Transferring assets in-kind can be a useful way to create a source of funds to accomplish registered account contributions, making gifts and fueling investment opportunities. But what exactly does it mean to transfer assets in-kind? Essentially, it involves moving an investment holding to another account, exactly as it is, without converting it to cash. Below we will review the scenarios and benefits of in-kind transfer, as well as some tax implications.

Contributing to Registered Accounts In-Kind

Amidst budget concerns, investors still want to contribute to their RSP, FHSA or TFSA, but may not have the cash to do so. One popular practice involves transferring securities from a non-registered account to these registered accounts. Transferring non-registered assets in-kind allows investors to gain immediate tax benefits, whether in the form of generating tax deductions or growing assets in a tax deferred or tax free manner. The total dollar amount being invested is the same, but the investment may grow faster with the added tax efficient benefits. That said, if the transferred security carries an unrealized capital gain, this transfer will trigger a realization of that gain, which will be reported on your personal tax return. For this reason, it would be prudent to transfer investments that have nominal unrealized gains, so as to not create a tax burden.

Conversely, if the security being transferred in-kind is at an unrealized loss position, the capital loss is denied and cannot be used to offset capital gains. Under this circumstance, depending on the size of the unrealized loss and whether you want to keep holding that position, it may make sense to liquidate the position first to capture the capital loss before transferring the cash to your registered account. However, you must also take into consideration the ‘Superficial Loss Rules’. This means you cannot purchase the security 30 days before or after your settlement date.

Transferring to Arm’s Length Individuals

Investors may seek to assist family members financially, but may lack the cash to make an outright gift. In this scenario, a transfer in-kind of securities may be considered so long as the transaction is at an “arm's length”. This means the receiving individual is acting independently. Adult family members (excluding your spouse) such as adult children, parents, siblings, and in-laws are all considered “arm’s length” and can receive an in-kind security transfer. Note that transferring to these individuals involves a deemed disposal of the security at its fair market value (FMV) on the transfer date. Hence, the capital gain or loss will be reported on the personal income tax return of the person making the gift. The adjusted cost base (ACB) of the security for the receiver will be the FMV on the transfer date. There is no income attribution rule applied to arm's length transactions, meaning the recipient assumes full responsibility for taxes on future income and capital gains from the transferred securities.

Consolidating Investments from Different Financial Institutions

Consolidating investments from different financial institutions is another reason to consider transferring assets in-kind. Some investors hesitate to consolidate investments at one financial institution due to feared tax implications; However, transferring in-kind avoids needing to realize any gains or losses, allowing for the direct transfer of securities at their adjusted cost base without triggering immediate tax implications.

Understanding the intricacies of in-kind asset transfers can be a eye opening for investors seeking to optimize their portfolios while minimizing tax burdens. There are other details to consider such as special rules that govern spousal transfers and transfers between non-arm's length parties. Transferring securities in the form of a donation to a charity is another topic that requires further planning and consideration. Seek advice your wealth advisor to determine how best to utilize the transfer in-kind method of making contributions or providing gifts.