It's a lament I hear frequently: I wish I'd started investing earlier.
You can't turn the clock back, but you can do the next best thing: Get your children started as early as possible. That way, they'll make the most of compounding – a key ingredient for building wealth.
Today, we'll look at how to set up a dividend reinvestment plan (DRIP) for a child. DRIPs harness the power of compounding by automatically using dividends to purchase additional shares of a company.
Many DRIPs include an optional share purchase plan (SPP) that lets the holder buy additional stock with no commission – a key consideration if your kids will be regularly socking away money from birthday gifts or a part-time job. You'll find a list of DRIPs and SPPs at dripprimer.ca/canadiandriplist.
"DRIPs are a great way to save money and can be a great way to teach kids about investing," says Bob Gibb, a DRIP enthusiast in Victoria, who provided valuable guidance for this column.
To enroll your child in a DRIP, you first need to transfer at least one share to him or her and register it with the company's transfer agent. Transfer agents, such as Computershare Canada and CST Trust, handle shareholder record-keeping and manage DRIPs on behalf of companies.
A word of advice: Instead of registering the share solely in the child's name, Mr. Gibb recommends registering it in the parent's name "in trust for" the child. This gives the parent legal authority over any transactions and avoids delays that can arise when a minor is named as the sole shareholder.
Once registration is complete, the parent can enroll the share in the DRIP. Transfer-agent DRIPs have a big advantage in that they permit fractional share purchases, which means every penny of dividends is reinvested. Most broker-operated "synthetic" DRIPs, on the other hand, deal only in whole shares, which means some cash will be left sitting in the account.
The transfer process
Shares can be transferred in different ways depending on who owns them and in what form.
If the parent already holds shares in a DRIP with the transfer agent, the parent can submit a form – called an "assignment and irrevocable power of attorney – securities," which specifies the number of shares to transfer. Note: For security purposes, this requires a "Medallion Signature Guarantee," which can be obtained from certain financial institutions, including Bank of Nova Scotia, Royal Bank and Toronto-Dominion Bank. (Computershare Canada's YouTube channel has an explanatory video titled "Medallion Signature Guarantees.")
If the parent holds shares with a discount broker, the parent can instruct the broker to register the shares in the child's name with the transfer agent. Alternatively, the parent can ask to have the shares registered in his or her name name first, and then transfer them to the child as in the first example. Either way, there may be a cost involved. Also keep in mind that many companies no longer issue paper shares – most things are done electronically now – so your child may get a simple registration statement instead of a physical certificate.
There's yet another way to transfer a share to a child: Buy a share privately on a share exchange board and ask the seller to register it in the child's name. Sellers charge a nominal fee of about $10 (in addition to the cost of the share) but the advantage is that they do most of the work for you. More information on private transfers (and DRIPs in general) is available at dripprimer.ca.
Dividends are taxable (in non-registered accounts) even if they're taken in shares instead of cash. But there are ways to avoid taxes altogether with a child's DRIP.
According to the attribution rules, if a parent gives money to a minor child to invest, dividends and interest are taxed in the parent's hands, whereas capital gains belong to the child. However, if a child invests his or her own money, both the income and capital gains are taxed in the child's hands.
The result: Most children who invest their own money in a DRIP will pay no tax (unless they have a large portfolio).
"If the money is from a paper route or snow shovelling or babysitting or reffing hockey, that's their own money," says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management.
What's more, any Canada Child Tax Benefit and Universal Child Care Benefit amounts also count as the child's money for tax purposes, Mr. Golombek says. He recommends keeping a record of the child's employment earnings and filing a tax return if there are any capital gains, which will help to avoid problems should the Canada Revenue Agency ever ask any questions.
If you get your kids started with DRIPping now, there's no telling how much wealth they'll build over the next 10 or 20 or 30 years. Heck, they might even get so rich that they won't have to move back home.
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