# TFSA December Shuffle and Capital Gains Distributions



## slacker (Mar 8, 2010)

Hi,

I have decided to do a "December Shuffle" and withdraw from my TFSA account in TDWH. I have some ETF's from iShares in the TFSA currently. Should I withdraw in-kind or in-cash?

If I withdraw in-kind, then I save a about $10 in trading fees, because I don't have to repurchase them in my new account in a different brokerage.

But, I've just read about something called the "capital gains distributions".

http://ca.ishares.com/content/strea...y/resource/press_release/pr_2010_11_18_en.pdf

If I sell my iShares ETF's before the capital gains distribution date, would I somehow "skip out" on the capital gain distribution tax? I'd imagine arbitrage would take care of any benefits (just as it would for timing dividends)

Another benefit of not getting the capital gains distribution is one less thing I have to do on my tax return.

Thoughts?

PS: I'm not trying to "skip out" on anything here, nor am I trying to do anything interesting that will draw the wraith of the CRA. I'm just curious about investment taxes, and would like to reduce paperwork on my tax return.


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## humble_pie (Jun 7, 2009)

hello slacker couple of comments in passing.

can they really issue an etf certificate so you could withdraw "in kind." My goodness. Certainly a stock certificate costs quite a few dollars, something around 35 or 40 per security & my info could be way out of date. Plus there will be a time lag - your new brokerage will need at least a month to verify your certificate & convert it into electronic cds format.

re the capital gains distribution, the likelihood is that your etfs have risen in market price since you bought them, so if you were to sell them you'd have a capital gain anyhow. It's theoretically possible you'd have a capital loss; but it's most unlikely that penny for penny your etfs have remained at your cost base price.

last but first in importance, capital gains are the most tax-favoured kind of income that exists. They are taxed at only 50%. Hello !! That's like having only half of your salary taxed. A weak second in the race are dividend tax credits, because the feds have launched a slow multi-year program of gradually lowering said div tax credits.

bref, capital gains are what we passionately long for. What we devoutly pray for. What we relentlessly pursue. What we openly lust after. The reporting of them on tax returns is actually quite simple. I speak as one who is almost done totalling hundreds of gains/losses for 2010, so as to get an accurate grip on what dollar amount of losses to offset gains should still be taken in these last trading days before the tax year finally ends.

to sum up, if you don't sell, you will have the capital gains distribution to report. The broker's tax slip will instruct you as to which line on the federal & provincial forms if any to report each figure. If you do sell, you will have the capital gains (or loss) from adjusted cost base to report. There will be no broker's tax slip, just your own record-keeping.


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## slacker (Mar 8, 2010)

@humble_pie: thank you for your response. But I have either not explained clearly enough, and/or you're confused. 

The ETF is in TFSA, so withdrawal from it (in-kind or in-cash) ought not trigger capital gain tax. And I don't think I'm actually going down to TDWH to ask for a ETF certificate, I just plan to dump it into my regular non-registered taxable trading account.

The "capital gain distribution" I'm referring to is internal to the iShares (they had to sell something at a profit to fund the purchase a new stock just added to the index). Please read the link for details if you still don't understand:

http://ca.ishares.com/content/strea...y/resource/press_release/pr_2010_11_18_en.pdf


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## CanadianCapitalist (Mar 31, 2009)

slacker said:


> Hi,
> 
> I have decided to do a "December Shuffle" and withdraw from my TFSA account in TDWH. I have some ETF's from iShares in the TFSA currently. Should I withdraw in-kind or in-cash?
> 
> If I withdraw in-kind, then I save a about $10 in trading fees, because I don't have to repurchase them in my new account in a different brokerage.


I don't fully understand what you are trying to do. If you withdraw some ETFs from a TFSA account into your taxable account, you still have to pay a transfer free to move your account to another brokerage, right? Are you planning on moving your taxable account anyway and looking to save on the TFSA transfer fee?


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## slacker (Mar 8, 2010)

Yes.

TFSA withdrawal: cost $0
RRSP stayput: cost $0
TAXABLE transfer: cost $130, but new brokerage will pay for it. (only one though)

But the question is regarding what would happen if I withdraw from TFSA in-kind into my taxable trading account. Would I then have to pay for taxes indicated here?

http://ca.ishares.com/content/strea...y/resource/press_release/pr_2010_11_18_en.pdf

Taxes (and paperwork) that I otherwise wouldn't have to pay if I had just withdrew in-cash.


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## cardhu (May 26, 2009)

slacker ... you explained clearly enough. 

