Social Icons

Sunday, May 9, 2010

TFSA and RSP: the contribution in kind of Gordon Pape

I had read many times Gordon Pape books. They contain many great information and its sometimes difficult to keep all the pieces in head. As I use to read and re-read Derek Foster books from time to time, I guess I will have to do the same thing with Gordon Pape books. Why? Because Gordon Pape answers my questions regarding transfer of non registered assets into TFSA assets. I had read his book about TFSA, but I can of forgive about the contribution in kind. Or I might have it in mind and it wasn’t perfectly clear in my head.

Anyhow, I also add here the RSP because the exact same scheme applies. In 2010, I engage myself in a RSP credit line at TD Canada Trust. For my tax declaration of 2010, I have a bit more than 7 000$ I can invest for my RSP. For that next RSP investment, I will do what Gordon Pape explains as being a « contribution in kind ».

In January 2010, I transferred my 4 980.98$ Sprott Canadian Equity Fund non registered investment into my TFSA. When I blog about what I had did, I was told I had done a mistake by one of my reader. But from my point of view, what I did wasn’t a mistake. Here’s the why. Back in 2008, I had invested 7 033.50$ in the Sprott Canadian Equity Fund. In early 2010, the same investment in the Sprott Canadian Equity Fund worth 4 980.98$. In January 2010, I transferred the exact same investment into the TFSA. So why this should be considered a mistake?

When doing a contribution in kind to a TFSA or a RSP, no capital loss can be declared. In this case, my initial investment in Sprott Canadian Equity Fund worthed 7 033.50$. In 2010, the same investment only worth 4 980.98$. This represent a capital loss of 2052.52$ that cannot be declared for taxes purposes. This is my mistake.

According to Gordon Pape, in order to be eligible for capital loss, an individual have to sell outside the RSP or TFSA than get the money transferred into the RSP and TFSA and than re-invested the money in the same investment if wanted. Actually, once the money is being re-invested into the RSP or TFSA, it doesn’t matter if you reinvested the money in the same product. Remember: it’s your money and you can do whatever you want with it!

As for my part, reclaiming a capital loss never cross my mind because for me, it was cleared that the Sprott Canadian Equity Fund was going to increase in value over time. On date of May 7, 2010, my investment in the Sprott Canadian Equity Fund worth 5215.55$, which represent a gain of 234.57$ compare to January 2010.

The reason why I wanted to transferred my Sprott Canadian Equity Fund into the TFSA its because first, I wanted to invest something into my 2010 TFSA contribution and secondly, I wanted my gain that will be made with the sell of Sprott Canadian Equity Fund to be free of taxes. Of course, we are talking here about a long term investment. I have a lot of time in my hand, I don’t mind waiting 2 years if needed before selling the Sprott Canadian Equity Fund in order to make a profit out of it. But when time will come, the profit will be free of taxes. That was the idea behind my transferred of Sprott Canadian Equity Fund into my TFSA.

With contribution in kind, if capital loss cannot be declared for taxes benefit, you absolutely have to declare capital gain, even if you don’t sell the investment, even if its only the question of a transferred from non registered to a registered account (TFSA or RSP). That’s kind of tricky and government just playing a very foolish game with investors. But I guess the reason why taxes had to be declared on capital gain on the money being transferred is because the money being transferred grow free of taxes. So if money had been made before the transferred being made, you can imagine, the government wants to get a bite of what you had made in profit.

We could make the following summary:
Capital loss: CANNOT be declared. Must sell the investment outside the TFSA before transferring the money (it cannot be the investment itself if you want to declared capital loss) into the TFSA.
Capital gain: MUST be declared.

Very easy to understand isn’t? I am glade I went thought this now because later on I will have to invest for my RSP and its going to be a contribution in kind. And a contribution in kind of course mean when you take non registered investment and transfer that investment into RSP or TFSA. Pretty easy once you understand.

And of course, you understand that what I had written in this post is my very own interpretation of Gordon Pape explanation of contribution in kind for TFSA that also applied for RSP. For the accurate information, you can read pages 20 and 21 of the Ultimate Tax Free Savings Account Guide of Gordon Pape latest edition and, if not, read the whole book, plenty, several, multiple times as required by your brain. :)


Anonymous said...

Well, your mistake is pretty obvious. Your investment in Sprott is worth less than what you paid it. You have a paper loss.

Since you transferred the stock into your TFSA, you did not record the loss, because you did not sell the stock, you just transferred it.

So, now your holdings did not change at all, you still own Sprott, but since you did not record the loss, you have actually lost the loss.

The tax loss has a value, because it makes tax free any future gains that you make on ANY other stock in an UNREGISTERED account.

So, for example, if you had registered the loss on Sprott of $2000, then, if you made a capital gain on another stock IN YOUR UNREGISTERED ACCOUNT of $2000, you would not pay ANY tax on that capital gain. Since you did not record the loss, you must now pay FULL tax on any future capital gain. Since the average tax on a capital gain is about 25%, you have basically lost about $500 (25% of the $2000 loss). Nice move, you're the best!

Sunny said...

I don't have nothing to declare on future capital gains when it come to my investment in Sprott Canadian Equity Fund because the money is now in the TFSA. There will be no taxes to be paid on capital gains of Sprott Canadian Equity Fund. And yes, I am the best!

Anonymous said...

This is all interesting Sunny, i am working on the stocks now, am older than you are but like to have dividends as the stock always Kevin O'Leary says.

Sunny said...

Hi, thanks for sharing. The contribution in kind is tricky but once understood, its good stuff to be known. What I did myself as contribution in kind could appear as a mistake - like the first commentator note, but its sll depend about personal point of view. As for myself, since I was confident that the Sprott Canadian Equity Fund will make some gains again, I didn't felt it was important to first sell the investment outside the TFSA first to than re-invested the money in the Sprott Canadian Equity... I could had done so, but it would had requested waiting for the fund to be sold, than have the money transfer into the TFSA and than make another purchase... Not to incluse the TD Waterhouse commission that I would had needed to pay on the sell of Sprott... So no thank you. My transfer of Sprott Canadian Equity Fund in kind into TFSA wasn't a mistake.

self-taught investor said...

Hello Sunny,

One thing you need understand, is that the capital loss can be used against ANY capital gains and at any time in the future. It doesn't have to be for Sprott and it can also be 40 years from now (unless there is a change in the tax law between now and then).It can also be for stocks you sold in the last 3 years where you had some capital gain. (You did sell some stocks last year and had to pay some taxes on some 50$ in capital gains)

Also, one thing you forgot to mention, is that after the sell, you have to wait 31 days before you can buy the very same stock in TFSA or non-registered account (Sprott in this example), otherwise you will lose the capital loss advantage. But if you buy any other stock, you can do it as soon as the money is transfered.

But you're right to mention that by doing so, you incure the 29$ TD brokerage fees twice (when selling the stock and again when you buy it inside the TFSA). But still, since we're talking about 500$ worth, you would still have been 440$ richer on the next few sales, and like you mentionned in a few post, you may at some point be in trouble with your credit card debt if no low-rate transfert materializes when you need it, and then you may have to sell.

But what is done is done. You have to learn from the mistake and be more thoughtful next time. That kind of money is usually called "Investing University" fees; the money you have to pay to learn. Just to bad it's 440$ you are giving to our "dear" governements.


Thank you

Thank you for visiting!
Blogger Templates