If you don’t have the ready cash to contribute to, or top up, your registered retirement savings plan before the Feb. 29 deadline, you’re not out of luck.
In addition to the oft-touted option of taking out an RRSP loan there’s another, lesser-known way to make that contribution and still enjoy all the short- and long-term financial benefits offered by this tax-sheltered retirement plan.
The method involves contributing eligible assets “in kind,” or in lieu of cash.
Contributing in lieu is “pretty common,” says Ted Rechtshaffen, a certified financial planner who heads up TriDelta Financial Partners, a Toronto-based financial planning firm.
“If you want to do something that’s pretty simple, and don’t have cash handy at the time, you can just transfer existing assets from a non-registered account into an RRSP,” he says.
What qualifies, or doesn’t
The list of investments that qualify for a contribution to an RRSP in lieu of cash is extensive. It contains most common investments, such as Canadian-listed publicly traded shares, mutual and segregated funds; guaranteed investment certificates (GICs) and term deposits; Canadian treasury bills; Canada Savings Bonds; Canadian federal, provincial and municipal government and Crown corporation bonds; bonds of corporations listed on Canadian stock exchanges; as well as shares listed on certain foreign exchanges, and bonds of certain foreign governments.
Retirement concerns
43%
Proportion of Canadians who don’t know much they need to save for retirement. 62%
Portion who are unsure about what their annual income will be during retirement. 28%
Proportion who worry they will outlive their savings. Source: Sun Life Financial/Omnitel survey
Some private small business shares held at arm’s length might also qualify. If you wants to contribute privately held shares to your RRSP, you should check with your financial institution to see if such shares qualify and in what amount, advises Patricia Lovett-Reid, senior vice-president of TD Waterhouse Inc. in Toronto.
There are a variety of items that cannot be put into the RRSP in lieu of cash. These include gold, silver and precious metals.
Other items that cannot be put into the RRSP in lieu of cash include: most shares not traded on a prescribed stock exchange; many foreign over-the-counter securities; uncovered options; debt instruments of a mortgage investment corporation; real estate; and listed personal property such as art or antiques.
Generally speaking, an in-lieu contribution requires the taxpayer to be holding a self-directed RRSP, so it is best to check with your financial institution to determine which plans are eligible to receive contributions in kind, as well as which investment assets will or will not be allowed to transfer in, as well as any fees that might apply.
But investors also need to be careful, and act strategically.
“This isn’t the dumping ground for the dogs in your portfolio, because you still want the RRSP to grow. This is your retirement fund,” says Ms. Lovett-Reid.
“When you put money into an RRSP, you can’t really afford to lose even a dollar of it. This is about being savvy and maybe a little far-sighted – looking into the future to see where you truly believe the good values and upside potential are [for instruments you are considering transferring,]” she says.
Beware the tax impact
RRSP holders also need to be fully aware of the tax consequences associated with transferring in lieu, experts stress.
For example, if you transfer a stock into your RRSP, the moment it is transferred, “the Canada Revenue Agency essentially views it as a deemed disposition – meaning even if you’re not actually selling those shares, for tax purposes, it’s as if you were,” Mr. Rechtshaffen says.
Thus, a stock transfer may also trigger a capital gain, with 50-per-cent of any gain between the purchase and deemed disposition price subject to tax at the RRSP holder’s marginal rate.
Capital losses are a different story, however: If the stock has lost value on the deemed disposition, Canada Revenue Agency does not allow that deduction for tax purposes.
“Some people think, ‘If I’ve got some kind of a [capital] loss situation, I’ll just put it in directly [to my RRSP], and get a [tax] loss to offset some other gain.’ But it doesn’t work that way,” warns Vas Pachapurkar, regional director with Investors Group Financial Services Inc. in Toronto.
In that instance, it would be best for tax purposes to sell the investment first, in order to recognize the loss. Then you could contribute the cash proceeds to your RRSP, taking into account fees that may be incurred for the double transaction, say financial advisers. (They also caution you not to buy that same stock again within 30 days, lest you fall victim to the Income Tax Act’s “superficial loss” rule, which would also prevent you from declaring that loss.)
The best-case scenario for transferring stocks directly into an RRSP involves selecting those “trading relatively close to where you’ve purchased them at” so you won’t be penalized with much of a capital gain or have to worry about a capital loss, suggests Ms. Lovett-Reid. “You feel these are good value companies that have upside potential [and] you want that growth within your plan,” she says.
And another thing
When transferring investments that normally accrue capital gains into your RRSP, you also need to be aware that future gains are treated as income and therefore fully subject to tax when the funds are eventually withdrawn from your plan.
Thus, some experts advise that, if given a choice between transferring in interest-generating items, such as bonds, versus assets such as equities, which generate capital gains outside the RRSP, you should transfer the income-producing assets.
Otherwise you will “lose the benefit of that tax-preferential treatment,” says Mr. Pachapurkar, who notes that some people who make in-lieu contributions to their RRSP act without thinking through the tax consequences.
Remember the calendar
It is also worth noting that when securities are transferred to your RRSP within the first 60 days after the end of the previous calendar year, you can apply the tax deduction for that transfer to either the current or previous year.
However, claiming the income from the transaction only has to be done in the year of transfer, Ms. Lovett-Reid says. For example, if you transferred assets in lieu of cash into your RRSP on Jan. 31, 2008, you could claim the full RRSP deduction from that transaction in either 2007 or 2008, or spread it out over the two tax years. But you do not have to declare the income from the deemed disposition until your 2008 tax return.
Those RRSP deductions can lead to substantial tax savings. For example, a person in the top Ontario tax bracket who contributes $10,000 in lieu of cash to his RRSP would save $4,610 on combined federal and provincial taxes.
Contributing in lieu can also create a good opportunity to rebalance the mix in your RRSP, notes Ms. Lovett-Reid.
You might, for example, think your portfolio has become too heavily weighted in equities and decide to “bring some balance and diversification back in play.”
If you also have assets outside your RRSP earning interest income that is being taxed at a high marginal tax rate, then it “may make sense to transfer that into your plan,” she says.
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In addition to the oft-touted option of taking out an RRSP loan there’s another, lesser-known way to make that contribution and still enjoy all the short- and long-term financial benefits offered by this tax-sheltered retirement plan.