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Q. I simply transferred 200 shares of an ETF from my margin account to my TFSA at a loss. Can I declare the loss, or does it fall into the 30-day rule?
–Stavros
A. Investments resembling shares, exchange-traded funds (ETFs) and mutual funds can typically be transferred “in-kind” between accounts, in order that the funding is transferred from one account on to the opposite with out promoting it. When an funding is transferred from a non-registered funding account, like a money or margin account, right into a tax-free financial savings account, the switch is taken into account an eligible TFSA contribution. The contribution quantity is predicated available on the market worth of the transferred funding on the time of switch.
The “30-day rule” you might be referring to, Stavros, is named the “superficial loss rule.” A superficial loss outcomes when a capital loss is triggered in a taxable account, however the identical funding is bought in one other account inside 30 days earlier than or after the loss is incurred.
The superficial loss rule applies to not solely your repurchase of the funding, but in addition a repurchase by your partner, a company you management, or a belief with you or your partner as a beneficiary. The rule has been put in place to stop Canadians from avoiding tax by promoting an funding, solely to have a accomplice or company repurchase it on their behalf.
Within the case of a switch of an funding out of your non-registered margin account to your TFSA, Stavros, this doesn’t end in a superficial loss. Nevertheless, the Earnings Tax Act does deny a loss triggered on a deemed disposition of an funding at a loss upon switch to a TFSA or registered retirement financial savings plan (RRSP). So, though the superficial loss rule wouldn’t apply, the consequence can be the identical—your capital loss can be ineligible.
Apparently, if you happen to switch an funding in form that’s buying and selling at a capital achieve, the capital achieve is triggered and is taxable.
To be able to efficiently declare a capital loss, Stavros, you would wish to promote an funding and switch the ensuing money proceeds to your TFSA. This will likely end in transaction prices to promote, and extra transaction prices to reinvest in your TFSA. If the capital loss tax financial savings is greater than the transaction prices, it most likely is smart to set off a loss by promoting and transferring money.
If you wish to repurchase the identical funding in your TFSA, keep in mind you should wait no less than 30 days so as to take action, in any other case the superficial loss guidelines will apply even if you happen to promote the funding earlier than contributing.
You might at all times think about shopping for the same funding as an alternative of the identical funding in an effort to get the money invested with out ready. In different phrases, you could possibly promote shares of 1 financial institution and purchase shares of one other financial institution. Or you could possibly promote one U.S.-equity ETF and purchase one other comparable one.
Capital losses can solely be claimed in opposition to capital beneficial properties on investments bought for a revenue in taxable non-registered accounts. Tax financial savings could be as excessive as 27% of a capital loss. Capital losses could be claimed in opposition to present yr capital beneficial properties, or when you have a web loss for the yr, you may carry the loss again as much as three years, or ahead indefinitely.
So, I hate to be the bearer of dangerous information, Stavros, however your capital loss might be ineligible. Regardless, utilizing non-registered investments to fund your TFSA contributions is sound tax planning, and now you realize subsequent time to promote earlier than you contribute.
Jason Heath is a fee-only, advice-only Licensed Monetary Planner (CFP) at Goal Monetary Companions Inc. in Toronto. He doesn’t promote any monetary merchandise in anyway.
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Watch: 4 issues to think about earlier than placing your cash in a TFSA or RRSP
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