Should I transfer stocks into my TFSA?

Should I transfer stocks into my TFSA?

Thanks to a reader question, I’m going to tackle this today and offer some perspectives:

“Hi Mark,

I don’t know if you have covered this anywhere in your blog but I’ve got a question about transferring shares from non-registered account to a TFSA account.  I’m not sure I’ll have $5500 cash to invest into my TFSA as of January 2018 (as I have maxed out all my RRSP contribution room).  I have shares in BNS, BMO, RY and others and I’m thinking of transferring $5500 worth of shares into my TFSA.

My questions are:

  • Is this wise?
  • Will it trigger a capital gain (if I sell)? If so, is that reportable to CRA?
  • What about calculating the adjusted cost base? I didn’t always keep track but it is doable.

Just wondering if you have experience with this.  Thanks.  I really enjoy your blog!”

First of all reader, thanks for being a fan – always great to hear from readers and get questions.  I hope I can help…

Second thought, I need to warn you I’m not a professional tax accountant or an investment guru.  This means the information that follows is not professional advice but rather my DIY perspective on things.

Third, let’s tackle those questions!

Is it wise? Part 1

Like everything in life – it depends!

What I mean is, it depends on your financial plan, goals and tax strategies that you want to employ.

Personally, I’m a fan of maximizing all registered accounts first (tax free = TFSA; tax deferred such as RRSP; tax deferred such as RESP, if you have kids) BEFORE non-registered investing.  The reason is – why pay tax today when you can let assets grow, defer tax, or in some cases keep Mr. Taxman away in the future?

Other reading:  What should your financial plan cover?

That said, I actually didn’t follow my own advice many years ago.  A decade ago, I opened (and still retain) a non-registered investing account.  This is where some of my Canadian dividend paying stocks are held.  However over the years I’ve maxed all contribution room with my TFSA and RRSP; and there is only some room left with my wife’s RRSP now – so all our registered accounts should be maxed out in the coming year or so.

Anyhow – back to you, I believe anytime you have an opportunity to maximize contributions to your TFSA in any year, you should.  The TFSA is a gift of an account for all adult Canadians to use.  This account can be for short-term saving street or long-term investing boulevard!

Investing 101

Is it wise? Part 2

Where you get the money (or assets) for your TFSA contribution every year is up to you.

For the most part, if you have non-registered assets like the Canadian bank stocks you mentioned (disclosure – I own some of these stocks as well) then you should be able to transfer those stocks “in-kind” from your non-registered investment account to your self-directed TFSA account at your brokerage.  Consider “in-kind” like “as-is”.  Just call your brokerage up and tell them you want to transfer shares “in-kind” to your TFSA.  Nothing else is really needed – they will take care of it.  The transaction time is typically about three business days for all assets to “settle” inside the TFSA after you make the call.

Will it trigger a capital gain (if you sell)?  If so, is that reportable to the CRA (Canada Revenue Agency)?

It might and yes are my answers.

Again, I’m not a tax professional but I’ve done what you are considering in the past.  In my situation, I sold a non-registered asset and triggered a tiny capital gain in the process.  I reported that gain to the CRA in that tax year.

If your investment when sold triggers a capital gain (i.e., you sold an asset for more than you paid for it), then a percentage of tax must be paid in the year that gain occurred.  That gain is added to your regular income in that tax year.

If you want to keep the shares you own (and not sell them for cash), then I believe transferring shares “in-kind” in the manner I mentioned above is the way to go.  When you transfer shares to your TFSA the CRA considers this a “deemed disposition”.  You technically sold the assets at market value for your TFSA contribution.  This means your TFSA contribution amount is the market value at the time of transfer.  For tax purposes, you have effectively disposed of the shares so any capital gain is taxable to you.  If however, you have a loss on the shares in your non-registered account before making the “in-kind” transfer then the capital loss is not deductible.

Let’s summarize a few great TFSA benefits (and why to max it out) before I get to your final question:

  • Use savings to invest in eligible investment vehicles (like stocks) and the capital gains and other investment income earned in your TFSA will not be taxed, even when withdrawn. Hooray!!
  • TFSA contributions are not deductible from income for tax purposes.
  • Unused TFSA contribution room can be carried forward to future years.

The implications of TFSA transfers from a non-registered account:

  • You will likely be ‘selling’/transferring an existing investment. If that occurs, then selling non-registered investments can produce capital gains or losses and therefore tax implications:

a) If your non-registered investment is in a gain position, making an ‘in-kind’ transfer directly into your TFSA will trigger a ‘disposition’. You’ll pay tax in the year of the transfer on 50% of the gains but then the asset will be inside your tax-free TFSA going forward.

b) If your non-registered investment is in a loss position, making an ‘in-kind’ transfer directly into your TFSA, you will lose the loss. Regarding the loss position, in order to claim the capital loss you would need to sell your stock(s) outside the TFSA first (no “in-kind” transfer).  Then a superficial loss rule kicks in.  This rule prevents investors from selling a stock to claim a loss and then buying it back right away.  The rule means if you sell a stock outside of the TFSA and buy it back within 30-days, the loss will be denied.  Read more on CRA here.

