Question

1. Explain what “contributions in kind” are with respect to your investment accounts.
2. Are “in-kind” contributions to your RRSP account permitted?
3. List and describe two (2) likely tax implication of making a “contribution in kind” of stocks from your non-registered investment account to your RRSP.
4. List four (4) disadvantages of contributing to your RRSP.

Answer 1

a) "Contribution in kind " refers to increase in the capital but not as cash. There are other means to gain capital. Like contribution of assets or incorporation of the liabilities.

If we talk about investment accounts, these are the accounts used for doing financial transactions of assets or transaction of shares or stocks. Basically it is meant for investment purpose.

"Contribution in kind" with respect to investment accounts can be issuence of shares by a company. A company adds capital to its account by issuing its shares. Investors but these shares and hence company gets capital in exchange. Company could also issue T bills and other financial assets to raise capital for the company.

So here we saw, without actual cash, how capital increases of a company.

b) yes, in kind contributions are permitted in RRSP accounts.

There are various investment products like stocks, mutual funds and Exchange traded funds. But there are some rules regarding this.Rules are as follows: 1) Shares have to be contributed at the fair market value when it is contributed.

2) The transaction is able to trigger capital gain which is taxable for the year it occurs.

c) tax implications regarding contribution in kind of RRSP accounts are:

1) when securities are contributed in kind to RRSP, these securities should be under a qualified investment. If this is not fulfilled, then there can be negative tax implications for this.

2) If the assets that are transferred, increases in value from its purchase, a capital gain will be experienced when sold or transfered.

d) Disadvantages of contribution in kind to RRSP are:

I) RRSP considers all the income as an ordinary income at the time of withdrawal. Whether they are dividends from company or they are capital gains made from special tax treatment. All the incomes are being taxed at time of withdrawal by marginal tax rate.

2) RRSP contribution room once withdrawn can not be brought back. It gets destroyed after one withdrawal and no possible to get again in the following year.

3) Here, the tax returns which are obtained, have certain risk for the one who are spending their tax returns every year. It is beneficial to make pre tax contributions. If post tax contribution is done, then the tax returns comes at the end of the year after the tax return is filed.

4) After the age of 70, RRSP account needed to be transferred to RRIF account. RRIF account needs some specific amount to be withdrawn as compulsory if needed or not which generally increases the tax burden.