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moneysense.ca, 24/02/09
In-Kind Contributions and Superficial Loss Rules
If you hold securities in a taxable portfolio, you can contribute them in-kind to your RRSP. But, you have to keep in mind the tax implications because an in-kind transfer is considered as a deemed disposition. If you have capital gains, you’ll have to declare it in your tax return. However, you cannot claim a capital loss on an in-kind contribution.
I was under the mistaken impression that you could simply sell the security in your taxable account, claim the capital loss and then buy the same security in your RRSP account. Turns out that the Canada Revenue Agency changed the rules in March 2004 and superficial loss rules will apply if you do that. Here’s the relevant portion from the Capital Gains Guide (T4037 Rev.08):
A superficial loss can occur when you dispose of capital property for a loss and:
- you, or a person affiliated with you, buys, or has a right to buy, the same or identical property (called “substituted property”) during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale; and
- you, or a person affiliated with you, still owns, or has a right to buy, the substituted property 30 calendar days after the sale.
Some examples of affiliated persons are:
- you and your spouse or common-law partner;
- you and a corporation that is controlled by you or your spouse or common-law partner;
- a partnership and a majority-interest partner of the partnership; and
- after March 22, 2004, a trust and its majority interest beneficiary (generally, a beneficiary who enjoys a majority of the trust income or capital) or one who is affiliated with such a beneficiary.
Bottom line: If you hold a security in a taxable account and have a significant capital loss, you may want to sell the security, lock-in the capital loss and buy an equivalent security (that is not “same or identical”) inside the RRSP.
Thanks to Canadian Financial DIY for a detailed post on this topic.
moneysense.ca, 24/02/09
The interesting part of the “affiliated person” definition is that with proper planning you can actually transfer capital losses to your spouse. By selling something at a loss and then having your spouse buy it within 30 days your spouse gets your cost base. If they hold for at least 30 days then they get to claim the loss.
There is a lot of confusion about superficial losses and registered assets. The fact is that until 2005 (or 2006), you could sell your non-registered assets, contribute the cash and buy the same security in your RRSP. Prior to the change in the law, the Income Tax Act had did not have any written rule preventing this per se, but a CRA has related a memorandum (available to tax professionals) stating that these would probably be subject to the General Anti-Avoidance Rule (GAAR). GAAR is simply a rule in the tax act that says that if you structure your transactions in a way that is legally permitted but is not in the spirit of the act, you may have your transactions denied.
When the superficial loss rules were changed, they simply added registered assets as related to the annuitant.
Great post.
I suspect this rule also applies with respect to sale out of non-registered account and TFSA? The policy behind it would seem to apply as well.
Thoughts?
The rules apply to TFSA as well.
0xcc: Good point. If the spouse has a lot of capital gains and the taxpayer has capital losses, the strategy you outlined can be used to transfer capital losses.
Thicken: I agree with Tax Blogger. I think the superficial loss rules applies to TFSAs as well.
With a superficial loss, will the CRA deny you the capital loss?
@ Earl
Yes the loss is denied. If the transactions were both non-RRSP/RRIF, then the loss is added to the cost base of the re-acquired securities.
If the re-purchased security is inside a TFSA or RRSP/RRIF, then the loss is gone and denied forever.
By using the term “General Anti-Avoidance Rule”, they make it sound like avoiding taxes is illegal.
Actually, I guess that’s true. I was thinking I use RSPs and buy and hold investing to avoid taxes, but really, I’m _deferring_ taxes, no?
Gene — in my opinion GAAR acts a defence that allows the government to enforce the rules fairly, not to make avoiding taxes illegal per se. RSPs are a legitimate way to avoid paying taxes that are available to many. The very wealthy have access to resources that the average person doesn’t, and it’s not entirely fair that they should use that advantage to work loopholes that just because they aren’t specifically laid out as against the law makes them valid and fair by default. (And they can fight the courtcase if they feel strongly otherwise). To use a sports analogy, in soccer there’s a rule against ‘ungentlemanly conduct’ which referees use when a player does something against the spirit of the game, if not the law — for instance punching out a teammate, or kicking the ball miles out of bounds to waste time. GAAR is the ungentlemanly conduct of the accounting world I think.
Novice, thanks for your interpretation and your soccer examples. I had to smile at the thought of a guy punching out his teammate or booting the ball into the stratosphere.
After my post, I was thinking of legitimate ways to avoid taxes. One is to work less, incurring fewer income taxes. Another is to buy goods from ebay, second hand, or from out of province. I think we are supposed to remit taxes to our provincial governments in the latter case, but I don’t.
[...] Canadian Capitalist discusses In-Kind Contributions and Superficial Loss Rules [...]
Does the superficial loss rule means that if I have a capital loss on my stock in self direct RRSP that I can sell it inside theRRSP, repurchase the same stock in my taxable trading account within 30 days to trigger superficial loss. Then eventually sell the same stock in my taxable trading account and claim capital loss?
If that’s the case, I have some Nortel stock in my self directed RRSP that I would like to get rid for some use.
Thanks for posting this, lifted my day.
Excellent ideas here, have emailed my mum so expect a big reply!!