There is no certificate required for a transfer in kind ... whether you choose to transfer in cash or in kind depends on whether or not you intend to continue owning that particular ETF. ... that’s about all there is to it but the annual cap gain distributions of certain ETFS do complicate things a little. 

There really isn’t anything to “skip out” on ... as long as the ETF resides in the TFSA, there is no tax owing on any distributions, and if you transfer the ETF into a non-reg account, but sell it by Dec 23 (assuming a transfer can be implemented that quickly), there would also be no tax owing on distributions (because you wouldn’t receive the distribution) ... so you see, you’d owe zero tax either way, and you wouldn’t be skipping out on anything. 

If you transferred the ETF out before the record date, and continued to hold it to receive the distribution, you’d expose yourself to taxation on a full year’s worth of cap gains distributions, effectively reversing the tax-free status that you presently enjoy, and doing it retroactively to boot ... if the distribution is substantial, this would be something to avoid. But for heaven’s sake don’t feel guilty about avoiding it. And don't worry about CRA, there's nothing in any of this for them to "notice". 

Bottom line ... avoid taking the cap gain distribution in a non-reg account if it is at all substantial ... cap gains in a non-reg account enjoy a moderate tax-efficiency, but for the vast majority of the population, they are far from the most tax-favoured form of investment income ... in any event, in the particular case you describe, volunteering to pay tax on returns that presently are tax-free would be a mistake .... good catch.


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## humble_pie (Jun 7, 2009)

slacker far from being confused, i clearly understand that your first post was poorly expressed and misleading.

what you asked about was a withdrawal in kind in order (so you said) to save the cost of re-purchasing the same securities "in my new account in a different brokerage."

then you segued into 4 paragraphs dwelling on your wish to avoid the capital gains distribution and your reluctance to do any paperwork necessary to report capital gains.

so i replied to those 2 points.

in a 2nd post you contradict yourself. Now your story is that you are not transferring to a different brokerage at all, but remaining at the original brokerage & simply "dumping" from tfsa to non-registered.

and finally, in a 3rd post your story changes again. Now you seem to be trying ...

sorry time's up. This is a meandering little story that's going nowhere. But you know what. Stick with cardhu. He specializes in advising impressionable newbs. You're in good hands.


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## Four Pillars (Apr 5, 2009)

Slacker - your first post was crystal clear. Mr. Not-Humble-At-All is completely out to lunch on this one.

This move, which I termed the "December Strategy" when I wrote about it:

http://www.moneysmartsblog.com/tfsa-institution-transfer-strategies/

entails selling the securities, doing a withdrawal from the TFSA (which has to be cash) and then rebuying the securities at the new brokerage. As CC points out - if you just do a transfer in-kind, you will be hit with the transfer fee.

I hadn't thought of it before, but this strategy is quite limited (I need to do a post on this). If you own enough securities, then the trading costs could add up to more than the transfer fee that you are avoiding. 

Another factor, is that if you have any decent amount of money - you should be able to get the new brokerage to pay for the transfer fee. Obviously most TFSA accounts are still fairly small, but in a few years - just getting the transfer fee covered is probably a better strategy and do a transfer in-kind.

Where this strategy makes more sense is for high interest savings accounts where there are no trading fees.

As for the capital gain dividend - If the security is in the TFSA, then it isn't relevant. If you own the security in a non-registered account (which doesn't make sense for this move), then you can avoid the distribution by selling, however as Humble noted, you could be looking at capital gains from the sale.

If you are going to do this strategy, then you should probably sell the securities inside the TFSA. Do a cash withdrawal from the TFSA and recontribute that cash to your new TFSA in January.


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## cardhu (May 26, 2009)

FP said:


> If you own the security in a non-registered account (which doesn't make sense for this move)...


It could make sense, if slacker was planning to move both a TFSA and a non-reg account over to the new brokerage ... if the new brokerage is willing to cover TDW’s $135 transfer fee, but only on one account, then it could make sense to consolidate the TFSA into the non-reg account, temporarily, in order to reduce the number of transfer fees to one ... with another security, it would probably work just fine ... however, the unfortunate timing of the cap gain distribution does throw a wrench into the scenario for this particular holding.



> _... then you can avoid the distribution by selling, however as Humble noted, you could be looking at capital gains from the sale._


Perhaps, but how much capital gain could possible accrue in 3 days? This is a non-issue (ie. an irrelevant distraction from the subject at hand). 

Still, if the ETF has to be sold in order to avoid volunteering for a tax bill that otherwise wouldn’t exist, then it may as well be sold inside the TFSA.


