TFSA Contribution Superficial loss Rule (I did something incredibly stupid today)

When contributing "in-kind" (transferring stock into a TFSA instead of cash), you have to be careful.

When you transfer in stock that has an accrued gain, for tax purposes it is considered a sale (with full tax consequences) and then a repurchase inside the TFSA where it is sheltered from further tax consequences.

However, when you transfer stock that has an accrued loss, it works differently. The CRA decides that any accrued losses are not deductible and your cost basis carries forward into the TFSA. What this means is that effectively you are in the same position as if you had originally purchased the stock inside the TFSA.

What this means for me is that I converted a $2,000 capital loss into a non-taxable loss and as a consequence, I lose approx 30% x $2,000 x 50% capital gain taxable amount = $300 (I pay more taxes than I otherwise would have).

All because of a paper transaction that has no consequences to anyone but the CRA. My excuse: I forgot.

My solution: Don't sell it now. If you feel the stock has potential to recover, then hang on to it... otherwise, if you sell you are locking in those losses.

I guess you are right. If I eventually gain money on the stock, there would be no loss and the conversion from taxable to non-taxable would be advantageous. Still, it was poor tax planning and I should have known better.

Happy ending. I sold at a gain and therefore the superficial loss rule is irrelevant.