Wants to undo RRSP transfer

Question: As a result of my ignorance, I transferred some shares of a company into my RRSP at a time when they were trading below my cost for them. I have now found that at the time of transfer into the RRSP, those shares were “deemed” to be sold at their market value and I can not claim the deemed loss on that transfer. I would like to undo my mistake by taking them out of the RRSP, pay any tax as a result of this withdrawal from the RRSP, and then actually sell the shares to realize an “actual” loss (representing my original cost of purchase less the current market price or the market price at which I contributed those shares to the RRSP). I have suffered a real economic loss and I want to be able to undo it. Please let me know if I can do this. I would really appreciate your input. – M.S., Toronto

Gordon’s answer: Sadly, the news is bad. What you’ve done cannot be undone. I have said for years that the government’s policy on this issue is unfair but unfortunately it’s the law and we’re stuck with it.

The rule is this. When you transfer any security into a registered plan, it is a deemed sale. If the market value at the time of the transfer is eater than your cost price, you have a taxable capital gain which you must declare on your return. But if it is below your original price, you are not allowed to claim a capital loss – hence the inequity. So an investor should never transfer a losing security into an RRSP or other registered plan. Sell it instead – this creates an allowable capital loss for tax purposes. You can then contribute the cash to the RRSP and use it to buy back the security within the plan, if that’s your desire.

As I said at the outset, you cannot undo this by transferring the shares back out of the RRSP. If you do, the Canada Revenue Agency will treat it as a new purchase within your non-registered account at the current market value. At this point, your original purchase price has been wiped from the books. There is nothing that can be done to get it back. Sorry.

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