What should I do with physical share certificates?

Recently, he came across the actual share certificates. Now we’re wondering what he should (or can) do with them. He doesn’t have any interest in continuing to own the physical shares, but we have no idea how to convert them into cash or contribute them to a TFSA or RRSP. Can you help? 

FPAC response:

Congratulations to you and your spouse! Discovering those BCE certificates must feel like quite a windfall. 

BCE (formerly Bell Canada Enterprises) is a publicly traded Canadian holding company for Bell Canada and is one of Canada’s largest corporations. 

Your spouse’s stock certificates are pieces of paper that physically represent his ownership shares in BCE. Most shares are issued in electronic form today, but shares from 20 or 30 years ago might have been issued in paper or certificate form.

Coming across the certificates, after possibly many years, makes it clear that holding shares in certificate form is a potentially risky proposition. If certificates are lost, they can usually be recovered. However, depending on the terms of certain corporate actions, like a merger, for example, the shareowner may lose the right to exchange the old shares for the new shares, resulting from the merger if action is not taken in a timely manner. I’m sure you would rather avoid that scenario, but this is unlikely with BCE.

Three ways to hold shares and stocks

Shares of company stock can be owned in three different ways: In physical certificate form (like your spouse’s BCE shares), through a broker or through a transfer agent.

These days, most investors own shares through a broker in “street name.” This means the brokerage holds the shares on behalf of the investor. The investor remains the beneficial owner and retains any voting rights.

Another way to hold shares is through a transfer agent, who maintains the records of shareholders for the corporation. Investors who are keen on dividend investing like to use this approach because the transfer agent will reinvest any dividends into new shares, including fractions of shares down to three decimal places. For an investor with only a few shares, this can be a helpful way to build up ownership in the company.

Depositing the shares and how to convert paper stock certificates to electronic shares

You can’t convert stock certificates into cash like you do with a cheque, even though both certificates and cheques are both made of paper and have your name on them. Instead, you need to deposit the certificates into a brokerage account first. Then you can buy and sell securities, like stocks, bonds and mutual funds.

Depending on the services offered with your brokerage account, the process of converting stock certificates into cash may be quite simple. If you open an account affiliated with one of the major banks, for example, you may be able to bring in the certificates to your local bank branch, endorse (sign) the certificates and any accompanying documentation. Then the bank and brokerage will take care of the rest.

Other brokerages may not offer the same services. So you may need to get in touch with the transfer agent and arrange for your physical certificates to be sent to them. Then the certificates will be converted to the Direct Registration System (DRS). This system allows registered securities to be held in electronic form without having a physical security certificate. 

As part of the transfer process, you’ll arrange for the shares to be transferred to your brokerage account. You can find out which organization serves as the transfer agent for the company whose shares you own by going to the investor relations part of the company’s website.

AST Trust Company is BCE’s transfer agent.

Now that you know how to deposit the physical shares into a brokerage account, your spouse has three choices for what he wants to do with the shares: Continue to hold them, cash them out, or deposit them into a different account, like an RRSP or TFSA.

• Option 1: Continue to hold the shares

Likely the simplest option is for your spouse to continue to hold the shares in his account. He will receive dividends four times a year, trusting that BCE’s business and share price will grow, and he can rest easy knowing the shares are secure in his account. And they can be sold at any time he wishes. Many investors do that. It is the classic buy-and-hold investment strategy.

• Option 2: Cash out the shares

Another option, once the BCE shares have been deposited into your spouse’s account, is to sell them. This transaction typically requires a commission—perhaps $10 or so total—if done at a discount brokerage. (Although, commission-free trading is slowly making an appearance in Canada.) After withdrawing the cash, he can close the account and be done with it. Alternatively, he can use the proceeds to invest elsewhere.

• Option 3: Contribute the shares to a TFSA or RRSP

Finally, instead of selling the shares and withdrawing the cash, your spouse can transfer the shares from his non-registered account to a tax-free savings account (TFSA) or registered retirement savings plan (RRSP). This is known as a contribution “in kind.” This is when the contribution is made by transferring securities, like stocks, bonds, mutual funds, etc., into a TFSA or RRSP, rather than contributing “in cash.” The amount will be based on the fair market value (FMV) of the shares at the time of the contribution. 

For illustration purposes, let’s assume that your spouse owns 100 shares of BCE. At the time of the contribution, the shares last traded at $60 per share. In this case, the contribution will be $6,000: 100 x $60. 

Remember the impact of taxes

You don’t say how long ago your spouse received his BCE share certificates. But ideally, he has the original value of the shares at the time they were gifted to him because there are taxes to consider.

If, however, he knows the date but not the original price per share, he can use a tool on the BCE website to estimate his adjusted cost base (ACB). The ACB takes into account the impact of purchases and stock splits or acquisitions on the cost of the shares over the time he’s owned the shares. (Other sources your spouse can use to look up historical prices are Yahoo Finance or Google Finance.) Taking this step to determine the ACB is important, as the Canada Revenue Agency (CRA) may ask him for evidence of the ACB he used.

Whether your spouse sells the shares or contributes them in kind to a TFSA or RRSP, the result is deemed to be a taxable disposition for tax purposes. For example: If the ACB of your spouse’s BCE shares was $30 per share, and he sold or contributed the shares at a price of $60 per share, he’d have a gain of $30 per share. On 100 shares, that would be a $3,000 gain. 

As this is a capital gain, only 50% of the gain is included for tax purposes. So he’d need to pay tax on $1,500. If we assume a 30% tax rate, then he would owe $450 in taxes ($1,500 x 30%) when he files his next tax return.

In the case of BCE, a capital gain from a sale is not unexpected. However, not all discoveries of stock certificates result in a tidy profit—many companies simply go out of business and their shares become worthless.

In your spouse’s case, the discovery of the physical stock certificates may represent a welcome windfall. 

This response was provided by FPAC Associate Member Russell Sawatsky, QAFP, CIM, Owner and Advice-Only Financial Planner, Money Architect Financial Planning in London, Ontario.

Qualified Advice is written by members of FPAC (the Financial Planning Association of Canada), a MoneySense content partner. Working closely with governments, regulators, financial planners, academia, vendors and the general public, FPAC’s goal is to set standards and principles that will allow financial planning to evolve into a knowledge-based profession that ultimately commands the credibility, public awareness and respect afforded to other advisory professions. 

If you have financial planning questions, FPAC members can help—consult our directory of members to find the right fit for you.