Should I transfer stocks into my TFSA?
Thanks to a reader question, I’m going to tackle this question today and offer some perspectives including what I’ve done in the past. I’ve also updated this post to reflect how I manage our dividend reinvestment plans (DRIPs) across our investment accounts.
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 necessary cash saved to invest into my TFSA as of January 1 (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 $5,500 or more 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!
My second thought, I just want to highlight I’m not an accountant / tax professional so please be mindful of any decisions I’ve made here that apply to you.
Third, let’s tackle those questions!
Is it wise?
Like everything in life, including personal finance decisions, “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 this in my mind:
why pay tax today (taxable investing) when you can let assets grow tax-free (TFSA) or tax-deferred (RRSP)?
In the early days of this blog, I didn’t eat my own cooking but then again, the TFSA was a very new account to all of us in 2009. I’ve used my TFSA (our TFSAs in fact) as an investment account since Day 1 although I did have some taxable investments before the TFSA was launched.
Ultimately, I believe your desire to invest inside your TFSA, RRSP, RESP if you have kids, is a personal decision but I’m biased to making contributions to the TFSA and then RRSP, for most Canadians, in that order.
Anyhow, back to you, I believe anytime you have an opportunity to maximize contributions to your TFSA in any year, you should.
Again, this account can be for short-term saving street or long-term investing boulevard!
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.
This leads me to your second question.
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 small 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 first), 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 fair market value (FMV) 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, regarding the TFSA benefits:
- You can contribute cash savings to invest in eligible investment vehicles (like stocks) and/or transfer assets in-kind.
- TFSA contributions are not tax deductible for tax purposes.
- Unused TFSA contribution room can be carried forward to future years.
The implications of moving non-registered assets to the TFSA:
- Deemed dispositions can produce capital gains (or losses) and therefore trigger tax consequences.
- 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 to grow and compound away.
- 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. 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.
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 (ACB) can be a pain so I typically refer people to this free software tool to do it (no affiliation).
As I get older I want to simplify my financial life and save time on such things. To keep things easy this is what we do related to DRIPs:
- I’ve turned off all DRIPs for our taxable accounts. Income comes in as cash to be used as needed.
- I’ve turned off all DRIPs for our RRSPs and my LIRA. That income will be used for any semi-retirement spending/withdrawals in our 50s and 60s.
- We do however DRIP investment assets inside our TFSAs. We want assets to compound away for another 20-30 years in those accounts and via dividend reinvestment plans we do just that.
If/when I sell any of our non-registered assets over the coming decades the ACB calculation will be very straightforward on the CRA tax forms without DRIP implications.
Should I transfer stocks into my TFSA?
Generally, you can transfer investments in-kind from a non-registered investment account to a Tax-Free Savings Account (TFSA) as long as you have the available TFSA contribution room.
However, you may have to pay tax if the value of the investments has gone up since you purchased them (in other words, you have a capital gain). Once your investments are in the TFSA, they will grow tax free.
Learn more about in-kind contributions to a TFSA – including what happens if your investments have gone down in value – from the Canada Revenue Agency.
Some of you might also wonder in retirement, if you can move assets from your RRSP to TFSA.
If you transfer an investment from your RRSP to your TFSA, you will be considered to have withdrawn the investment from the RRSP at FMV. That amount will be reported as an RRSP withdrawal and must be included in your income in that year (like any other RRSP withdrawal during the tax year).
At the end of the day, I can’t tell you the correct decision to make on this subject but I hope this post highlighted some considerations related to transferring stocks into a TFSA for any tax year.
Good luck with your decision and thanks for reading.
Let me know what you decide and why in a comment below.