Tips on Tax

 		  
UTILIZING YOUR SELF DIRECTED RRSP    
A self-directed RRSP can provide several opportunities to maximize your RRSP's growth. However, several unintended income tax consequences can result if you are unaware of the various traps and pitfalls.

Contributions In Kind    
The Income Tax Act provides for contributions to your RRSP in forms other than cash. These "in kind" contributions often take the form of stock,CSB or similar type contributions. In kind contributions to your self-directed RRSP, must be "qualified investments" or the fair market value ("FMV") of your in kind investment will be included on your personal income. In general, most publicly traded Canadian stocks are qualified investments. Private Canadian securities may also qualify as investments. Unfortunately, many unlisted stocks do not qualify as eligible investments.

 


Where you contribute a stock to your RRSP, you will be considered to have disposed of that stock at its FMV on that date.

The FMV is important for two reasons:

1. The FMV is considered your proceeds of disposition for income tax purposes.
2. Your RRSP contribution is equal to the FMV of the security contributed.

It is extremely important to understand that the transfer does not defer your gain to the RRSP. In point of fact you have an immediate gain for income tax purposes. Where you have a substantial gain, cash flow problems can result. You have a tax bill due without having received any cash proceeds for the contribution.

Where you have a capital loss on a transfer to your RRSP, the capital will not be recognized but deemed to be nil. This income tax provision has surprised many a tax payer. It appears that Revenue Canada disallows the loss because the share has not been disposed of but just transferred to another account. Thus, please ensure you never transfer shares with inherant losses to your RRSP.

 


 

Private Canadian Securities    

The rules are extremely complex in regard to private Canadian securities with respect to both the transfer and the purchase within your RRSP. We will only provide a brief overview of these rules at this time. If you wish to undertake a RRSP transaction involving private Canadian securities, consult your advisor.

In general, private corporation shares will not be qualified investments where you and your immediate family hold more than 10% of any class of shares. Where this is the situation, a de minimus rule allows the 10% shareholder and their relatives to make an aggregate investment of $25,000.


 

Swaps    
Most RRSP administrators allow for a "swap" of assets, such that you can transfer assets to your RRSP for cash. If you have a substantial cash balance in your RRSP, you may be able to transfer $25,000 of shares in your private company to your RRSP for $25,000 in cash. A swap therefore can provide liquidity to your private company shares. Care must be taken to ensure you account for the various rules mentioned above.

 


The tips and information above are intended to highlight general tax rules and plans and should not be used as a substitute for appropriate professional advise relating to your specific circumstances.


 

 




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