# XDV DRIP in TFSA account



## vidm (Mar 4, 2012)

XDV is popular ETF, so I believe more people should see same behaviour.

I just noticed that XDV ETF paid into my account DRIP (reinvested distributions not paid in cash) for about 2.9%. This is year end DRIP. Actual amount was deposited and right away subtracted because this is DRIP. Also my book value of that ETF was increased by exactly same amount as DRIP amount. In open account I would have no problem with that. But this is TFSA account. So really in TFSA account (or RRSP for that matter) adjusted cost based (book value) is not tracked. So am I right to assume that this payment is lost if you have XDV in TFSA or RRSP account?
I know that some less popular ETFs (like XGD) are doing notion distributions and I was avoiding them in TFSA/RRSP. But this is very popular XDV ETF, I had no idea that they do such payments.


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## Spudd (Oct 11, 2011)

If it was DRIP, you should have seen your number of units increase. Did you?


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## Eclectic12 (Oct 20, 2010)

I'm not sure what a notion distribution is and how a DRIP would interact with it. However, if you are happy with what's happening in an taxable account - there shouldn't be a problem (or lost payment), even if you are getting more info than required (ex. up to date book values).

If as Spudd and I suspect, the DRIP has increased the number of units - there shouldn't be a problem. After all, DRIP are supposed taking what would have been paid in cash and buying more units, right?

Cheers


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## humble_pie (Jun 7, 2009)

vidm you have a very interesting point. I had not thought of that since i would never dream of holding a dividend fund in any account, for the simple reason that it's always more efficient to hold the stocks themselves.

plus holding an etf that pays these special capital-adjusting dividends out at year's end & then immediately folds them into cost base - as ishares often do - does create a tfsa or rrsp SNAFU, as you have figured out. Congratulations to you.

one way to avoid would be to sell such an etf immediately prior to the record date of the special year-end & general dividends. One would capture share price increase as capital gain, not as dividends. This is a useful strategy to know as it can serve in many situations, not just avoiding special dividends in registered accounts.

however the selling & subsequent re-buying of the etf after the record date would unfortunately cost commissions.

i find myself wondering what would be wrong with a dividend trio in tfsa such as a telco, a canadian bank plus a hi-dividend pipeline, utility or energy. Meanwhile dump those etfs among whose handicaps is the fact that tax consequences can never be properly controlled ...


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## andrewf (Mar 1, 2010)

Wait a second... why is this a problem exactly?

The funds that have reinvested distributions will as a net effect distribute no cash, issue taxable income, and increase your ACB. The number of units should remain the same.

This is all moot in a TFSA. Can you articulate what you are concerned about? TFSAs do not have true DRIPs. Some ETF providers/brokers offer synthetic DRIPs where distributions are used to buy whole units, if possible, with the remainder paid in cash.


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## vidm (Mar 4, 2012)

Number of units did not change. What changed was just book value (Adjusted cost base - ACB). This was big payment - 65cents per share - I believe it is biggest every for XDV. Previous years (2011) payment was 22cents. I talked with iShares and from their perspective I did not loose anything - DRIP was simply put back into fund as they say and that changed NAV value so I "own a bit more of the fund". But from my personal perspective - I lost that payment. That is anybody who has RRSP/TFSA would much more prefer to get payment in actuall dividends instead of in reinvested divident payment. Reinvested dividend in RRSP/TFSA means nothing - you loosing that money.

Let me explain with numbers (please correct me if I am wrong).

Lets say in the open account on Dec 1st 2012 I bought 1000 XDV shares for the price of 20$ per share for total book value 20,000$. On Jan 3rd, 2013 I received DRIP of 650$ and my adjusted cost base was increased to 20,650$. On Jan 4th I sold my shares for 21,000$. I'll pay tax on profit of (21,000$-20,650$) 350$. So in this case distribution made a difference! What it simply did iwas - it did not pay income right away (as dividend), but deffered income to the point when I sold my investments (through increased ACB). I can live with that because and the end I did get that 650$ as my income (through increased ACB).

Lets do same calculation on RRSP account. At the end I'll have in my RRSP account 21,000$ (!) and my adjusted cost bases will not matter at all !!! From my perspective I can treat that this payment in RRSP/TFSA did not happen at all - as I will not benefit from in in any way. Yes, maybe NAV value changed, but really it changed when I had money in my regular account, yet in my regular account my ACB was increased that is real benefit for me there.
I am ignoring fact here that taxes on RRSP/TFSA account are totaly different game, but the fact is that when money are in TFSA/RRSP - you do not care about ACB and you do not want to keep any stocks in there that do distribution in ACB.

