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investor clinic

I'm interested in starting a dividend reinvestment plan (DRIP). How can I buy my first share without going through a broker?

DRIPs let you reinvest your dividends in additional shares of the company. Normally, you would have to open a brokerage account and pay a commission to acquire your first share(s), but it's possible to bypass the broker altogether by finding someone to sell you a share privately.

The process is explained in the Canadian DRIP Primer at To find a seller, click the link labelled "DRIP Resource Center" and scroll down to the section titled "Share Exchange." (Tip: Once you are on the Share Exchange message board, click "End" to get the most recent postings.)

The message board is where DRIP investors meet to buy and sell shares from each other. Because dealing with strangers can be risky, users also post "reputation checks," much as buyers on eBay rate sellers.

For first-timers, there's also a helpful section marked "Caution to Newbies."

"While 99 per cent of the people who trade on this site are honest and trustworthy, occasionally a person may try to take advantage of newbies" by taking their money and disappearing without sending a share, it reads.

To avoid getting burned, the site offers several tips:

-Read the reputation checks of the seller;

-Be wary of users who have only a few posts on the site;

-Get a phone number and mailing address, and send a cheque instead of an electronic payment;

-Speak to the person on the phone and ask about the process and how long it will take.

Robert Gibb, a Victoria-based DRIP investor, said he's aware of only three scams in the seven or so years that the board has been operating, and "we've caught the people each time." He also recommends that first-timers read the "Share Exchange Guidelines," which he wrote.

The savings can be substantial, he said. Typically, sellers charge $10 plus the price of the share. If you go through a broker, you'll pay a commission (which varies depending on the firm and the size of your account) plus a fee of about $50 to have the share(s) registered in your name and mailed to you.

Another way to avoid the $50 fee is by enrolling your shares in the broker's "synthetic" DRIP. But most synthetic DRIPs only allow purchases of whole shares, whereas with a company's "true" DRIP even fractional shares can be purchased, which means the entire amount of the dividend is reinvested.

I have a fund that distributes return of capital (ROC). In about three years the adjusted cost base (ACB) will be zero, at which point capital gains taxes will have to be paid on any further ROC distributions.

My problem is that I need some capital gains to offset losses now, but I don't want to sell this fund yet. Can ROC distributions be declared for tax purposes before arriving at an ACB of zero?

"The answer is no," says Jamie Golombek, managing director, estate and tax planning, with CIBC Private Wealth Management.

When a fund distributes ROC, the amount is generally not taxable. Rather, the investor deducts the amount from his or her ACB. This gives rise to a larger capital gain, or smaller capital loss, when the units are ultimately sold. As you correctly state, when the ACB reaches zero, ROC is then treated as a capital gain for tax purposes in the year it was received.

But as long as your ACB is more than zero, you cannot report ROC distributions as capital gains. Besides, there's no reason to, Mr. Golombek says.

You are allowed to carry capital losses back up to three years and forward indefinitely to offset capital gains. In other words, those losses will still be there for you when you eventually decide to sell your units (and presumably have some capital gains to offset).

"There's absolutely no rush," he says. "In a nutshell, if you want to hold on to the [fund] because it makes sense from an investment standpoint, do so. Ultimately, when you sell the investment any gain you have could be sheltered with any available capital losses carried forward, which never expire."