# Inside or outside my TFSA



## Mandy101 (Dec 7, 2009)

Hello everyone

I'm considering whether or not I should buy some Canadian dividend bearing shares inside or outside my TFSA. Reason for this is that where I hold my TFSA I am charged $19 when I buy more shares and I am not able to participate in partial shares dripping. How can I figure out what is more beneficial to me in terms of tax savings by doing one instead of the other?

Cheers
Mandy


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## Eclectic12 (Oct 20, 2010)

^^^^^

I'm not sure I understand. 

Where tax savings is the criteria - the TFSA wins hands down as there are no taxes for either dividends or capital gains. I am not aware of any full DRiPs that are tax free like the TFSA.

Maybe there's more that just taxes on your mind?


Cheers

*Edit:* At $19 a trade, I'd also investigate other TFSA options such as Questrade or consolidating assets or family accounts to one address to qualify for $10 or less trades.


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## Mandy101 (Dec 7, 2009)

Eclectic12 what I'm wondering is would it be beneficial for me to hold in TFSA and not be able to participate in partial drip and pay $19/each time I self drip i.e. buy more whole shares or is it better to hold outside and get taxed on the dividends but reinvest them into partial shares as I go along. I'm wondering which option would result in keeping more of my money


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## AltaRed (Jun 8, 2009)

Mandy101 said:


> What I'm wondering is would it be beneficial for me to hold in TFSA and not be able to participate in partial drip and pay $19/each time I self drip i.e. buy more whole shares or is it better to hold outside and get taxed on the dividends but reinvest them into partial shares as I go along. I'm wondering which option would result in keeping more of my money


Why drip at all? Let the dividends accumulate as cash in your TFSA until next year's contribution and then invest the aggregate in something at that time. Drips are over rated, and especially so in taxable accounts where keeping track of ACB records becomes tedious.


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## Mandy101 (Dec 7, 2009)

I thought that dripping gets me a ahead no? Since I am able to buy partial shares instead of waiting until I have $60 in dividends in order to buy another share - with the small amount I have to get started it would take me much longer than a year to accmulate $60 in cash.


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## GoldStone (Mar 6, 2011)

I agree with AltaRed. Dripping is OVERRATED. Yes it gets you ahead, but very... very... very... very... (you get the idea) slowly. It won't make you rich.

I tried dripping in a taxable account for a couple of months. 10 stocks. Record keeping was way more work than I was prepared to do. So glad I'm not doing that any more.

ADDED: To clarify, I still own the stocks. I cancelled the drips.


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## Eclectic12 (Oct 20, 2010)

Mandy101 said:


> Eclectic12 what I'm wondering is would it be beneficial for me to hold in TFSA and not be able to participate in partial drip and pay $19/each time I self drip i.e. buy more whole shares or is it better to hold outside and get taxed on the dividends but reinvest them into partial shares as I go along. I'm wondering which option would result in keeping more of my money


Does the TFSA allow a whole share drip for the stocks you are interested in? 

If so, the two differences IMO are the partial share for each purchase (i.e. not all of the dividends will be automatically re-invested) versus having to pay two sets of taxes (i.e. tax on dividends in the year paid and capital gains in the year sold). In this case, I'd go with the TFSA. 

Note that a whole share drip is usually referred to as a synthetic drip, where most brokerages will offer this for a range of stock, especially dividend paying stock.


Cheers


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## Eclectic12 (Oct 20, 2010)

Mandy101 said:


> I thought that dripping gets me a ahead no? Since I am able to buy partial shares instead of waiting until I have $60 in dividends in order to buy another share - with the small amount I have to get started it would take me much longer than a year to accmulate $60 in cash.


The main benefits of the drip are that there's no commission to pay plus the re-investment is automatic. It is true that partial shares will help but I'd be focusing on how to get enough stock so that the dividends buy whole shares or more.

The down side is that there is no control over what price is paid and limited control over participation (ex. if one sees a stock on sale and places a trade, the stock can be bought in minutes versus the drip where calling today may not stop the drip before the next dividend is paid).





GoldStone said:


> I agree with AltaRed. Dripping is OVERRATED. Yes it gets you ahead, but very... very... very... very... (you get the idea) slowly. It won't make you rich.
> 
> I tried dripping in a taxable account for a couple of months. 10 stocks. Record keeping was way more work than I was prepared to do. So glad I'm not doing that any more...


I'm not sure why the drip has to be slow. A lot depends on the dividend to share price ratio and whether the stock goes on sale for an extended period, or at least when the drip is buying more shares.

For one stock I bought years ago, in the first three years - the synthetic drip added at least twenty-one more shares. That's before considering the increase in dividends paid, the 2:1 stock splits in the years since and about a $38 per share rise in share price.

I'm quite happy with the automatic part as I was too busy with other activities so I would not have re-invested the money as efficiently.


Agreed ... the record keeping is tedious. However, after setting up a spreadsheet and considering that I'm reconciling my monthly statements anyway, an extra four or twelve numbers to plug in does not seem that bad to me. 

