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.