Why you should focus on Lower-Risk Investments in your TFSA

We recently had a question from a member of Pat McKeough’s Inner Circle that asked:

“Pat, I hold Intel in a non-registered account with a capital loss showing and am thinking of transferring it to my TFSA “in kind” with no tax penalty. Is Intel a suitable stock to hold in a TFSA?”

We’re not tax experts, so you might want to consider talking to an expert, especially if there are large funds involved.

However, transferring shares in kind into a TFSA does trigger a capital gain or loss for income tax purposes.

If the investment is in a capital gains position, you will have to declare it as a capital gain on your income tax return. But if there is a capital loss, you will not be able to declare the loss for tax purposes. This is because the government still sees you as the beneficial owner of the security.

Note that if you sell the shares in a non-registered account, you can deduct your loss against capital gains. For example, if he were to sell his Intel shares in 2023, he’d get to deduct the loss against his 2023 capital gains.

If you still have capital losses left over, you can carry them back up to three years (2022, 2021 and 2020), or forward indefinitely to offset future capital gains.

Hold Lower-Risk Investments in a TFSA

We think it is best to hold lower-risk investments (such as blue-chip stocks we see as buys like Intel) in your TFSA. That’s because you don’t want to suffer big losses in these accounts. If you do, you can’t use those losses to offset capital gains, as is the case with taxable (non-registered) accounts. You’ll also lose the main advantage of a TFSA: sheltering gains from tax. You won’t have gains to shelter if the value of your investments falls.

Note, however, that when you hold U.S. stocks like Intel (symbol INTC on Nasdaq) in your TFSA, Canadian shareholders pay a 15% withholding tax on dividends from U.S. stocks. In most cases, if you hold the stocks outside your RRSP, you can get a Canadian income tax credit to offset that tax. If you hold U.S. or foreign stocks in an RRSP, the withholding tax doesn’t apply. However, if you hold U.S. stocks in a TFSA, you can’t get back the withholding tax.

Intel yields 1.1%, and you will not be able to recover the 15% withholding tax if you hold it in your TFSA. However, it won’t necessarily be a significant amount — if you own 100 shares of Intel in your TFSA, you’ll lose $7.50 U.S. in withholding taxes in a year.

At the same time, instead of transferring in-kind, this member might consider selling his shares first to realize the capital loss (to offset any gains he might have — see above). He could then transfer the cash into his TFSA and then buy the shares of Intel.

Again, we’re not tax experts, but it appears that if you sell a stock outside your TFSA to trigger a capital loss, then you must wait until 30 days have passed from the time of the disposition to the time you buy it back in your TFSA in order to avoid superficial loss rules.

This rule states that if an investor, their spouse or a company they control, buys back a stock or mutual fund within 30 days of selling it, then they are not permitted to claim the capital loss for tax purposes. Failing to obey the 30-day rule will result in the capital loss being disallowed.

Do you have experience with this scenario? Leave a comment and weigh in. 

Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was published on Dec. 19, 2023 and is republished on Findependence Hub with permission.