But to each, their own.


Cheers


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## Robillard (Apr 11, 2009)

Mandy101,

Have you been manually reinvesting your dividend payments, or did you ask your broker to enroll you in a DRIP? If you are manually reinvesting the dividend payments, then your broker is probably charging you the commissions. In my experience, brokers don't charge commissions on shares acquired through a DRIP, though yours may be different. An alternative to holding individual stocks and reinvesting the dividends would be to hold mutual funds or index funds and opting for the distributions to be reinvested. In general, neither your broker bor the fund company will charge a commission to reinvest distributions automatically.

With respect to whether you should hold equities in a TFSA or not, if depends on your situation. If you are in the bottom tax bracket, it never makes sense to hold Canadian equities in a TFSA, since the dividend tax credit results in a negative effective tax rate on the dividends received. If you are not in the bottom tax bracket, it is my understanding that generally it is better to hold Canadian equities outside of a TFSA, and instead hold international equities and bonds in the TFSA. This is because the marginal tax rate on international and interest income is much higher than marginal tax rate on Canadian eligible dividends.

Of course, if you are not otherwise in a position to max out your TFSA contributions, it makes sense to hold Canadian equities in a TFSA rather than leaving that contribution room unused.


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## AltaRed (Jun 8, 2009)

Robillard said:


> and instead hold international equities and bonds in the TFSA.


Not equities, because TFSA's are not recognized elsewhere as retirement vehicles and thus there is a withholding tax, for example 15% on US domiciled securities, that is non-recoverable in a TFSA. Do NOT put ex-Canada income/dividend paying securities in a TFSA.


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## Eclectic12 (Oct 20, 2010)

Robillard said:


> ... With respect to whether you should hold equities in a TFSA or not, if depends on your situation.
> 
> If you are in the bottom tax bracket, it never makes sense to hold Canadian equities in a TFSA, since the dividend tax credit results in a negative effective tax rate on the dividends received...


Good point ... I've been above the bottom so long I'd forgotten this.




Robillard said:


> ... If you are not in the bottom tax bracket, it is my understanding that generally it is better to hold Canadian equities outside of a TFSA, and instead hold international equities and bonds in the TFSA. This is because the marginal tax rate on international and interest income is much higher than marginal tax rate on Canadian eligible dividends....


Like a lot of other tax credits, the dividend tax credit is a sliding scale that is sensitive to income. If one is in Ontario and have a high income, dividends and capital gains are taxed at pretty much the same rate. If one is even higher, then dividends are taxed at 30% compared to capital gains at 23%.
http://canadiancouchpotato.com/2012/01/23/dividends-not-as-tax-friendly-as-you-may-think/


Cheers


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## andrewf (Mar 1, 2010)

Wait a second. We're worried about losing out on the -4% tax rate on dividends in low tax brackets, but not worrying about the 10% tax on CGs (the majority of the return)?

If you have TFSA room, use it!


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## Eclectic12 (Oct 20, 2010)

AltaRed said:


> Not equities, because TFSA's are not recognized elsewhere as retirement vehicles and thus there is a withholding tax, for example 15% on US domiciled securities, that is non-recoverable in a TFSA. Do NOT put ex-Canada income/dividend paying securities in a TFSA.


In lower tax situation, yes. I have seen posts that argue the situation changes in a high tax situation.

The basic idea is that the US 15% withholding tax on the dividends on the US stock is a small amount for those in a high tax situation for the alternatives of an RRSP (i.e. everything is reported as income when withdrawn) or a taxable account.


Cheers


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## Mandy101 (Dec 7, 2009)

Wow thanks for the variety of responses everyone - I'm on work time right now - read through your responses carefully tonight and hope to answer some of your questions and come up with more of my own!


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## jumbalaya (Jan 17, 2013)

http://www.finiki.org/wiki/Tax-Efficient_Investing

credit goes to cjottawa


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## Mandy101 (Dec 7, 2009)

Hey everyone I'm not in the bottom tax bracket - I'm in the 2nd tax bracket in BC with an average tax rate of 19% and a marginal rate of 30%. I thought that keeping any income generating Cdn equity in TFSA was the goal - as US equities do not get the foreign tax credit unless kept in RRSP?
Furthermore if I kept any equity outside of a registered account I would get the dividend tax credit on any dividends I earn?
I understand that dripping is a slow process and ideally it would be great if I had enough funds to purchase enough shares that the dividends would generate enough to purchase a whole new share but I don't...maybe I need to do some more number crunching!


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## james4beach (Nov 15, 2012)

DRIP'ing is overrated, as others have said.

One of the reasons it's pushed so hard is that it benefits the company (or fund company) you're getting dividends from. For example there's at least one high dividend utility in Canada who would have cashflow problems, if it wasn't for all the cash coming straight back to them through DRIP enrollments. A few fund companies are in that situation too, where their huge distributions would suck a lot of cash out of the fund (to the point where the fund may go out of business), but thanks to DRIP's much of the cash is coming back in, so the fund doesn't shrink so quickly.


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