{"id":438,"date":"2014-11-08T15:43:05","date_gmt":"2014-11-08T20:43:05","guid":{"rendered":"http:\/\/www.adjustedcostbase.ca\/blog\/?p=438"},"modified":"2019-01-10T11:50:04","modified_gmt":"2019-01-10T16:50:04","slug":"capital-gains-and-losses-for-in-kind-contributions-to-registered-accounts","status":"publish","type":"post","link":"https:\/\/www.adjustedcostbase.ca\/blog\/capital-gains-and-losses-for-in-kind-contributions-to-registered-accounts\/","title":{"rendered":"Capital Gains and Losses for In-Kind Contributions to Registered Accounts"},"content":{"rendered":"

An in-kind contribution to a registered account is where shares are transferred directly into the account, as opposed to cash.\u00a0 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.\u00a0 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.<\/p>\n

If the fair market value is greater than the adjusted cost base<\/a> of the security, a capital gain will occur.\u00a0 From a tax perspective, making an in-kind contribution to a registered account is equivalent to:<\/p>\n

    \n
  1. Selling the shares in your non-registered account.<\/li>\n
  2. Transferring the cash proceeds into your registered account.<\/li>\n
  3. Repurchasing the shares in your registered account.<\/li>\n<\/ol>\n

    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<\/a>.\u00a0 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.<\/p>\n

    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.\u00a0 This is because the denied capital loss is added to the ACB where the repurchase transaction occurs.\u00a0 When the repurchase occurs in a registered account, you could look at as if\u00a0 the ACB has increased in the registered account.\u00a0 But ACB has no meaning inside a registered account because capital gains are not taxable there.<\/p>\n

    Fair Market Value<\/strong><\/span><\/p>\n

    For the fair market value, you can use the total value of the contribution reported by your brokerage.\u00a0 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.\u00a0 Alternatively, you can look up the market price on the date of the contribution and use that as the fair market value.<\/p>\n

    Tracking ACB for In-Kind Contributions on AdjustedCostBase.ca<\/strong><\/span><\/p>\n

    AdjustedCostBase.ca<\/a> can be used to assist you with calculating capital gains resulting from in-kind contributions.\u00a0 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).<\/p>\n

    Example #1 \u2014<\/span> In-Kind Contribution of Shares that Have Risen in Value<\/span><\/p>\n

    You own 100 shares of BCE with a total ACB $2,500 or $25\/share.\u00a0 You make an in-kind contribution to your TFSA of 60 shares when the fair market value is $50\/share.<\/p>\n

    The in-kind contribution results in a deemed disposition of 60 shares.\u00a0 Even though you haven’t actually sold the shares on the market, a deemed sale occurs for tax purposes at the prevailing market price.\u00a0 On AdjustedCostBase.ca, you should enter this as a “Sell” transaction as follows:<\/p>\n

    \"Sell<\/a>This will result in a capital gain of $1,500:<\/p>\n

    \"Capital<\/a><\/p>\n

    The capital gain is taxable for the year when the in-kind contribution occurred (2014 in this case).<\/p>\n

    Example #2 \u2014<\/span> In-Kind Contribution of Shares that Have Fallen in Value<\/span><\/p>\n

    You own 100 shares of BCE with a total ACB $2,500 or $25\/share.\u00a0 You make an in-kind contribution to your TFSA of 60 shares when the market value is $20\/share.<\/p>\n

    Once again, the in-kind contribution results in a deemed disposition of 60 shares.\u00a0 On AdjustedCostBase.ca, you should enter this as a “Sell” transaction as follows, taking into account the fair market value of $20 per share:<\/p>\n

    \"Sell<\/a><\/p>\n

    After adding the “Sell” transaction for the deemed disposition, you should see a capital loss of $300 in the transaction list for BCE:<\/p>\n

    \"Superficial<\/a><\/p>\n

    This capital loss, however, is a superficial loss, and is permanently denied.\u00a0 You cannot claim the capital loss of $300.\u00a0 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.\u00a0 It’s up to you to recognize this.\u00a0 To correct the transaction so that the superficial loss is denied, edit the transaction by clicking on the appropriate “Edit” link.\u00a0 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).\u00a0 The form should look like the following:<\/p>\n

    \"Sell<\/a><\/p>\n

    After updating the transaction to apply the superficial loss rule, the capital loss is reduced from $300 to $0:<\/p>\n

    \"Superficial<\/a><\/p>\n

    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).<\/p>\n

    Should I Avoid In-Kind Contributions of Shares that Have Dropped in Value?<\/strong><\/span><\/p>\n

    This is really a matter of perspective and depends on your individual circumstances.\u00a0 It’s often suggested that you should never make an in-kind contribution when the shares have dropped in value.\u00a0 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.\u00a0 But this is really a “glass half empty” point of view.\u00a0 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.\u00a0 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.\u00a0 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.\u00a0 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.\u00a0 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.<\/p>\n

    There are ways to circumvent the superficial loss rule in cases like this.\u00a0 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.\u00a0 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.<\/p>\n","protected":false},"excerpt":{"rendered":"

    An in-kind contribution to a registered account is where shares are transferred directly into the account, as opposed to cash.\u00a0 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.\u00a0 Even though you haven’t […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-438","post","type-post","status-publish","format-standard","hentry","category-advanced-acb-topics"],"_links":{"self":[{"href":"https:\/\/www.adjustedcostbase.ca\/blog\/wp-json\/wp\/v2\/posts\/438","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.adjustedcostbase.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.adjustedcostbase.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.adjustedcostbase.ca\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.adjustedcostbase.ca\/blog\/wp-json\/wp\/v2\/comments?post=438"}],"version-history":[{"count":26,"href":"https:\/\/www.adjustedcostbase.ca\/blog\/wp-json\/wp\/v2\/posts\/438\/revisions"}],"predecessor-version":[{"id":690,"href":"https:\/\/www.adjustedcostbase.ca\/blog\/wp-json\/wp\/v2\/posts\/438\/revisions\/690"}],"wp:attachment":[{"href":"https:\/\/www.adjustedcostbase.ca\/blog\/wp-json\/wp\/v2\/media?parent=438"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.adjustedcostbase.ca\/blog\/wp-json\/wp\/v2\/categories?post=438"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.adjustedcostbase.ca\/blog\/wp-json\/wp\/v2\/tags?post=438"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}