DRIP Income Tax

Rule of thumb #1 on DRIP income tax:  all dividends are treated equal.

For Revenue Canada, all the dividend you reinvested to buy more shares of the same stock are treated as same as the dividend you received in cash. What does this essentially mean is that by selecting re-investing the dividends to purchase additional shares does not relieve you of any liability for income tax. Dividend reinvestment is taxable in the same manner as cash dividends.


Rule of Thumb #2 on DRIP income tax: if you sale, do your own math.

If you keep your DRIP investment, what you really have to worry about each year is just to file those dividend reinvestment occurred each year. However, if you decided to liquidate one or all of your DRIP investment, you have some really math exercises to do. The onus is on you to calculate the ACB (adjusted cost base) on your DRIP investment, then minus the market value of your DRIP investment, finally to get the capital gain of capital loss of your DRIP investing. This is often the most challenging and daunting task for DRIP investors.

Dividend Income – Report your annual dividend reinvestment with T5

To report your dividend reinvestment is not a challenging job. Your stock transfer agents (yes, I mean either Computershare or CIBC Mellon) should mail you the T5 tax slip every year around Feb. or March. You can simply fill out the information on your T5 slip on your tax software or give them to your tax consultant.
The only thing you may need to watch for is that you may not receive T5 for each of your holdings. If your DRIP position is small, you may not receive any T5. Normally, if the annual dividend re-invested is less than $10 or $20, your stock transfer agents will not send you a T5 slip. You still need to report this earning, but then you need to calculate it manually.
For example, if you re-invested a total of $10 in dividend with XYZ company. Your taxable amount of eligible dividend is 145% of $10, which is $14.50. Enter this amount on line 425. Meanwhile, you will have a $2.75 dividend tax credit (18.97% of your taxable eligible dividend).

Capital Gain – ACB calculation
When it comes to capital gain with DRIP, there’s both good news and bad news. 
The good news is that you do not have to worry about it now. Capital gain is a future thing for DRIP investors, because most of us is more concerned about accumulating more shares rather than selling them. However, you have to face the capital gain sooner or later if you decide it’s time to cash out, or if you want to close down one of your investment holdings. By that time, you need to report the capital gain (or capital loss in the unfortunate situation) to Revenue Canada. 
The bad news is that it’s almost mission impossible to calculate the capital gain. The cost base of your DRIP investment is always changing whenever the dividend was reinvested to buy more shares, and whenever you made optional cash purchase to buy additional shares. 
The key to report the capital gain on DRIP is to understand the concept of ACB. Adjusted cost base (ACB) is usually the cost of a property plus any expenses to acquire it, such as commissions and legal fees. You may buy and sell the same type of property (for example, units of a mutual fund trust or publicly traded shares) over a period of time. If so, you have to calculate the average cost of each property in the group at the time of each purchase to determine the adjusted cost base (ACB). 
The detailed formula for ACB per share:
ACB/share = (initial DRIP investment + dividend reinvestment + optional cash purchase – any commission or fees)/total number of DRIP shares 
The Capital gain/loss formula:
Capital Gain (loss) = (Selling Price/share – ACB/share) x total number of DRIP shares sold – selling commissions 
Calculate your taxable capital Gain or net capital loss:
Capital Gains Tax = Capital Gains x 50% x Marginal Rate 
Last step is to report them on Schedule 3 Capital Gains (Losses) in your tax filing.

 

 

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