I’m a bit late getting to this reader question as the RRSP deadline was at the beginning of this month (March 1, 2010), however, this can apply to the current tax year. The question relates to the tax implications of transferring stock in-kind to an RRSP or a TFSA.
Say Mr. Investor has stock in his non-registered portfolio, but he hasn’t made any RRSP contributions for the year. If Mr. Investor is in a higher tax bracket, it may make sense to transfer the stock to his RRSP and claim the RRSP contribution as a tax deduction at the end of the year.
While he may get a tax deduction for his RRSP contribution, there are other tax implications to be aware of. If there is a capital gain in the stock being transferred from a non-reg account, there will be capital gains tax owed at the end of the year. That is, 50% of the profit will be taxed at your marginal tax rate.
What if the stock being transferred is at a loss? Typically, when stocks are sold at a loss within a non-registered portfolio, a capital loss can be claimed against capital gains. However, an in-kind transfer to a registered account cannot claim a capital loss.
So how do we get around this? Simply sell the stock to capture the capital loss, then deposit the cash into the registered account. Note though, if you sell a stock for a capital loss, the superficial loss rules state that you’ll have to wait 30 days before repurchasing the same stock again.
These rules, as far as I know, apply to in-kind transfers to both an RRSP or TFSA.
When does it make sense to transfer?
For me, I like to be as tax efficient as possible. I would consider an in-kind transfer from my non-registered account if I was in a high tax bracket and/or if it was simply more tax efficient to hold the stock in a tax sheltered account. For example, if I held a US dividend stock in a non-registered account (US dividends are taxed as income), then it may make sense to consider sheltering the US dividend income within an RRSP. Even if there are capital gains in the transfer, the RRSP contribution tax deduction should more than cover it. However, if I was considering transferring to a TFSA, since contributions do not get a tax deduction, I would hesitate to transfer any stock with significant gains.
Have you made an in-kind stock transfer before? What was your rationale?