Am I right, or am I making somewere fundamental mistake?


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## andrewf (Mar 1, 2010)

Oh, so that's your concern.

Let me fix that for you.

Take the number of shares you have *0.65/22.27. Sell that number of XDV units. Presto chango, you have your cash.


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## andrewf (Mar 1, 2010)

vidm,

You should not care whether the funds you hold have reinvested distributions in a TFSA. The only thing that matters is total return, regardless of how you get it.


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## vidm (Mar 4, 2012)

humble_pie said:


> vidm you have a very interesting point. I had not thought of that since i would never dream of holding a dividend fund in any account, for the simple reason that it's always more efficient to hold the stocks themselves.
> 
> plus holding an etf that pays these special capital-adjusting dividends out at year's end & then immediately folds them into cost base - as ishares often do - does create a tfsa or rrsp SNAFU, as you have figured out. Congratulations to you.
> 
> ...


Humble_pie : I am big ETF fan because I had made bad investment choices with some stock investments (YLO, HNU, etc). I am trying to build nice ETF portfolio and altough there is price for ETFs, I am willing to pay it. My current all portfolio MER is 0.3789% and I can live with that. So I do want to go with ETFs, but I need to figure out tax and distribution efficiency for accounts. As you can see I am still strugling with this even many people would call me reasonably knowledgable in this area. 

But you are right, I am ready to sell XDV from TFSA/RRSP accounts, I just need to figure out what to use as replacement.


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## HaroldCrump (Jun 10, 2009)

vidm said:


> Humble_pie : I am big ETF fan because I had made bad investment choices with some stock investments (YLO, HNU, etc).


You are comparing the proverbial apples and oranges.
You can't pick high risk stocks like YLO, lose money, and then benchmark against a blue chip dividend ETF like XDV.
HNU is not even a stock. It is some weird 2X leveraged commodity ETF.

If you want to benchmark your personal picks against XDV, you have to pick similar large cap, blue chip, dividend stocks.


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## humble_pie (Jun 7, 2009)

vidm not that anyone would care what a dumb crumb's opinion might be. But in for a crumb in for a cracker, as they say, so fwiw here goes:

i think you have an excellent holding there with XDV in your tfsa. If it were myself, particularly following a YLO/HNU etc history, i would not worry at all about some small special or notional dividend in a well-chosen etf like the one you have picked. I might start to worry after the holding grew bigger, say north of 80-100k, but not yet.

what i meant about holding actual dividend-paying stocks is what Harold says (below). In a tfsa one wants to hold big, solid, large-cap dividend payors that boast long, strong histories.

cmf member Argonaut posts frequently about his tfsa, in which he holds 5 cherry-picked hi-quality canadian stocks that pay good dividends. In cmf forum, this has come to be known as argo's 5-pack. He holds a bank, a telco, a pipeline, a utility & i think a railroad. You might want to take a look at his posts when you have a moment.

argo's tfsa has done just beautiful. Better than comparable etfs. But for many who are not quite willing to make the leap, a good dividend-paying etf like your XDV definitely cuts the biscuit, too.




HaroldCrump said:


> You are comparing the proverbial apples and oranges.
> 
> You can't pick high risk stocks like YLO, lose money, and then benchmark against a blue chip dividend ETF like XDV.
> 
> ...


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## vidm (Mar 4, 2012)

andrewf said:


> vidm,
> 
> You should not care whether the funds you hold have reinvested distributions in a TFSA. The only thing that matters is total return, regardless of how you get it.


Andrewf,

You have a very good point, all I care is about total profit. So looking from this perspective here is what I see:

In case of XDV in open account my total profit is: 1,000$ minus Tax on 350$ capital gain

In case of XDV in TFSA account my total profit is: 1,000$ and no taxes are paid

In case of XDV in RRSP account my profit is: 1,000$ minus tax paid on that total amount (nature of RRSP)

So looking from this perspective I did not loose anything in TFSA account. So I am calmer now . But if you look closer, that payment (ACB) did not benefit me in any way in TFSA account, but it clearly benefited me in my regular account.
My goal of holding money in TFSA was to reduce my tax payable on investments. But DRIP payment that XDV pays already reduces tax payment, so my benefit of TFSA account tax advantage is reduced.


