A question I often receive is, "Is it possible to DRIP within a Registered Retirement Savings Plan (RRSP)?" Within the context of what the person is asking, the simple answer is, "No and yes, however."
What the questioner wants to do is make fee-free periodic cash purchases within their (most likely self-directed) RRSP. However, ninety-nine percent of RRSPs are held by a third party that only allows periodic purchases according to a fee schedule. For example, my own RRSP is held by BMO Investorline. If I wanted to make an optional $100 contribution to BCE I would have to pay a $25 brokerage commission plus GST. The $100 would only buy whole shares. Any excess cash left over would be deposited into the account. So, the answer is, yes, it is possible to DRIP within an RRSP but because of the high costs involved it would be a very inefficient use of resources.
DRIPpers are resourceful people who like to work around obstacles. Following are three methods that partially help to overcome the difficulties noted above:
If your RRSP is held through a broker, then the partial DRIPping effects of dividends can be achieved by registering in any offered synthetic DRIP. Any dividends received in your RRSP can be reinvested in whole shares of a company with the excess cash going into your account. Note that individual companies cannot be registered in a broker’s synthetic DRIP. If you register, all eligible companies in your RRSP will be registered. For example, if you own both Bank of Nova Scotia and Magna and the broker synthetically DRIPs both, you cannot request that only your Magna dividends be reinvested. Both companies must be synthetically DRIPped. It’s an all or none situation.
Different brokers have different lists of eligible companies for their synthetic DRIPs. Just because one broker has a synthetic DRIP for TransAlta does not mean all brokers do. Some brokers offer the entire TSX 300 while other brokers offer only a select few companies. Brokers will provide a list of eligible companies on request.
With the method above, only dividends are DRIPable. Any optional purchases are subject to the brokerage commission.
A second possibility is to use an in-house DRIP. Dofasco, RioCan Reit and Summit Reit offer in-house self-directed RRSPs. There is an annual management fee in the $35 to $45 range. Periodic payments can be made fee-free. There are downsides to any in-house DRIP. Firstly, you can only hold equity and debt from the particular company in it. If you have a RioCan RRSP, then only units of RioCan or RioCan debentures can be placed in it. This severely limits diversification. Secondly, the ability to maximize foreign content becomes restricted. The thirty (30) percent foreign contribution limit is set for each RRSP. If you have several RRSPs it is impossible to over-contribute a foreign amount to one RRSP to make up for the lack of a foreign contribution in an in-house RRSP.
A third possibility is to contribute to a DRIP in the usual fee-free manner outside an RRSP. Later, take possession of the share certificates and deposit them in your RRSP. Possession of share certificates is gained by contacting the transfer agent. On the back of some contribution statements is a section to request some or all whole share certificates. Possession can also be gained, in some instances, by faxing or writing the transfer agent. There should be little or no fee for this.
The brokerage usually suggests the share certificates be sent by courier. This costs around $35. It is possible to send certificates by mail, at less cost, but you have to decide your own comfort level for this. There are no fees to deposit shares in your account. The broker will issue an RRSP contribution statement equal to the value of the shares on the day they are deposited. In some instances it is possible to indicate to the broker that determination of the contribution amount be based on the high or low trading price for the day.
There is the usual fee if you wish to take the certificates back. I’ve noted that the fee to do this, in many instances, has risen dramatically in recent times. My own biases indicate that, because of increasing popularity, this is an attempt by brokerages to discourage people from starting DRIPs. Most likely it is a reflection of the recent economy.
Canada Customs and Revenue (CCRA) require that any capital gain on these share certificates must be declared at the time of deposit. Conversely, no capital loss can be claimed. As a result, this method works best with shares that are trading at or very near their Accumulated Cost Base (ACB). For myself, this year, I am using this third method to deposit several share certificates in my wife’s RRSP.
Finally, if you choose this third method and you wish to continue making periodic fee-free contributions, make sure you leave at least the minimum number of shares in the DRIP account outside your RRSP to maintain it.
Disclosure: I own shares in BCE, Bank of Nova Scotia, Dofasco and TransAlta mentioned above.
Robert Gibb, 401-2910 Cook Street, Victoria, BC, V8T 3S7 (250) 383-7075 firstname.lastname@example.org . Robert is a frequent contributor to Internet DRIP boards under the nickname OperaBob.
© Canadian MoneySaver, PO Box 370, Bath, ON K0H 1G0 613-352-7448 - Published November/December 2003