Q. I was surprised to find out from a friend that making an in-kind transfer of losing stocks from a non-registered account to a TFSA would not trigger a “deemed disposition” for tax purposes. However, if the stocks had gone up in value, there would be a deemed disposition and you would have to pay the tax on any capital gains. That doesn’t make any sense to me. Can you confirm this policy and provide some explanation? — Rudy B.
A. Your friend is correct, Rudy. If you hold stocks showing a loss in a non-registered account and you transfer them in kind to your TFSA (or your RRSP, for that matter), you cannot claim a capital loss. However, if you transfer stocks with unrealized gains, then Canada Revenue Agency considers this a “deemed disposition,” and you would be responsible for reporting the capital gains and paying tax on them.
This sounds unfair, but it’s really not. To understand why we need to review the CRA’s treatment of capital gains and losses.
Normally, when you sell an investment for less than you paid, you can claim a capital loss, which you can use to offset capital gains you have realized in the current year or up to three years in the past. You can even carry forward your capital losses to offset gains you may realize in the future.
However, if you sell a stock to realize a loss and then buy it back within 30 days, the CRA considers this a “superficial loss,” and you cannot claim it.
The superficial loss rule applies even if you sell the stock in a non-registered account and then buy it back within 30 days in your TFSA or your RRSP, or even an account owned by your spouse, or by a corporation you control.
Note that there is no corresponding “superficial gain” rule. If you decide to sell a stock that has appreciated in value and then buy it back immediately, the CRA is quite happy for you to pay the taxes now rather than deferring them.
A similar rule applies when contributing stocks in-kind to your TFSA. If you transfer a losing stock to a registered account, CRA treats your loss the same way it would if you’d sold the stock and then repurchased it immediately: the loss is denied. But if you contribute a stock that is showing a gain, this isn’t a problem, since you are paying the taxes you owe before the stock is transferred.
So, Rudy, if your goal is to both harvest the capital loss on your stocks and make a TFSA contribution, I suggest doing it in two steps. First, sell the stocks in the non-registered account to realize the loss, and then contribute the cash proceeds to your TFSA. If you still like the long-term prospects for your losing stocks, you can wait 30 days before repurchasing them.
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Correction 09/19/17: A previous version of this article stated that contributing stocks in-kind to your TFSA is considered a superficial loss. The loss is in fact simply denied by the CRA.