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moneysense.ca, 6/07/11
A Blanket Ban on RRSP Swaps is a Bad Idea
In Budget 2011, the Government proposed a clamp down on certain swap transactions between RRSPs and other accounts:
Benefits derived from asset purchase and sale transactions (“swap transactions”) between RRSPs and other accounts controlled by the RRSP annuitant. A swap transaction is a transfer of property (other than a transfer that is a contribution or a withdrawal) between an RRSP and the RRSP annuitant or a non-arm’s length person. Subject to the application of existing anti-avoidance rules, these transfers, when performed on a frequent basis with a view to exploiting small changes in asset value, can potentially be used to shift value to or from an RRSP without paying tax or using RRSP contribution room, as the case may be. An exception will be provided to accommodate transfers from one RRSP of a taxpayer to another RRSP of the taxpayer.
The Budget proposals are aimed at eliminating “advantages” of a swap transaction which are defined as benefits that intend to exploit the tax attributes of a RRSP. However, media reports indicate that some financial institutions are now prohibiting all swaps with RRSP accounts, not just those that run afoul of the new advantage rules.
One hopes that brokers don’t end up issuing a blanket ban on swaps in RRSPs as many did when similar rules were introduced for Tax-Free Savings Accounts (TFSAs). One can skirt a blanket ban on swaps by buying and selling assets separately in two TFSA/RRSP/taxable accounts. But if one or both assets are not liquid (a GIC, for example), a swap may be the only way to exchange assets between a tax-deferred account (an ideal place to hold GICs) and an investment account. At least with TFSAs, one could work around a ban on swaps by withdrawing funds from the account and contributing in-kind during the next financial year. With RRSPs, brokers will be throwing out the baby with the bathwater if they impose a blanket ban on RRSP swaps.
Related:
The Blunt Bean Counter weighs in on the new advantage rules regarding swap transactions.
Tax expert Jamie Golombek says the new rules target misuse of RRSPs.
moneysense.ca, 6/07/11
That’s odd – I was told many years ago that this was already the case. I was trying to sell off a stock in my taxable account for a capital loss, but buy the same security from myself in my RRSP. I was told exactly what you said here – that my RRSP account isn’t more than an “arm’s length” transaction and my tax loss would not be permitted by the CRA.
Hmm… Who knew that it was OK before Budget 2011? Not me, but obviously other people must have been exploiting it like crazy.
Is this the same as an “in kind” transfer of an equity from a non-registered account to an RRSP?
@Phil: What we are talking about here is a swap. Say you hold a GIC in a taxable account and a Canadian stock in a RRSP account. A swap will allow you to exchange the assets and you’ll then have the GIC within a RRSP and the Canadian stock in the taxable account. Even if you were to swap an asset that has a capital loss in the taxable account you are still allowed to swap it. What you can’t do is claim a capital loss on the disposition, which is what you are referring to.
The new rules disallow “advantage” transactions that allows investors to move money between RRSP and taxable accounts using a thinly-traded stock that has a wide bid-ask spread. But some brokers are reported to disallow swaps altogether. I think that will disallow swaps done for legitimate purposes and involve no “advantage”.
@DG: In-kind transfers are still okay. A swap is different because an investor is not making any contributions, merely exchanging assets between a RRSP account and taxable account. Whereas in an in-kind transfer, they are essentially making a RRSP contribution albeit with securities instead of cash.
Thx for the cite CC.
I agree with you totally, the institutions get gun shy on certain transactions and “throw out the baby with the bathwater” as you note. If they dont like the risk of dealing with thinly traded stocks, fine, just allow swaps with stocks that are indexed included or something along those lines as Jamie noted.
[...] A Blanket Ban on RRSP Swaps is a Bad Idea @ Canadian Capitalist [...]
I have a federal Life Income Fund and I plan on transferring 50 per cent of the funds in that account to a RRSP under the 2008 provision that allows this one time unlocking. Will this new rule effect my transfer from my Life Income Fund to the RRSP as it would put me over my contribution limit? Could this be considered a swap under this new rule?
Tried to do a swap today at RBC Direct and was told brokerages are not allowed to do them anymore. I’ll have to do the trades manually I guess. It will cost me two commissions instead of the free swaps RBC used to offer me.
@gene: I hope discount brokers come to a sensible decision on this. Banning swaps altogether is a pretty extreme measure. The commissions plus bid-ask spreads add up over the years.