An in-kind contribution to a registered account is where shares are transferred directly into the account, as opposed to cash. When making an in-kind contribution to a registered account (such as an RRSP or TFSA), it’s possible for a capital gain to be realized, even if the shares are transferred directly. Even though you haven’t actually sold the shares on the market, Canadian tax rules dictate that a deemed disposition at fair market value has occurred, which can result in capital gain taxes.
If the fair market value is greater than the adjusted cost base of the security, a capital gain will occur. From a tax perspective, making an in-kind contribution to a registered account is equivalent to:
- Selling the shares in your non-registered account.
- Transferring the cash proceeds into your registered account.
- Repurchasing the shares in your registered account.
However, in this scenario, if the deemed disposition results in the shares being sold at a loss, a capital loss cannot be claimed for tax purposes due to the superficial loss rule. The superficial loss applies here because both of its conditions are met: a) the shares are repurchased within the 61-day period centred around the sale date, and b) shares are still owned at the end of the period.
Unlike when the superficial loss rule applies to strictly non-registered transactions where the denied capital loss is added to the ACB (effectively deferring the capital loss), in cases where shares a transferred in-kind to a registered account at a loss, the capital loss is denied permanently. This is because the denied capital loss is added to the ACB where the repurchase transaction occurs. When the repurchase occurs in a registered account, you could look at as if the ACB has increased in the registered account. But ACB has no meaning inside a registered account because capital gains are not taxable there.
Fair Market Value
For the fair market value, you can use the total value of the contribution reported by your brokerage. Your brokerage will usually provide you with a statement that details the total amount of the contribution, which should be based on the market value of the security on the date of the contribution. Alternatively, you can look up the market price on the date of the contribution and use that as the fair market value.
Tracking ACB for In-Kind Contributions on AdjustedCostBase.ca
AdjustedCostBase.ca can be used to assist you with calculating capital gains resulting from in-kind contributions. To illustrate how this works, two examples of in-kind contributions are provided (one that corresponds to a gain, and another corresponding to a loss).
Example #1 — In-Kind Contribution of Shares that Have Risen in Value
You own 100 shares of BCE with a total ACB $2,500 or $25/share. You make an in-kind contribution to your TFSA of 60 shares when the fair market value is $50/share.
The in-kind contribution results in a deemed disposition of 60 shares. Even though you haven’t actually sold the shares on the market, a deemed sale occurs for tax purposes at the prevailing market price. On AdjustedCostBase.ca, you should enter this as a “Sell” transaction as follows:
The capital gain is taxable for the year when the in-kind contribution occurred (2014 in this case).
Example #2 — In-Kind Contribution of Shares that Have Fallen in Value
You own 100 shares of BCE with a total ACB $2,500 or $25/share. You make an in-kind contribution to your TFSA of 60 shares when the market value is $20/share.
Once again, the in-kind contribution results in a deemed disposition of 60 shares. On AdjustedCostBase.ca, you should enter this as a “Sell” transaction as follows, taking into account the fair market value of $20 per share:
After adding the “Sell” transaction for the deemed disposition, you should see a capital loss of $300 in the transaction list for BCE:
This capital loss, however, is a superficial loss, and is permanently denied. You cannot claim the capital loss of $300. AdjustedCostBase.ca does not warn you that this is a superficial loss because it has no way of knowing that the sale corresponds to an in-kind contribution to a registered account. It’s up to you to recognize this. To correct the transaction so that the superficial loss is denied, edit the transaction by clicking on the appropriate “Edit” link. Then check off “Apply Superficial Loss Rule”, set the “Adjusted Capital Loss” to $0 (since the capital loss is fully denied by the superficial loss rule) and make sure that “Add Reduction in Capital Loss to ACB” is unchecked (since the capital loss is permanently denied and does not get added back to the ACB for your non-registered account). The form should look like the following:
After updating the transaction to apply the superficial loss rule, the capital loss is reduced from $300 to $0:
Also, the total ACB remains $1,000 (the reduction in capital loss should not be added to the ACB since the loss is permanently denied).
Should I Avoid In-Kind Contributions of Shares that Have Dropped in Value?
This is really a matter of perspective and depends on your individual circumstances. It’s often suggested that you should never make an in-kind contribution when the shares have dropped in value. The rationale behind this is that the superficial loss rule will permanently deny the capital loss and you’ll never be able to apply the capital loss to offset capital gains. But this is really a “glass half empty” point of view. If you believe that the shares will rise in value and/or generate income in the future (which you probably do if you’re holding onto the shares) then the drop in share value presents a wonderful opportunity in terms of contributing to your registered account. Since registered accounts such as RRSP’s and TFSA’s have limited contribution room, the drop in share value allows you to transfer more shares into the registered account than you otherwise would have been able to if the shares had not decreased in value. If and when the share value recovers, the capital gains and dividends will be sheltered from taxes while the funds remain inside the registered account. In the end, the benefit of being able to transfer more shares into your registered account may outweigh the drawback of the capital loss being permanently denied. Also, if you don’t have any capital gains available to be offset by a capital loss, the capital loss is of little value to you.
There are ways to circumvent the superficial loss rule in cases like this. Instead of doing an in-kind contribution, you could sell the shares in your non-registered account, transfer the proceeds into your registered account, and wait at least 31 days before repurchasing the shares in your registered account. As long as you wait long enough, you’ll be permitted to claim a capital loss on the sale of the shares in your non-registered account.