# Basic DRIP + TFSA question



## scientist (Feb 14, 2015)

As I understand it, when you DRIP in a TFSA, which is something the company would offer you to buy, dividends get re-invested into your stock similar to a capital growth, but you're still taxed on the dividend as a dividend. Is this right? If so, when you invest in a dividend-paying stock in a TFSA that isn't a DRIP, where does the dividend go? Do you have to specify a specific TFSA account for it to be deposited into?


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## supperfly17 (Apr 18, 2012)

scientist said:


> As I understand it, when you DRIP in a TFSA, which is something the company would offer you to buy, dividends get re-invested into your stock similar to a capital growth, but you're still taxed on the dividend as a dividend. Is this right? If so, when you invest in a dividend-paying stock in a TFSA that isn't a DRIP, where does the dividend go? Do you have to specify a specific TFSA account for it to be deposited into?


It just goes into your TFSA cash account, and dividends are not taxed.


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## scientist (Feb 14, 2015)

supperfly17 said:


> It just goes into your TFSA cash account, and dividends are not taxed.


perfect - thanks!


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## My Own Advisor (Sep 24, 2012)

Aren't tax-free dividends are great thing? :biggrin:


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## Toronto.gal (Jan 8, 2010)

scientist said:


> 1. As I understand it, when you *DRIP in a TFSA*...dividends get re-invested into your stock....
> 2. you're still *taxed on the dividend* as a dividend. Is this right?
> 3. Do you have to *specify a specific TFSA account* for it to be deposited into?


*1.* With a broker synthetic DRIP [no other available with TFSAs], you can only DRIP provided you have enough dividends to purchase full share [not fractional]. 

- If a stock = $25/your dividend payment = $20, you would receive the cash in full.
- If a stock = $25/your dividend payment = $30, 1 share would be DRIPped, & $5 would go into your cash account.

*2.* Keep in mind it's a tax-free account, but not always, so it's important that you should familiarize yourself with the rules.

- Capital gains/dividends/interest = tax-free.
- Taxes [penalty] apply on over-contributions & ineligible investments.
- Foreign investments [with few exceptions] are subject to non-resident dividend withholding taxes.
- US investments are also subject to withholding taxes [not the case if held in an RRSP acct. due to the Canada/US tax treaty].

You can pretty much find any answer for other TFSA questions in below link/CRA website.
http://www.taxtips.ca/tfsa.htm

*3.* You just have to specify which stocks you want DRIPped - it can be set-up on a stock or account level.


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## scientist (Feb 14, 2015)

Toronto.gal said:


> *1.* With a broker synthetic DRIP [no other available with TFSAs], you can only DRIP provided you have enough dividends to purchase full share [not fractional].
> 
> - If a stock = $25/your dividend payment = $20, you would receive the cash in full.
> - If a stock = $25/your dividend payment = $30, 1 share would be DRIPped, & $5 would go into your cash account.
> ...




Thanks toronto.gal -- very useful! 

Just to clarify :- "Taxes [penalty] apply on over-contributions & ineligible investments."

Now I understand if I invest in the TSX or S&P500 in an index fund, my capital growth makes my TFSA account bigger, larger than my TFSA contribution limit, but I am not taxed or penalized for it. Is this the case for DRIP/dividends? Will it make it so I overcontribute? If not, what are other cases of over-contributions (Besides directly depositing into a TFSA account) and "ineligible investments"?


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## Eclectic12 (Oct 20, 2010)

scientist said:


> ... Just to clarify :- "Taxes [penalty] apply on over-contributions & ineligible investments."


Over-contributions are determined by ... the contribution limit - nothing else. Growth while held in a TFSA, regardless of the source has no bearing.

Take someone who turned 18 in 2009 and was granted $5K of TFSA contribution room. Where they contribute $6K to the TFSA, they have over-contributed - generating the tax penalty. Where they contribute $5K - the TFSA could have investments worth $30K from share prices gains plus eligible dividends but they have not over contributed.




scientist said:


> ... Now I understand if I invest in the TSX or S&P500 in an index fund, my capital growth makes my TFSA account bigger, larger than my TFSA contribution limit, but I am not taxed or penalized for it.


Technically true ... but it is a confusing way of thinking of it.

Going back to our 18 year old in 2009, say they made a cash $5K TFSA contribution in Feb 2009, they buy a bank stock in Mar 2009.

Jan 2, 2009 ... TFSA contribution room $5K, TFSA account cash value $0 & stock held $0.
Feb 2009 ... TFSA contribution room $0, TFSA account value $5K cash & stock held $0.
Mar 2009 ... TFSA contribution room $0, TFSA account value $10 cash & 166 shares of BNS stock bought @ $30 a share plus a $10 commission.
Dec 2009 ... TFSA contribution room $0, TFSA account value $254.02 ($10 with no growth + 166 x 0.49 dividend x 3 paid) and 166 BNS shares trading at $49.

My point here is that the TFSA contribution room that was used up by the $5L contribution stays at $0. There is no way for it to change until Jan the following year 2010. The TFSA account value on the other hand, has grown to $8388. 

On Jan 1st, 2010 - the new allotment of TFSA contribution room for 2010 is added so that:
Jan 2n, 2010 ... TFSA contribution room $5K, TFSA account value $254.02 and 166 BNS shares trading at $49.


IMO ... it is far safer to know that's available today (i.e. like tracking the balance on a chequing account). I don't see the point of knowing about contribution room that is used up. 




scientist said:


> ... Is this the case for DRIP/dividends?
> Will it make it so I overcontribute?


DRIP/dividends occur within the account so they are not contributions. They will be Canadian tax free. 

However, you mentioned a S&P500 Index fund where as the post indicated:


> US investments are also subject to withholding taxes [not the case if held in an RRSP acct. due to the Canada/US tax treaty].


What should be made clear is that the withholding taxes referred to here are the *US gov't withholding taxes*. Before the S&P500 Index fund dividend or cash payment hits your TFSA, the US gov't will have sliced off their 15% NR withholding tax.




scientist said:


> ...If not, what are other cases of over-contributions (Besides directly depositing into a TFSA account) and "ineligible investments"?


Don't you mean "taxes"?

There's only one situation for over-contributions ... that's to contribute more than the TFSA contribution room one has available to one (which is equal to or less than the total the gov't has granted).


Cheers


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## scientist (Feb 14, 2015)

Eclectic12 thanks for your detailed message - it helps confirm and clarify a lot of things
Cheers


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## Toronto.gal (Jan 8, 2010)

scientist said:


> ...what are other cases of *over-contributions.*..


If you could understand the basic contributions rules first, then you would answer your question.

Just keep in mind that contributions consist of:

1. annual limit,
2. withdrawals from previous years [not to be redeposited until the following year, unless you had contribution room, otherwise such deposits would qualify as over-contributions],
3. unused contributions from previous years.

So if in 2014 your contribution was $4K/withdrew $2K [assume you maxed it in prev. years with no withdrawals], what would be your contribution limit in 2015 if you were to also include the new increase?

Like I said, explore the link provided when you have time as it has a lot of information.
http://www.taxtips.ca/tfsa/contributions.htm


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## cannew (Jun 19, 2011)

Toronto.gal said:


> *1.* With a broker synthetic DRIP [no other available with TFSAs], you can only DRIP provided you have enough dividends to purchase full share [not fractional].




ShareOwner Investments Inc has Full Dividend reinvestment, to 4 decimals. Granted they are not a full service broker, but one can't beat their dividend reinvestment plan. Always try to get the tfsa contribution made in Jan so you earn the max possible tax free.


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