.
The bookkeeping is to add in the additional cost to the ACB. This is same as if the investor bought the one or more shares by ordering them.

Ex. Shares have a current ACB of $600 for 100 shares, May dividend payment for all shares is $10, DRIP price is $7.
New share count is 101, new ACB = old ACB + cost of new shares = $600 + (1 x $7) = $607.


Some investments such as ETFs, MFs and trusts pay a mixture of income. Return of Capital (RoC) is tax deferred until the ACB is negative and reduces the ACB. This also adds more bookkeeping as usually the RoC breakdown isn't reported until the following year.

So before considering a DRIP, one needs to recalculate the ACB.

Example, trust ACB is $600 for 100 units, May cash distribution is $10 - where $1 is RoC.
Units are still 100 where new ACB = old ACB - RoC = $600 - $1 = $599.

So if this trust is DRIP'd, with the same DRIP price for one unit, then the combination of the two is that first the RoC reduces the ACB to $599 and then the DRIP increases the ACB by $7 = $599 + $7 = $606 for 101 units.

So it's pretty difficult to end up with a taxable event as a result, unless the cash distributions are high, the RoC portion is high and the current DRIP price is really low.


The key point here is that RoC as part of the cash payments means the extra calculations - the DRIP is only adding more recalculations.


That said .... I usually wait for the breakdown and then sit down with my spreadsheet in one sitting.


I agree that RioCan is best held in a TFSA (or RRSP) if:
a) one does not want to do the bookkeeping.
or more importantly,
b) in 2013, 61.77% of the cash paid was treated as income so that it was taxed the same as interest with only 0.52% RoC.
http://investor.riocan.com/Investor-Relations/distribution-info/Income-Tax-Information/default.aspx

(This is the same idea as to why to put a GIC in a registered account versus a stock with dividends.)


Trusts I have that pay 80% RoC, I prefer in a taxable account as in exchange for the bookkeeping, I pay tax on 20% and the other 80%, nothing for at least the next three years or longer. If I DRIP, then likely I will only pay capital gains taxes when I sell.


Cheers

^^^^

Where the investment pays RoC, I recommend collecting the breakdown of the cash payments as well as updating the ACB at least yearly based on painful experience. It was a pain in the butt to try to figure it out as over the years it was held, there were buyouts by other companies so that only the new company RoC % per year numbers were easily available from a web site.


I also am not sure why most people think of REITs and trusts as tricky when ETFs can be far more complicated.

The first complication is that ETFs can pay RoC as well.
For example, XIU has paid RoC *every year* from 1999 through 2013.
http://ca.ishares.com/product_info/fund/distributions/XIU.htm


The second complication is that ETFs can have phantom distributions, which if not properly recorded by the investor, the result is paying more capital gains taxes than are due.

In the one blog which I can recall but I am not finding at the moment, the poster was shocked to see that for the relatively short period he had owned XIU, the ACB had climbed by $3 a unit. If the investigation as well as info was not easily available, he would have been reporting an additional $3 a unit capital gain.

If I find it I will post it but here is a G&M article on the same subject.
http://www.theglobeandmail.com/glob...by-phantom-etf-distributions/article18225076/


Cheers


PS

Having learned the bookkeeping required for REITs and updated my spreadsheet for it, I personally feel it's not worse than reconciling my monthly credit card statement.

So I'm focused on transferring REITs that pay out a high percentage of the more highly taxed income (ex. RioCan) versus a REIT that is paying mostly capital gains on a deferred basis.