In-Kind Contributions to RRSPs

It’s “RRSP season” and once again there is a scramble among a substantial proportion of Canadians to put a 2021 contribution together by the March 1, 2022 deadline. If the cash is not available, the classic option has been to get an RRSP loan from the bank or credit union where your RRSP account is held. This can work out but instead of contributing to your RRSP by saving in arrears, i.e., by paying back the loan, I encourage contributors to save in advance. Better yet, treat your RRSP like a bill payment and automate regular monthly contributions.


An alternative to contributing cash to your RRSP is to make an in-kind contribution.


What is an in-kind contribution?

Perhaps you have occasionally struck a deal with a neighbour to do some work for them in exchange for some work they would do for you. This is often a part of the so-called underground economy since it is seldom reported as income to the provider of the service. It is, however, an example of work done “in kind.”


In-kind contributions to your RRSP are a genuine option for many if you have invested assets available in a different account. However, unlike helping your neighbour build a deck, in-kind contributions are carefully reported to the Canada Revenue Agency by your financial institution.


How do you make an in-kind contribution?

The typical scenario for an in-kind contribution involves two account types, a registered account, an RRSP in this particular circumstance, and a non-registered account.


Let’s assume you have taxable income of $70,000, that you are a resident of Ontario, and that you have $5,000 in contribution room available after accounting for the Pension Adjustment from your employer pension plan. You don’t have a lot of extra cash, but fortunately, through your employee stock purchase plan, you have built up $50,000 in shares in a non-registered account. Your Adjusted Cost Base (ACB) is $30,000.


At the time I last worked at a discount or online brokerage, in 2019, a potential in-kind contributor would need to call in to make the transaction. The investment representative would need to determine the last price at which the stock traded and calculate the maximum number of shares that could be contributed within the client’s stated limit. In this case, let’s assume that the last trade occurred at $25 per share. With a $5,000 contribution limit, that means you can contribute a maximum of $5,000 ÷ $25 = 200 shares. A less convenient number would mean that you would need to contribute an amount under $5,000 in kind and make up the difference with cash if you wish to maximize your contribution.


Investment assets that cannot be contributed to an RRSP

You are also fortunate that you work for a major Canadian company listed on the Toronto Stock Exchange. If the only shares you had available were those of unlisted U.S. stocks that traded “Over the Counter” (OTC), you would find them not “qualified” to be held within an RRSP. Rules restricting contributions to qualified investments apply to all registered accounts: RRSPs, RRIFs, RESPs, RDSPs, and TFSAs.


You should note that sometimes an investment that is qualified and already in your RRSP can become non-qualified, which would obligate you to remove it from your account, either by selling it if possible, or if not possible by transferring it out of your RRSP. This is something to be wary of, and for you to swiftly act on because the tax hit for non-compliance in this area can be substantial if you do not deal with it immediately. Read about the tax consequences of non-qualified investments here, beginning at Section 1.69.


Tax Consequences of an In-Kind Contribution

When you contribute to your RRSP from a non-registered account this results in a deemed disposition (sale) of the asset in question. Following the example described above, a $5,000 contribution with a $3,000 ACB means that there has been a $2,000 capital gain. Capital gains in Canada have a 50% inclusion rate currently. With $70,000 of taxable income, your combined federal and Ontario marginal tax rate is 29.65%. Since the inclusion rate reduces your taxable gain to $1,000 you will need to pay capital gains tax of $296.50.


It may seem odd that, while you must pay capital gains tax when there is a gain on the contributed security, you cannot claim a capital loss when the security you are contributing is worth less than your ACB. An example would be if the ACB on the above stock was $7,000 but was only worth $5,000 when you contributed it to your RRSP. You may question the rationale for this, but the argument that the CRA would put forward is that you effectively sold the stock and then immediately reacquired it when you contributed it to your RRSP. In a capital gain situation, that is perfectly legitimate. But in the case of a capital loss, this transaction violates the superficial loss rule. The best alternative is to sell the stock, realize the capital loss, and then make a cash contribution to the RRSP.


Having said all that, it doesn’t mean you can just go ahead and rebuy the stock you sold at a loss as soon as the money is in your RRSP. The superficial loss rules require that you wait more than 30 days after selling a security for a loss before you can buy it again or you will be denied use of the capital loss. The alternative is to buy a security that is different than the one you sold.


Is an In-Kind Contribution Worth Pursuing?

If you are confident that your income in retirement is likely to be less than now, then the tax deduction from contributing now may very well be worth it. However, do remember that you are giving up some flexibility in doing so. The tax deduction you get now will eventually be paid for when you are obligated to take money from your RRIF according to a set schedule. Yes, your non-registered account will be taxed every year, and there is definitely an advantage to being able to defer taxation on income and realized gains inside an RRSP, but there is also flexibility with your non-registered account that there is not with a RRIF. You don’t need to sell off your non-registered account under any regulations. Canadian dividends qualify for a tax credit. Capital gains can be deferred as long as you wish, can be offset by capital losses, and are (currently) tax advantaged.


Having said that, the advantages of the tax deduction upfront and tax-deferred growth in your RRSP are hard to beat and almost always favour the RRSP over non-registered accounts.


This is the 135th blog post for Russ Writes, first published on 2022-02-14.


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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.