Making In-kind RRSP contributions? It’s possible!

13 February 2018 by National Bank
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Did you know that cash RRSP contributions are not the only type of contribution you can make? Indeed, as long as you remain within your contribution limit, in-kind contributions to a registered account are also possible, without incurring fees or paying any commissions.

Several investment products can be used to make an in-kind contribution including stocks, exchange-traded funds, and mutual funds. Before proceeding, one should be aware of the rules that govern this alternative form of contribution as well as the benefits and drawbacks associated with it. First, the shares or units must be contributed at a price which corresponds to the fair market value of the securities at the time of the contribution. Second, although the transaction involves neither the sale nor the repurchase of the contributed securities, the contribution is nonetheless considered a deemed disposition from a tax perspective, meaning that it triggers a taxable capital gain for the year during which it occurs.

However, if the market price of a security when contributed turns out to be less than its average cost, the resulting capital loss cannot be used to reduce the taxable gains realized on other transactions. It is not permitted to claim a loss on an investment you still own while getting a tax deduction for an amount equivalent to its contribution. You can’t have your cake and eat it too. A taxpayer who would attempt to circumvent this rule by selling a security he holds in a non-registered account and repurchasing it in a RRSP without waiting for the mandatory 30-day minimum period to elapse, would be well advised, prior to proceeding, to consult a tax specialist or the Canada Revenue Agency (CRA) with regard to the treatment of superficial losses. In any event, once transferred to a registered account, the investments held will be able to grow sheltered from the tax collector’s reach.

Obviously, the contributed securities must be RRSP eligible as determined by the CRA. The Agency is not too picky, however, since the inventory of eligible investments includes the shares of most of the companies listed on the major stock exchanges of the world. On the other hand, shares traded on over-the-counter markets—such as the Pink Sheets in the U.S.—do not always meet the qualifying criteria. Moreover, if you hold an investment which was previously eligible but no longer qualifies, you will need to swiftly get rid of the holding or withdraw it from your account to avoid the penalty that your failure to comply would entail.

Furthermore, even though your portfolio may be comprised of a large number of international stocks, the tax treaty signed with the United States, which exempts from any withholding income derived from an American source in Canadian registered pension plans, does not apply to income generated by other foreign investments.

Registered accounts for which contributions are not tax deductible may also be the object of an in-kind contribution, and the rules pertaining to deemed dispositions stay applicable in their case. But since the tax shelter status that Canada grants to TFSAs and RESPs is, by definition, not recognized in the agreement negotiated between the two countries, income earned from American investments held in these types of accounts is subject to withholding at the source, by the Internal Revenue Service of the United States.

Furthermore, if in-kind contributions are allowed, so too are withdrawals. For example, the holder of a RRIF account may very well choose to receive his payments in-kind rather than in cash. However, keep in mind that these payments remain taxable and that any amount paid above the required minimum would be lessened by a progressively increasing rate of withholding. Therefore, the annuitant must have enough disposable cash on hand in his account to cover the taxes owed according to the value of the securities withdrawn.

The conceivable strategies prove numerous and, among the factors to consider, the expected yield and return of the investment figure at the top of the list. Some taxpayers have even gone as far as to withdraw securities from their RRSPs—despite the tax consequences—in order to contribute them to their TFSAs with the aim of wresting from the CRA’s grasp, in near perpetuity, the future capital gains and income they anticipate.

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