A dividend reinvestment plan (DRIP) takes the dividends or distributions a stock or ETF pays you and uses them to buy more of the same investment. This page explains the two kinds of DRIP available in Canada, how to turn one on, what it does to your taxes and cost base, and when reinvesting automatically makes sense. For ETFs generally, see the ETFs and index funds guide.
How DRIP works
Without a DRIP:
- You own 100 units of an ETF at $50 ($5,000).
- The ETF pays a quarterly distribution of $0.50 per unit.
- You receive $50 in cash, which sits in the account until you reinvest it yourself.
With a DRIP:
- You own 100 units of an ETF at $50 ($5,000).
- The ETF pays $0.50 per unit.
- The $50 buys 1 more unit automatically.
- Next quarter, you are paid on 101 units instead of 100.
Synthetic DRIP vs full DRIP
| Synthetic DRIP (through your brokerage) | Full DRIP (company-sponsored) | |
|---|---|---|
| Who runs it | Your brokerage | The company’s plan agent |
| How units are bought | The brokerage buys at market price | The plan agent buys on the market, or the company issues new shares |
| Fractional units | Depends on the brokerage: some buy only whole units and pay the remainder in cash, some buy partial shares | Usually credited |
| Discount | None | Some plans offer one on newly issued shares; check the current plan terms |
| Where the shares are held | In your brokerage account | With the plan agent, or through your broker if the plan and broker allow it |
| Setup | A setting at the brokerage | Enrolment in the plan; some plans or brokers require registered shares first |
A synthetic DRIP is simpler and works for ETFs as well as stocks. A full DRIP only exists for companies that sponsor one, and if registration is needed, moving shares out of a brokerage account into your own name adds paperwork (and some intermediaries charge for it).
Setting up a synthetic DRIP. At most brokerages you enable reinvestment in the account settings, for the whole account or holding by holding, or by contacting the brokerage. It takes effect from a later payment date, depending on the brokerage’s cut-off. A synthetic DRIP needs the payment to be large enough to buy at least one whole unit at brokerages that don’t buy fractions, so small positions may still receive cash. The online broker comparison covers each platform’s features.
Setting up a full DRIP.
- Buy the shares at your brokerage.
- Check whether the plan accepts shares held through your broker. If not, ask the brokerage to register them in your own name (usually through the Direct Registration System, DRS).
- Enrol in the plan with your broker or with the company’s plan agent, named in the plan documents on the company’s investor relations page.
- Reinvested shares, including fractions where the plan credits them, are then added on each dividend date.
Plan terms, including any discount, are set by each company and can be suspended or changed; the company’s investor relations page has the current terms.
A compounding example
Assume $10,000 in an ETF with a 4% yield paid once a year (on the unit price at the start of the year) and 6% annual price growth. Without a DRIP, the cash is left uninvested; with one, it buys more units, so the holding grows 10% a year:
| Year | Without DRIP (units + idle cash) | With DRIP | Difference |
|---|---|---|---|
| 5 | $15,637 | $16,105 | $468 |
| 10 | $23,181 | $25,937 | $2,757 |
| 20 | $46,786 | $67,275 | $20,489 |
| 30 | $89,058 | $174,494 | $85,436 |
The gap is the growth on the reinvested payments. If you reinvest the cash yourself instead, you get much the same result; the DRIP simply does it automatically and on the payment date. The dividend calculator projects income and growth with your own numbers.
DRIP by account type
| Account | Tax on reinvested payments | Things to watch |
|---|---|---|
| TFSA | None | None beyond normal contribution rules |
| RRSP | None until you withdraw | Turn it off before you need cash in the account |
| RRIF | None until withdrawn | Reinvesting can leave too little cash for the minimum withdrawal |
| Non-registered | Taxable in the year paid | Every reinvestment changes your adjusted cost base |
For eligible Canadian dividends in a non-registered account, the dividend gross-up and dividend tax credit apply whether the dividend is paid in cash or reinvested.
Tracking adjusted cost base on DRIP purchases
In a non-registered account, each reinvestment is a purchase that adds to your adjusted cost base (ACB). Keep a record of the date, units bought and amount reinvested:
| Date | Units | Price | Amount | Running total cost |
|---|---|---|---|---|
| Initial purchase | 100 | $50 | $5,000 | $5,000 |
| Q1 DRIP | 2 | $52 | $104 | $5,104 |
| Q2 DRIP | 2 | $48 | $96 | $5,200 |
| Q3 DRIP | 2 | $55 | $110 | $5,310 |
| Total | 106 | $5,310 |
ACB per unit = $5,310 รท 106 = $50.09. When you sell, your capital gain or loss is the proceeds minus this ACB, so missing the reinvested amounts overstates your gain and your tax. Brokerage statements don’t always carry a complete ACB, so it’s worth reconciling against your T3 and T5 slips. The ACB calculation guide covers the method in detail.
A DRIP can also trip the superficial loss rules: if you sell a holding at a loss and a reinvestment buys more of it within 30 days, part of the loss can be denied. Turning the DRIP off before tax-loss selling avoids this.
When a DRIP doesn’t fit
- You need the dividends as income, for example in retirement.
- You want to direct new money to whichever holding is below its target weight rather than back into the one that paid.
- You hold many small positions whose payments won’t buy a whole unit.
- You are tax-loss selling in a non-registered account (see the superficial loss note above).
For long-term investors in a TFSA or RRSP who don’t need the income, leaving a DRIP on is a low-maintenance way to keep payments invested. Canadian dividend ETFs and the Couch Potato portfolio are common pairings.