DRIPs and adjusted cost base: how reinvested dividends are taxed

Are reinvested dividends taxable?

Yes, in a non-registered account. The CRA’s long-standing position (archived Interpretation Bulletin IT-88R2, paragraph 27) is that a dividend reinvested through a DRIP is included in income, grossed up where applicable, for the year the cash dividend would have been paid. The new shares aren’t treated as stock dividends. The bulletin is archived and no longer updated, but we found no current CRA page that contradicts it.

So a DRIP changes what happens to the cash, not the tax. Canadian dividends reinvested this way still get the gross-up and dividend tax credit, and they still count in net income for the OAS recovery tax.

It also means a DRIP can leave you with tax to pay on dividends that were never available as cash, because every dollar went into new shares. That isn’t a problem in itself; it’s a planning point to be aware of when estimating what you will owe for the year.

How do reinvestments change your adjusted cost base?

Your adjusted cost base is, at its simplest, what you paid for all your shares of one security. When identical shares are bought at different times, Canada uses an average cost: total cost divided by total shares.

A reinvested dividend buys more shares, so it increases your total cost. For reinvested fund distributions, the CRA says you must still report the amounts on your slips because they are considered received before being reinvested, and each reinvestment raises your cost. Applying the same averaging to DRIP shares bought with a cash dividend follows the CRA’s general ACB rules in its capital gains guide (T4037), though no current CRA page addresses share DRIPs in those exact words.

Worked example: four quarters of reinvestment

A hypothetical investor owns 400 shares of Company T, a hypothetical telecom, with a total cost of $8,000. It pays $0.25 per share each quarter, all reinvested at the prices shown. Fractional shares are allowed in this example.

Why do the records matter?

Suppose the investor later sells all 416.12 shares. If they use the correct ACB of $8,406, the reinvested dividends aren’t taxed again. If they forget the reinvestments and use the original $8,000, they overstate the capital gain by $406, and pay tax on money that was already taxed as dividends.

Over many years of quarterly reinvestments, those small amounts add up. Brokerage statements may show a book value, but it may not match your ACB for tax purposes, especially if shares were transferred between institutions. Keeping your own record of each reinvestment is the reliable fallback.

• Date of each reinvestment
• Dividend amount reinvested
• Price and number of shares (including fractions)
• Running total cost and total shares

How the US treats reinvested dividends

IRS Publication 550 says that if you use dividends to buy more stock at fair market value, you must still report the dividends as income. If the plan lets you buy at a discount, you report the fair market value of the extra shares, and service charges paid for you are also dividend income.

Because the reinvested amount has already been reported as income, keeping a record of each reinvestment, with its date and amount, makes it clear what the new shares cost when you eventually sell them. The US qualified dividends page explains how the dividends themselves are taxed.

If you aren’t a US taxpayer, the Canadian rules above are the ones that apply to your return. US withholding on dividends from US companies is covered on the Canada–US treaty page.

A simple record-keeping routine

1. Start with your opening position. Note the number of shares and the total cost, including any commissions on the original purchase.
2. Log each reinvestment as it happens. Date, dividend amount, price and shares bought, including fractional shares.
3. Update the running totals. Add the reinvested amount to total cost and the new shares to total shares, then divide to get ACB per share.
4. Match it to your slips at tax time. For a plan that buys at market price, the dividends you reported for the year should equal the amounts you added to cost for that year.
5. Adjust when you sell. Selling part of a position reduces total cost proportionally at the current average; ACB per share stays the same until the next purchase.

What about registered accounts?

Inside an RRSP, RRIF or TFSA, dividends aren’t reported on your return as they arrive, so the year-by-year ACB tracking described here is a non-registered account task. The DRIP basics guide covers how plans work in any account.