DRiPs - Paperwork and Taxes

This is the fourth installment of my series on DRiP investing.

Paperwork

One of the disadvantages of DRiP is that, for each company that you drip, you will receive regular account statements in the mail. The frequency depends on the activity (purchases and dividend paid), but you should expect at least a few every years.

Even though some of the companies you drip may be handled by the same transfer agent, statements will be sent independently for each companies. So if you have 4 companies for which you makes purchases each month, you will receive 4 statements every month, for a total of 48 statements for the year. That's a lot of paper!

Still, it is important to keep those statements, since they report of each purchase you made, dividend you received, and price paid for additional shares of the company. You need that information to be able to calculate you Adjusted Cost Base (ACB), a very important number when you are ready to sell shares (or if you transfer shares to someone else). More on this in a future installment.

Taxes

The dividends you receive from the companies you drip must be reported, even though you decided to reinvest them. At tax time, the companies will send you a slip for that income. If the amount is below a certain treshold, they might decide not to send one to you. You are still supposed to report the income, though.

In Canada, dividends are treated favourably by the tax-man. Although the amount of dividend is grossed up, there is a substancial tax credit also applied. The end result is that if you taxable income for the year is below a certain number (about $40K-$50K, check with your accountant), the dividends you received will actually lower your taxes! Nice, isn't it?

A note, however, about income thrusts (such as real estate income thrusts, REITs). Most of the distributions from income thrusts are not dividends. They are reported on the tax slip as part capital gain (which must be used to readjust your ACB but have no impact on taxes until you sell), part as interest income. Interest income is taxed as regular income, based on your tax bracket.