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## vidm (Mar 4, 2012)

humble_pie said:


> vidm not that anyone would care what a dumb crumb's opinion might be. But in for a crumb in for a cracker, as they say, so fwiw here goes:
> 
> i think you have an excellent holding there with XDV in your tfsa. If it were myself, particularly following a YLO/HNU etc history, i would not worry at all about some small special or notional dividend in a well-chosen etf like the one you have picked. I might start to worry after the holding grew bigger, say north of 80-100k, but not yet.
> 
> ...


Humble_pie - thank you, I found your post on argo 5 pack and I'll look into this very closely.

Thanks again!!


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## andrewf (Mar 1, 2010)

vidm said:


> So looking from this perspective I did not loose anything in TFSA account. So I am calmer now . But if you look closer, that payment (ACB) did not benefit me in any way in TFSA account, but it clearly benefited me in my regular account.
> My goal of holding money in TFSA was to reduce my tax payable on investments. But DRIP payment that XDV pays already reduces tax payment, so my benefit of TFSA account tax advantage is reduced.


So in a taxable account, XDV distributes $650 in taxable capital gains, and you add that to your 2012 income and pay tax on it. To offset this, you increase the ACB of your XDV holding by $650. Essentially you are prepaying some of the capital gains tax. In TFSA this is moot, you never pay tax on the fund; not now, not later.

I think it's just fine to hold index funds. Stock picking works fine in theory so long as you keep costs low and don't trade too much. In practice, the temptation to chase performance and time stocks is too strong for many investors to resist. See the AAPL/Options threads for indications of what happens when people are overconfident in their can't-lose investment in a company with great fundamentals.


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## andrewf (Mar 1, 2010)

Vidm,

Just to clarify. This distribution has absolutely nothing to do with DRIPs.


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## james4beach (Nov 15, 2012)

vidm said:


> XDV is popular ETF, so I believe more people should see same behaviour.
> 
> I just noticed that XDV ETF paid into my account DRIP (reinvested distributions not paid in cash) for about 2.9%. This is year end DRIP. Actual amount was deposited and right away subtracted because this is DRIP. Also my book value of that ETF was increased by exactly same amount as DRIP amount. In open account I would have no problem with that. But this is TFSA account. So really in TFSA account (or RRSP for that matter) adjusted cost based (book value) is not tracked. So am I right to assume that this payment is lost if you have XDV in TFSA or RRSP account?


Wait, this does actually sound like a real concern to me too. What's the verdict on this?

What you have there is a reinvested distribution; it shows up in the ETF providers distribution tables too (not cash but reinvested column). You're right that you see no benefit in terms of share price. In a taxable account, you only see the benefit as you would increase your ACB and thus pay less capital gains tax.

In the tax shelter, ACB is moot. But then again the distribution was probably mostly internal capital gains... because capital gains wouldn't be taxed anyway, is that why this whole thing cancels out and is NOT an issue?

I'm on the fence about this one.

What if the reinvested distribution wasn't entirely made up of reinvested capital gains? Would that change things?


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## vidm (Mar 4, 2012)

andrewf said:


> Vidm,
> 
> Just to clarify. This distribution has absolutely nothing to do with DRIPs.


Sorry, you right, it has nothing to do with DRIP, just in my TD Waterhouse account was marked as DRIP. But from ishares page I do see that this is just called "reinvested distribution". 

My lesson from this is - I have to do better allocation between different accounts (regular, TFSA, RRSP).


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## andrewf (Mar 1, 2010)

The way these work is that the issuer issues a distribution in the form of units of the fund then immediately does a reverse split so you have the same number of units afterwards. Net effect is income triggered, no cash, and increased ACB.


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## humble_pie (Jun 7, 2009)

james you got it, ishares does sometimes use this special dividend mechanism at yearend in order to keep a particular etf true to its index.

the special dividend is paid out but immediately disappears because it immediately gets folded into the book value of the holding. In non-reg'd accounts this adjusts the cost base upwards so things even out in the end, but in non-reg'd accounts there is a practical loss to all intents & purposes ... pretty smart of vidm to figure this out, huh ?

but i think in terms of practical priorities, vidm's main concern is preserving & embellishing his tfsa. Ishares special dividends are usually quite small so imho they can be lived with comfortably enough unless a registered account holding is of a staggeringly giant size.

it's better to go along with a small disappearing special dividend than to lose a huge amount with YLO/HNU type holdings, would you not say? the good aspect to this story is that vidm has corrected himself & now he's on the right path.


