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. :)
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