Principal Issues: What is the tax treatment of an in-kind withdrawal of securities from an RRSP and a corresponding contribution of the securities to a TFSA?
Position: The taxpayer would be treated as having received a taxable RRSP benefit, and as having made a TFSA contribution, equal to the FMV of the securities at the time of the respective transactions.
Reasons: The transactions are considered to be a disposition and acquisition between separate taxpayers occurring at fair market value.
Signed on June 10, 2009
XXXXXXXXXX
Dear XXXXXXXXXX :
The office of the Honourable Tony Clement, Minister of Industry, forwarded to me a copy of your correspondence concerning registered retirement savings plans (RRSPs) and Tax-Free Savings Accounts (TFSAs). Please accept my apology for this delayed reply.
I understand that you would like to make a taxable withdrawal of securities from your RRSP and make an immediate corresponding contribution of the securities to your TFSA without having to sell the securities, and reacquire them, on the open market. You have asked for clarification on the tax treatment of these transactions.
For income tax purposes, your RRSP and TFSA trusts are considered to be separate and distinct entities from each other and from you. As a result, the withdrawal from the RRSP will be considered a disposition of the securities by the RRSP and an acquisition of the securities by you. You will be treated as having received a taxable RRSP benefit equal to the fair market value of the securities at the time of the withdrawal. The financial institution that administers your RRSP will be required to withhold income tax on the amount treated as an RRSP withdrawal.
The contribution to the TFSA will be considered a disposition of the securities by you and an acquisition of the securities by the TFSA. You will be treated as having made a contribution to the TFSA equal to the fair market value of the securities at that time. In this regard, you should be aware that the TFSA contribution limit for 2009 is $5,000. Any excess contributions will be subject to a 1% per month penalty tax.
If there is any delay in making the TFSA contribution and the value of the securities has increased, the resulting taxable capital gain must be included in your income. If, however, the value of the securities has decreased, the income tax rules do not allow you to claim the capital loss. This should not be a concern provided that the RRSP withdrawal and TFSA contribution are concurrent.
I would recommend that you discuss this with your financial institution, as not all institutions are set up to accommodate in-kind transactions. In this regard, the income tax rules do not obligate financial institutions to accept in-kind transactions in connection with RRSPs and TFSAs, nor do the rules regulate the level of fees charged in connection with these registered accounts. These are matters that reflect the day-to-day business decisions of the financial institution.
I trust that the information I have provided is helpful.
Sincerely,
Jean-Pierre Blackburn, P.C., M.P.
c.c.: The Honourable Tony Clement, P.C., M.P.
Minister of Industry
House of Commons
Ottawa ON K1A 0A6
David Wurtele
(613) 957-2093
2009-032069