DRIP — Dividend Reinvestment Plan (Canada)

A DRIP (Dividend Reinvestment Plan) automatically converts every dividend you receive into additional shares of the same security, commission-free. Instead of piling up as idle cash, your dividends buy more shares that in turn pay more dividends — compounding, applied directly to your portfolio.

Two Kinds of DRIPs in Canada

Dividend reinvestment comes in two flavours in Canada, and the difference matters:

Feature	True DRIP (transfer agent)	Synthetic DRIP (broker)
Fractional shares	Yes	No — whole shares only
Price discount	Sometimes (often 1-5% on treasury-issued shares)	Generally none
Enrolment	Through the agent (e.g. Computershare, TSX Trust), shares registered in your name	One request to your broker, per account or per security
Fees	None	None (commission-free)

When a discount exists, its terms are set out in each company's plan prospectus — check before enrolling. In practice, the vast majority of DIY investors use their broker's synthetic DRIP, which takes one request to set up.

A Quarter of DRIP, by the Numbers

Say you hold 120 shares of a Canadian bank trading at $70 that pays a quarterly dividend of $1.10 per share:

Dividend received: 120 × $1.10 = $132
Synthetic DRIP (broker): buys 1 whole share at $70; the remaining $62 is deposited as cash
True DRIP (transfer agent): the full $132 is reinvested, about 1.886 shares (fractions allowed)
Next payment, the dividend is calculated on 121 shares (or 121.886) — the snowball is rolling

The 20-Year Gap: Reinvest or Take the Cash?

Scenario ($10,000 start, 20 years)	Assumptions	Final value
With DRIP	3% price growth + 4% dividend reinvested (7% compounded)	≈ $38,700
Without DRIP (dividends taken in cash)	Shares ≈ $18,060 + accumulated dividends ≈ $10,750	≈ $28,810

Simply reinvesting opens a gap of nearly $9,900 — close to the starting capital itself. This is a simplified illustration at constant returns, before tax and fees: real markets fluctuate, but the compounding mechanics stay the same.

How DRIPs Are Taxed in Canada

Non-registered account: reinvested dividends are taxable in the year they are paid, even though you never touch the cash. You receive a T5 slip (plus an RL-3 in Quebec); eligible dividends from Canadian companies still qualify for the dividend tax credit.
ACB: every reinvestment is a purchase that raises your adjusted cost base (ACB). An untracked ACB means an overstated capital gain — and overpaid tax — when you sell.
TFSA: compounding is entirely tax-free, which makes the DRIP especially powerful here. See the TFSA definition.
RRSP and FHSA: no tax as long as the money stays inside the plan.

Strengths and Trade-Offs

Strengths

Automation: no decisions to make — the discipline is built in
No commissions on reinvestment purchases
Regular buying that averages your entry price over time
Faster compounding: every dividend goes to work immediately

Trade-offs

Creeping concentration: your allocation drifts toward high-dividend holdings unless you rebalance
No control over the timing or price of purchases
Heavier ACB bookkeeping in non-registered accounts (dozens of small buys per year)
Leftover cash with synthetic DRIPs whenever the dividend does not cover a whole share

Frequently Asked Questions

Can I use a DRIP in a TFSA or RRSP?

Yes. Most Canadian brokers let you turn on automatic reinvestment in registered accounts (TFSA, RRSP, FHSA) as well as non-registered ones. Inside a registered account, the compounding is fully tax-sheltered.

Are reinvested dividends taxable?

In a non-registered account, yes: dividends are taxed in the year they are paid even if you never see the cash (T5 slip, RL-3 in Quebec). Inside a TFSA or RRSP, no tax applies.

Does a DRIP buy fractional shares?

A true DRIP (run by the transfer agent) does. The synthetic DRIP offered by brokers buys whole shares only — whatever is left of the dividend lands in your account as cash.

Does a DRIP change my ACB?

Yes. Every reinvestment is a new purchase that adds to your adjusted cost base. Tracking it properly keeps you from overstating your capital gain — and paying tax twice — when you eventually sell in a non-registered account.

Can I start or stop a DRIP at any time?

Yes. At most Canadian brokers (Wealthsimple, Questrade, Disnat), enabling it is free, per account or per security, and you can switch it off on request.

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