Security Swapping with your RRSP to Increase Tax Efficiency

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If you read the post on "trying to hold fixed income positions inside your RRSP", you’ll know that there can be a tax advantage to doing so. And that’s great to know when you are starting out and making new investments as you go along. But what about if you only recently found this out and have substantial holdings in both accounts already? There can be some tax implications or transaction fees incurred in trying to re-order everything around for the maximum tax efficiency.

MagnifyingGlassOnPrint.jpgOne way to help circumvent this is through the "swapping" of securities between your non-registered account and your RRSP account. Essentially you would SWAP interest bearing securities from your non-registered account to your RRSP, and the swap would be for tax advantaged securities from your RRSP to your non-registered account. (By tax advantaged, I mean capital gain producing securities or Canadian dividend paying stocks, etc.)

It’s important to note that the securities on each side of the swap must be of equal value, and that value is based on the Fair Market Value of the securities at the time of transfer. No RRSP contribution room is used up, and no RRSP de-registration is deemed to have occurred when you perform a swap.

This will allow for the interest bearing securities’ income (which is taxed at your full marginal rate in a non-registered environment) to be tax sheltered in the RRSP and allow for the tax advantaged securities to be held in the non-registered environment. The net effect should be a reduction in ongoing taxes.

NOTES

This discussion assumes you do not violate your asset allocation or time horizon/risk profile within or between accounts. This means that this discussion is only valid if your non-registered account and RRSP account are both being used for the same goal. If your non-registered account has a shorter-term goal attached to it, then you will need to re-assess accordingly. 

You have to make sure your RRSP administrator can accommodate swaps (most should be able to), and there is usually a fee to do so (around $50 – $100 for individual security positions). 

The same tax treatment applies to the securities going into the RRSP as with the in-kind RRSP contributions. In other words, securities going in that have a capital gain will attract the capital gains tax for that tax year, and if you transfer between interest payments on a fixed income security, you have to pay tax on the accrued (but as of yet unpaid) interest.

If the securities going into the RRSP have a capital loss – you will not be able to claim the capital loss for your tax return if you contribute them in-kind to your RRSP (swap or not).

One other use for using a swap is to get access to cash inside your RRSP. For example, if you have a non-cashable GIC in your non-registered account and you don’t want to pay excessive interest penalties to use the money for an emergency and happen to have a cash balance in your RRSP account, you could swap the GIC for the cash. The GIC remains a GIC and eventually will mature as cash in the RRSP – restoring balance to the force the original cash position in the RRSP. No de-registration, no interest penalty.

Make sure to run over the details of your specific situation with a qualified financial advisor as always.

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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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