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## andrewf (Mar 1, 2010)

HP, please explain where you think the loss is coming from. There is no loss, as far as I can see.

In a taxable account, you pay tax on the reinvested distribution and add it to ACB. In a TFSA/RRSP you do not pay tax on the reinvested distribution. It's better for this transaction to occur in a registered account than a taxable account.


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## james4beach (Nov 15, 2012)

andrewf said:


> HP, please explain where you think the loss is coming from. There is no loss, as far as I can see.
> 
> In a taxable account, you pay tax on the reinvested distribution and add it to ACB. In a TFSA/RRSP you do not pay tax on the reinvested distribution. It's better for this transaction to occur in a registered account than a taxable account.


When you say above "you pay tax on the reinvested distribution and add it to ACB". That's not exactly true. You pay tax on internal capital gains, which sometimes aligns with reinvested distribution and sometimes doesn't. They're different things.

So in the case where the reinvested distribution = internal capital gains, yes there is no problem in the tax shelter.

In the case where reinvested distribution is something else (as humble_pie just posted above), you haven't got a capital gains issue, it's some other type of value and I think you really do lose that value in the tax shelter.

But as humble_pie says, it's small and infrequent, so this is probably a non-issue.


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## andrewf (Mar 1, 2010)

If you look at XDV, the years and amounts of year-end reinvested distributions correspond to taxable capital gains. We'll see how 2012 shakes out when they release the tax info in a few weeks.

I'm guessing these are a result of holdings that are removed from the index as a result of being acquired (or otherwise being removed from the index). The proceeds are reinvested in the fund, but the realized gain has to be distributed to unitholders. And since the proceeds are reinvested in the fund, the fund issues a reinvested distribution as the cash is not available.


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## james4beach (Nov 15, 2012)

I agree that when those two align (as they do for say XDV and XSP, which are the two I checked) then there's no issue here.


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## andrewf (Mar 1, 2010)

I'm having difficulty imagining when this would ever be a problem for registered accounts.


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## humble_pie (Jun 7, 2009)

i think in rrsp/rrif the final tax result will be a hair's less beneficial, because the original contribution - measured by shares at market value, not by dollar amount - will be taxed as income regardless of gain or loss. There will be no recognition of any special dividend(s) used to adjust cost base upwards or remediate a taxable withdrawal by any manner whatsoever.

whereas the non-registered owner at least has a raised cost base plus capital gains/losses treatment of disposition.

meanwhile the tfsa gets it best of all because it sails through with nary a tax nor a scratch.


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## andrewf (Mar 1, 2010)

> whereas the non-registered owner at least has a raised cost base plus capital gains/losses treatment of disposition.


They also have a tax liability for the income from the reinvested distribution. That more than cancels out the tax benefit of increased ACB. The decrease in unrealized capital gain is taxed as current income.


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## vidm (Mar 4, 2012)

First of all thank you very much for helping me with understanding this issue and for such interesting discussion. I understood that actually even in TFSA reinvested distributions not really lost.

But I still have one more question. My understanding that most of the people here track their investments very closely and know how much their investment paid dividends and produced capital gain. So if you would have such investment in your TFSA/RRSP - would you add this reinvested distribution amount to total dividends amount paid for that position in the year?


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## Sampson (Apr 3, 2009)

vidm said:


> So if you would have such investment in your TFSA/RRSP - would you add this reinvested distribution amount to total dividends amount paid for that position in the year?


Internal rate of return for the whole account.

I only consider new money added into the accounts - the reinvested or cash dividends simply factor into the end value.


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## vidm (Mar 4, 2012)

Sampson said:


> Internal rate of return for the whole account.
> 
> I only consider new money added into the accounts - the reinvested or cash dividends simply factor into the end value.


Sampson, 

In "not tax scheltered" account when you receive "reinvested distribution" you have to pay that year capital gains on amount received and investment ACB was changed. So in such case I would think it would be fair to add such distribution amount to total dividend paid by that position. But in tax sheltered account I agree, as no money were added into account, this payment probably should not be added to total dividends paid amount.

I think my misunderstanding was based exactly because I am thinking based on above principals, that is why I was saying that "payment is lost".