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## Four Pillars (Apr 5, 2009)

cardhu said:


> It could make sense, if slacker was planning to move both a TFSA and a non-reg account over to the new brokerage ... if the new brokerage is willing to cover TDW’s $135 transfer fee, but only on one account, then it could make sense to consolidate the TFSA into the non-reg account, temporarily, in order to reduce the number of transfer fees to one ...


Hey - this is a great idea! I'm going to steal it and mention it in my post.


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## CanadianCapitalist (Mar 31, 2009)

cardhu said:


> Bottom line ... avoid taking the cap gain distribution in a non-reg account if it is at all substantial ... cap gains in a non-reg account enjoy a moderate tax-efficiency, but for the vast majority of the population, they are far from the most tax-favoured form of investment income ... in any event, in the particular case you describe, volunteering to pay tax on returns that presently are tax-free would be a mistake .... good catch.


Agreed. If you can wait until Dec. 24th to withdraw in-kind from the TFSA, you can avoid capital gains distributions and associated paperwork. 

If you do withdraw in-kind before the ex-dividend date, you'll pay capital gains taxes. Your ACB will be adjusted by the distribution amount. HOWEVER, when you contribute the security back to the TFSA (assuming price remains the same), you'll have a capital loss. BUT, you can't claim this capital loss because you are transferring a security to a TFSA. Therefore, it's best to avoid capital gains distributions in your taxable account.


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## slacker (Mar 8, 2010)

Thanks all, I will do as instructed.

On a secondary note regarding capital gains distributions. I have some XSP and TD US e-series in my non-registered account. I plan on switching them over to VTI anyway. Does it makes sense to sell it soon, to avoid the capital gains distributions? I'll realize some capital gains anyway, but the timing can help me reduce paperwork.


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## Eclectic12 (Oct 20, 2010)

cardhu said:


> [ ... ]
> 
> Perhaps, but how much capital gain could possible accrue in 3 days?
> This is a non-issue (ie. an irrelevant distraction from the subject at hand).
> ...


Maybe ... maybe not ... some of the mutual funds I used to have would assess the gain as a lump sum in Dec. So instead of 3 days, the hit may be as much as a full year.

I'd recommend checking first.


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## mordko (Jan 23, 2016)

I feel like this is a dumb question, but...

- If XIC has ex-div and record dates in December, but the dividend payment date is in January, in which year is the distribution taxed? 

- If XIC distributions have a tiny fraction classified as "foreign income", will I need to split them out from "eligible Canadian dividends" on tax return?


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## Eclectic12 (Oct 20, 2010)

mordko said:


> I feel like this is a dumb question, but...


No such thing as a dumb question ....




mordko said:


> ... - If XIC has ex-div and record dates in December, but the dividend payment date is in January, in which year is the distribution taxed?


Year it is paid ... the other dates are documentation.




mordko said:


> ... - If XIC distributions have a tiny fraction classified as "foreign income", will I need to split them out from "eligible Canadian dividends" on tax return?


Assuming it's a taxable account, what I've received is a T3 form that summarizes for the different types of income (ex. eligible dividends, foreign income, RoC). The matching summary document breaks it down by each investment.


Cheers


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## mordko (Jan 23, 2016)

Great, thanks! The only thing is that they seem to recommend to be careful trusting T3 with ETFs... 

And January distributions are included in the December tax slip in this example http://www.taxtips.ca/personaltax/investing/taxtreatment/etfs.htm


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## Eclectic12 (Oct 20, 2010)

I'll check to make sure my eyes aren't crossing ... but the references to Jan I am seeing are for phantom distributions - which only come into play when one sells the Canadian domiciled ETF (apparently phantom distributions don't exist for a US ETF).

The times I had an ETF in a taxable account - the yearly taxed distributions were correctly recorded on the T3 (ex. CG associated with a cash payment, Eligible dividends, foreign income etc.). RoC also affects the ACB where in an ETF it typically is too small to come into play until the sale. (Some REITs I have pay 80 to 100% of the distribution as RoC.)


Cheers


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## mordko (Jan 23, 2016)

OK, I think I get it:

- Distributions are taxed in the year that January falls in, aka year when you got the money. That includes eligible Canadian distributions, foreign dividends, etc... 

- Anything that impacts ACB applies to the previous year, specifically to the shares held on "ROC distribution" or "non-cash distribution" dates. 

- Capital gains tax for reinvested capital gain distributions applies to the year that includes December. Also, you need to adjust ACB for the number of shares held on each date when reinvestment occurred. 

Right? 

Thank you.


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