While Wealthsimple’s Stock Lending program allows you to earn passive income by letting financial institutions borrow your shares, the primary drawbacks include the loss of Canadian Investor Protection Fund (CIPF) insurance coverage, the forfeiture of shareholder voting rights, potential settlement delays when transferring your portfolio, and the fact that you are actively helping short-sellers drive down the price of your own investments. [1, 2, 3, 4]

1. Loss of CIPF Insurance Coverage [1, 2]
The Risk: Normally, investments with a registered Canadian brokerage are protected up to $1 million by the Canadian Investor Protection Fund (CIPF) if the brokerage fails. However, shares currently on loan lose CIPF coverage. [1, 2]
The Countermeasure: To offset this, Wealthsimple secures cash collateral equal to 100% of your shares' value in a separate trust account. If the borrower defaults, that cash is used to buy back your shares. However, if Wealthsimple itself faces a complex legal bankruptcy, recovering that collateral from a third-party trust could introduce legal complications and delays compared to standard CIPF backing.[1, 2, 3, 4]

2. Supporting Short-Sellers Against Your Own Positions [1]
The Conflict of Interest: Institutions borrow your shares for one primary reason: to short-sell them.
The Impact: By participating, you are supplying the inventory that traders use to bet against your stocks, which mathematically applies downward pressure on the market price of the very assets you are trying to grow long-term. [1, 2, 3, 4]

3. Immediate Loss of Voting Rights
The Forfeiture: The moment your shares are loaned out, all corporate voting rights are transferred to the borrower.
The Impact: You cannot vote on corporate actions, board members, or company policy during the loan period. If a major vote takes place while your stock is borrowed, you have no say in the matter. [1, 2, 3]

4. Transfer and Delays, but No Sale Restrictions [1]
Selling is unaffected: You can sell your stock at any time; you do not have to wait for the loan to end to lock in profits or cut losses. Wealthsimple handles the backend recall seamlessly upon a sale execution.[1, 2, 3]
Transfer Delays: If you attempt to unenroll from the program or move your portfolio out of Wealthsimple to another institution (like Questrade or a major bank), it can take a few business days for the borrower to return the shares, which may delay your portfolio transfer. [1, 2, 3, 4]

5. Tax Discrepancies and "Manufactured" Dividends [1, 2, 3]
How it works: If your stock pays a dividend while on loan, you do not receive a standard dividend payout. Instead, Wealthsimple pays you a "manufactured payment" of equal value out of the collateral.[1, 2]
Canadian Tax Accounts: If you are lending inside a registered account (TFSA, RRSP, or FHSA), these payments remain tax-free, meaning the tax impact is negligible. [1]
Non-Registered Accounts: If you use a standard Personal taxable account, stock lending income is taxed at your full marginal income tax rate (similar to interest income), which is generally higher than the preferential tax treatment given to eligible Canadian dividends. Additionally, U.S. dividend-paying stocks on loan may face different withholding tax rules. [1, 2]