Contributing Investments (as opposed to cash) to your RRSP


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While the norm is to deposit money into an RRSP and then purchase the investments once the money has been deposited, it is also possible to contribute to your RRSP in the form of already-held investments. This in known as an "in-kind" contribution.  (Think of it as shifting your investments from one account to another without having to sell them.) If the source of the "in-kind" contribution is NOT from another RRSP account that you own, then you can use this contribution as your RRSP contribution for the year, just like the normal cash contributions. 

BondCertificate.jpgFor example, you can contribute stocks, bonds, mutual funds, GIC’s, etc. directly into your RRSP and the Fair Market Value (FMV) of those securities (as of the previous day’s close from the date of the transaction) will count as your RRSP contribution for that tax year.

Some people do this when they cannot make a regular cash contribution to their RRSP but still want a tax refund. Another reason is that your non-registered investment (which may have originally been intended for a short term use) is now no longer needed and can be put away for a longer period of time (i.e. for retirement). 

There are a few things to be aware of:

DEEMED DISPOSITION OF THE ASSET

Once you make this in-kind contribution from a non-registered account, it is deemed to have been sold at it’s fair market value for tax purposes and you need to know how to handle the tax treatment. If the security has a capital gain, then you will have capital gains tax owing. If you contribute an interest bearing security between interest payment dates, then you will have to declare the accrued (but as yet unpaid) interest as income. If you sell a bond between interest payments AND it has a capital gain – you have both capital gains tax and interest income to declare.

YOU MAY WANT TO AVOID IN-KIND TRANSFERS OF SECURITIES WITH A CAPITAL LOSS

Usually, it would be better to sell the asset in the non-registered environment and then make a cash contribution with the proceeds to your RRSP. This is because the CRA will not allow you to claim a capital loss on the asset if it is being contributed in-kind to your RRSP. The only time you would proceed with an in-kind transfer of an asset with a capital loss is if the cost to sell the asset and then re-purchase it inside your RRSP was less than the tax advantage of being able to claim the capital loss – so basically, if the loss is VERY small (i.e. less than $50) it’s probably okay to just transfer it in-kind.

CAPITAL LOSSES

Capital losses have to be applied against any capital gains or distributed capital gains in the current tax year first. If you still have a capital loss balance, that amount can then either be applied to the previous 3 tax years or carried forward indefinitely. Also note, that if you carry back a capital loss – you would want to apply it to the year of highest reported income (when you would be in your highest possible marginal tax rate) – there is no requirement to use up the balance in the first previous year, then the second, etc.

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Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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  • John

    I had never heard of this. I wish i knew about this years ago when i was employed. I have an investment that is gauranteed after 10 years, for it’s origional value and it was outside an RRSP. It was the worst investment ever. no tax advantages up front, lost 50% of its value, have hung onto it waiting for the 10 year. Even so inflation will eat it up regardless. But if I can throw it into a RRSP maybe I can get some tax relief.