Given the advantages of tax deductibility and tax-free income growth, it’s no wonder RRSPs are the savings vehicle of choice for most clients. Realizing those benefits by maximizing annual contributions is key to ensuring a comfortable retirement. But what if your clients have unused contribution room without the funds to take advantage of it?

Your client can borrow the money to make a contribution, although interest costs on RRSP loans are not tax-deductible. (See page B16.) A better choice might be to make an in-kind contribution, which involves transferring an eligible investment held outside an RRSP into the registered plan. That way, your client can take advantage of the tax deduction.

Anything that meets Canada Revenue Agency eligibility rules can be transferred; qualifying investments include publicly traded Canadian stocks and bonds, Canada Savings Bonds, Canadian mutual funds (those available for purchase in Canada), certain private Canadian corporate shares and foreign securities listed on specific foreign exchanges.

Among the few exclusions are options and bonds issued by private corporations. Some private small-business shares held at arm’s length might qualify, although there are restrictions.

“You need to check with the RRSP administrator or an accountant for eligibility and specific rules,” says Preet Banerjee, a wealth advisor with ScotiaMcLeod Inc. in Toronto.

There are no purchase or sales transaction costs associated with in-kind contributions, nor is there a fee for CSBs that are transferred to a directed RRSP, Banerjee says. However, for those who make in-kind contributions to a self-directed RRSP, fees vary — usually, $25 to $100.

In-kind contributions are much like contributing cash, in that the client is entitled to an RRSP deduction for the fair market value of the investment.

“Fair market value can be attributed on the day you make the transfer, the previous day or the following day,” says John Archer, an investment advisor with RBC Dominion Securities Inc. in Montreal. “That decision is up to the RRSP administrator.”

When deciding which securities to contribute to an RRSP, your clients should be reminded that the CRA considers this a taxable event. If a client transfers an investment that has realized a capital gain, the act of contributing it to an RRSP is considered a disposition for tax purposes and 50% of the capital gain becomes taxable.

The client’s RRSP deduction may offset the taxable amount, depending on his or her marginal tax rate and the size of the capital gain, says Archer, but each case is unique.

“People who traditionally review their portfolios and pick off stocks with healthy gains for this purpose may have a hard time finding them this year,” he says. “And some may want to hold on to their stocks because of the current market turmoil.”

Clients thinking of transferring an investment that involves a capital loss had better think again; such transfers trigger the “superficial loss” rule, which means they can’t claim the capital loss and will lose the opportunity to do so forever. It would be better to sell the losing investment for cash, triggering a capital loss that can be claimed, and then put the cash from the sale into the RRSP.

Your clients should keep in mind, however, that if they — or their spouse or partner — purchase the same investment within 30 calendar days on either side of the sale, it, too, will trigger the superficial loss rule.

“If you really like the investment,” Archer says, “try buying shares of a different company in the same industry, or a mutual fund or ETF that mimics the position you just sold.”

If a client transfers an interest-paying bond or GIC into an RRSP and the transaction occurs between interest payments, the client will have to pay taxes on the accrued but unpaid interest up to the time of the sale, notes Banerjee. The client will pay 50¢ on each dollar of interest, he adds.

The client’s overall tax-planning strategy for the year may also influence which investments he or she chooses to transfer to an RRSP, adds Banerjee: “If your client doesn’t want to trigger a large capital gains amount, he or she might select a security that has realized little or no capital gain. All else being equal, that would be the most appealing scenario from a tax perspective.”

@page_break@Your client should also see if there are penalties for redeeming certain assets, Banerjee says, so that he or she keeps investments with little or nothing in the way of redemption fees outside the RRSPs. That means the client wouldn’t have to pay fees if he or she had to access the investments in case of an emergency.

Archer suggests that you advise clients to wait until the beginning of next year to make in-kind contributions that involve a capital gain. “You’d benefit immediately from the RRSP contribution but you wouldn’t have to pay the capital gains taxes on the transferred security until the following year,” he explains. “It’s all about tax deferral.”

Ted Rechtshaffen, president and CEO of TriDelta Financial Partners in Toronto, cautions against transferring investments into a registered account in a year in which the client’s income is lower than usual: “If the client withdraws the investments in a year in which his or her income is higher,” he warns, “the client will wind up paying more taxes.”

In 2009, Rechtshaffen notes, Canadians can open a tax-free savings account and deposit up to $5,000. (See page B8.) “You might be better off to do that instead of transferring assets to a registered account,” he says. “If you earn more than $50,000 a year, making an in-kind contribution to your RRSP is probably a good idea; if you earn less, depositing money to a TFSA might be better.”

In-kind contributions to RRSPs are not particularly common, says Rechtshaffen: “Those who do [it] tend to be wealthier people who have maxed out their RRSP contribution room and have additional money left to invest.”

Archer says many of his clients are pleased to discover they can exercise this option. “It encourages them to build up their non-registered portfolios,” he says, “and gives them a pool of funds to draw from at RRSP time.” IE