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## andrewf (Mar 1, 2010)

In my book, you should stop worrying about the dividends and look at total after-tax return. But then why buy a dividend fund, right?


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## humble_pie (Jun 7, 2009)

vidm said:


> In "not tax scheltered" account when you receive "reinvested distribution" you have to pay that year capital gains on amount received and investment ACB was changed. *So in such case I would think it would be fair to add such distribution amount to total dividend paid by that position*. But in tax sheltered account I agree, as no money were added into account, this payment probably should not be added to total dividends paid amount



this is by way of splitting a hair, as they say ... but in non-registered account it would *not* be "fair to add such distribution amount to total dividend paid by that position."

not fair or accurate because such distribution is already fully-accounted for by the upwards adjustment to cost base. This upward adjustment will affect the capital gains/loss that will be realized upon disposition of the security.

so recording the distribution also as a dividend would mean recording it twice. This would distort the final picture.

overall, i am left wondering why it would matter particularly to continuously record the exact nature of distributions, dividends & capital gains in tfsa. The only thing that matters imho is the 100% tax-free nature of all eventual withdrawals.

just as Sampson said.


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## vidm (Mar 4, 2012)

andrewf said:


> In my book, you should stop worrying about the dividends and look at total after-tax return. But then why buy a dividend fund, right?





humble_pie said:


> this is by way of splitting a hair, as they say ... but in non-registered account it would *not* be "fair to add such distribution amount to total dividend paid by that position."
> not fair or accurate because such distribution is already fully-accounted for by the upwards adjustment to cost base. This upward adjustment will affect the capital gains/loss that will be realized upon disposition of the security.
> so recording the distribution also as a dividend would mean recording it twice. This would distort the final picture.
> overall, i am left wondering why it would matter particularly to continuously record the exact nature of distributions, dividends & capital gains in tfsa. The only thing that matters imho is the 100% tax-free nature of all eventual withdrawals.
> just as Sampson said.


Andrewf, humble_pie

All my investments are tracked in Excel and I wrote code to continuously track my investments, including dividends. So I know how much dividends I get paid and when, I compare these results to last year same month, etc.
I understand I over-analyze, but as first step in understanding my investments, I need to be able to measure performance. I track separately "realized capital gains", "unrealized capital gains" and "distributions/dividends". That is why I asked if you would include such payment into total dividends paid. So in open acount when I receive "reinvested distribution" I increase dividends and then increase book value and at the same time this will reduce unrealized capital gain. So I believe I am capturing this properly from all angles and I know exactly how my investment is doing. It helps me also when I sell investment and file taxes, as I have properly calculated ACB. I also should be able to match bank issues T5 and T3 with my own calculated values.

So I am comming to conclusion that for TFSA/RRSP account I would not record such transaction at all.


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## humble_pie (Jun 7, 2009)

vidm said:


> So I am comming to conclusion that for TFSA/RRSP account I would not record such transaction at all.


vidm i do indeed believe that you over-analyze each:

in both tfsa & rrsp i record nothing. The rrsp is being deliberately kept very small, so probably my slapdash approach is atypical. However i find that the broker displays breakdowns & histories for registered accounts that are good enough for my purposes.


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## Sampson (Apr 3, 2009)

I used to do the exact same, but it really is so cumbersome.

This method allows you to assess the return of individual holdings, but I don't like to change my investments that much and as a result of my laziness, have simply focused on the total portfolio return.

This is really the metric you need to compare with your benchmark anyway - not whether a single stock has outperformed in isolation.

Laziness always wins out.


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## humble_pie (Jun 7, 2009)

Sampson said:


> I used to do the exact same, but it really is so cumbersome.
> 
> This method allows you to assess the return of individual holdings, but I don't like to change my investments that much and as a result of my laziness, have simply focused on the total portfolio return.
> 
> ...



yea i am so not getting all the measuring & metrification that so many cmf forum members seem to go in for.

i mean, in a small account under 100k i can see with my bare eye what's going on ...

even in larger margin trading accounts i only keep records that strictly lead to information that will be used at tax time.

i don't like XIRR because it capitalizes new contributions, which is fine for the giant mutual & pension funds it was created for. However for small individual retail investors it can distort returns to the upside imho, particularly registered accounts that undergo frequent contributions but few or no withdrawals.

what i do like are net worth statements including invested securities plus house only.


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