Stavros is worried that contributing an investment in kind to his TFSA will trigger the “superficial loss rule.”
Q. I just transferred 200 shares of an ETF from my margin account to my TFSA at a loss. Can I claim the loss, or does it fall into the 30-day rule?
A. Investments such as stocks, exchange-traded funds (ETFs) and mutual funds can generally be transferred “in-kind” between accounts, so that the investment is transferred from one account directly to the other without selling it. When an investment is transferred from a non-registered investment account, like a cash or margin account, into a tax-free savings account, the transfer is considered an eligible TFSA contribution. The contribution amount is based on the market value of the transferred investment at the time of transfer.
The “30-day rule” you are referring to, Stavros, is called the “superficial loss rule.” A superficial loss results when a capital loss is triggered in a taxable account, but the same investment is purchased in another account within 30 days before or after the loss is incurred.
The superficial loss rule applies to not only your repurchase of the investment, but also a repurchase by your spouse, a corporation you control, or a trust with you or your spouse as a beneficiary. The rule has been put in place to prevent Canadians from avoiding tax by selling an investment, only to have a partner or corporate repurchase it on their behalf.
In the case of a transfer of an investment from your non-registered margin account to your TFSA, Stavros, this does not result in a superficial loss. However, the Income Tax Act does deny a loss triggered on a deemed disposition of an investment at a loss upon transfer to a TFSA or registered retirement savings plan (RRSP). So, although the superficial loss rule would not apply, the result would be the same—your capital loss would be ineligible.
Interestingly, if you transfer an investment in kind that is trading at a capital gain, the capital gain is triggered and is taxable.
In order to successfully claim a capital loss, Stavros, you would need to sell an investment and transfer the resulting cash proceeds to your TFSA. This may result in transaction costs to sell, and additional transaction costs to reinvest in your TFSA. If the capital loss tax savings is more than the transaction costs, it probably makes sense to trigger a loss by selling and transferring cash.
If you want to repurchase the same investment in your TFSA, remember you must wait at least 30 days in order to do so, otherwise the superficial loss rules will apply even if you sell the investment before contributing.
You could always consider buying a similar investment instead of the same investment in order to get the cash invested without waiting. In other words, you could sell shares of one bank and buy shares of another bank. Or you could sell one U.S.-equity ETF and buy another comparable one.
Capital losses can only be claimed against capital gains on investments sold for a profit in taxable non-registered accounts. Tax savings can be as high as 27% of a capital loss. Capital losses can be claimed against current year capital gains, or if you have a net loss for the year, you can carry the loss back up to three years, or forward indefinitely.
So, I hate to be the bearer of bad news, Stavros, but your capital loss will be ineligible. Regardless, using non-registered investments to fund your TFSA contributions is sound tax planning, and now you know next time to sell before you contribute.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.