What about calculating the adjusted cost base? I didn’t always keep track but it is doable

Doable, please do.

Calculating your adjusted cost base can be a pain so I typically refer people to this free software tool to do it (no affiliation).  On my end, I keep few spreadsheets up to date on this for my non-registered account.  To keep things easy, I’ve also turned off all DRIPs (Dividend Reinvestment Plans) in my non-registered account so I don’t have to deal with the adjusted cost base calculations any longer.  I have my market value and my base cost documented for about a dozen stocks.  If/when I sell any of these non-registered assets, the calculation will be very straightforward on the CRA tax forms.

Summary

I can’t tell you the correct decision to make on this but I hope this post highlighted some considerations related to transferring stocks into a TFSA.  Good luck with your decision and thanks for reading.

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $700,000 now - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Subscribe and join the journey!

10 Responses to "Should I transfer stocks into my TFSA?"

  1. For us older folks who have to withdraw funds from a RRIF, I always transfer the max allowable of shares In Kind to the TFSA. The funds are being taxed regardless, but it allows us to get some stocks that are generating a nice return and growing into the TFSA.

    Reply
  2. In time this will be a consideration for me likely with unregistered accounts. For registered accounts my broker has said I can’t make a direct in kind contribution to another registered acct -TFSA. I didn’t really pursue this further as didn’t have any need at the time. If this is correct I suspect there is an easy work around: RRSP>unregistered>TFSA

    Reply
  3. This may be a dumb question. I was already aware of a deemed disposition when transferring shares “in kind” from a non-registered account to a registered account, and either have to pay tax if there was gain or cannot claim a loss due to triggering the superficial loss rule; however, does the same apply when transferring from a registered account to another registered account (ie. RRSP to TFSA OR from one RRSP to another RRSP)?

    I assuming no, but thought I’d ask.

    Reply
    1. Hey MoneyHelp – based on my understanding, no gains or tax when you go from one registered account to another as long as you have contribution room…but….

      TFSA TO RRSP: GREAT IDEA

      Funds can be withdrawn from a TFSA at any time, for any reason, without tax consequences. In fact, the contribution room will be returned to you the following calendar year. If your TFSA investments have done well and you’re looking for a tax break for the current calendar year, that money may be better invested in your RRSP.

      You cannot transfer investments directly between TFSAs and RRSPs but you can sell for cash in one and repurchase them in another. Just be sure you have the contribution room in your RRSP, which is usually posted with CRA. Best idea: RRSP contributions are fully taxed when they are withdrawn (ideally in retirement), but they can be deducted from your 2018 taxes if you make the contribution before next March.

      RRSP TO TFSA: BE CAREFUL

      If you withdraw from an RRSP before you’re 65 the funds will be subject to an immediate withholding tax. Once you file your taxes for the year you could wind up paying more or you could pay less, depending in your income level. It makes more sense to withdraw from an RRSP if your income is low. Unlike a TFSA, the re-contribution space from an RRSP withdrawal will be lost.

      Assuming you have not maxed out your TFSA, you can put the funds right back in your TFSA. The CRA also keeps a record of your TFSA contribution space.

      A quick Google will tell the tale but essentially once you have cash inside your RRSP, keep it there. Depending upon investing strategies, you might want to withdraw from TFSA to feed RRSP in your asset accumulation years.

      I personally leave both alone!

      Reply
  4. Hi Mark,

    I thought so, but something you mentioned has me scratching my head, I’m hoping you can clarify.

    2 Things:

    1) “no gains or tax when you go from one registered account to another as long as you have contribution room” – I understand if you are transferring from a TFSA to an RRSP, but, If you are transferring a stock in kind from one RRSP to another RRSP, will that affect your contribution room? Since its not a deemed disposition, I’d assume it won’t affect your contribution that you may still have available. No?

    2) “You cannot transfer investments directly between TFSAs and RRSPs” – I think this is incorrect isn’t it? Meaning, if I own Apple stock in one RRSP and I have another RRSP account which also holds Apple stock and let’s say I want to consolidate my Apple stock position into only one RRSP account, I cannot do this?

    Reply
    1. Hi MoneyHelp – no, I meant to write/clarify TFSA to RRSP you need RRSP contribution room but RRSP to RRSP is really just an in-kind transfer. RRSP to RRSP is all good!

      Reply

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