My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, July 4, 2011

RRSP Swaps - Be careful of the new “advantage” penalty provisions

On June 6th, the Federal Finance Minister, Jim Flaherty, re-introduced the Conservative government’s budget of March 22, 2011 (that was never passed due to the dissolution of parliament).

The June 6th budget re-introduces the proposed Registered Retirement Savings Plan (“RRSP”) anti-avoidance rules, including the introduction of “advantage rules” similar to those for Tax-Free Savings Accounts.

Simply put, an “advantage” is a benefit obtained from a transaction exploiting the tax attributes of an RRSP. One of the benefits explicitly targeted are asset purchase and sale transactions (“swap” or “RRSP strip” transactions) between RRSPs and other accounts held by the annuitant of the RRSP. An example of a swap or strip transaction would be if you transferred $15,000 of Research in Motion shares to your RRSP in exchange for $15,000 in cash from your RRSP account. The government is not concerned about swaps or strips, such as the above, which take place at fair market value, but rather frequent swaps that exploit small changes in asset value, such as the transfer of an illiquid stock that has a wide ranging bid and ask value so the fair market value on a given day is not necessarily clear and thus, taxpayers can exploit this uncertainty.

The “advantage” rules in relation to swaps and strips are effective starting July 1, 2011. The “advantage” rules impose a tax of 100% of the benefit received, a very harsh penalty. However, so long as the swap is done at fair market value, there will be no tax advantage gained and therefore no penalty will apply.

It should be noted that the budget proposals also re-introduced new rules in connection with “prohibited” and “non-qualified” investments in RRSP accounts. Rather than the current 1% per month penalty, an RRSP annuitant will be subject to a 50% special tax on the fair market value of any “prohibited” or “non-qualified” investment in their RRSP account. A swap transaction to remove a “prohibited” or “non-qualified” investment in an RRSP account, and also to avoid the new 50% tax, is permitted until the end of 2012.

I had heard rumblings that swaps were now prohibited by certain financial institutions and I could not understand why, since the legislation only talked about an advantaged gained on a swap, not the elimination of swaps.

However, I recently watched a video on the swap rules by Jamie Golombek of CIBC Private Wealth Management and now understand what is happening. Some financial institutions are concerned that the “advantage” rules may come into play unknowingly and want to eliminate the risk to themselves, their advisors and their clients. As a result, they are considering not undertaking any swaps. Since there is no tax advantage if a swap is undertaken at fair market value, the institutions are effectively disallowing swaps that are allowed under the Income Tax Act.

As Jamie notes, some institutions are considering allowing swaps of TSX listed shares, so stay tuned to see how this all shakes out.

Bloggers Note: There is now some concern that the CRA may take the position that even if a transaction is undertaken at equal value,  if the swapped security generates a greater return than the security transferred out, there is an advantage.

Thus, it would appear the prudent position is to not undertake swap transactions and most institiutions are not even allowing swap transactions.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.


  1. I've never heard of this swap idea before, so happily this will not impact me in any way.

  2. I have a federal Life Income Fund and I plan on transferring 50 per cent of the funds in that account to a RRSP under the 2008 provision that allows this one time unlocking. Will this new rule effect my transfer from my Life Income Fund to the RRSP as it would put me over my contribution limit? Could this be considered a swap under this new rule or be subject to these new rules?

  3. Hi Jeff, it is my understanding that the 50% unlocking option is regulated under the Pension Benefits Standards Regulations and not the Income Tax Act, which is where the “swaps” are regulated. So it is my understanding, they are mutually exclusive and the swap rules will not affect the unlocking provision.

    However, since I have minimal dealings with pension legislation, I would confirm such with the regulator of your pension plan before doing anything.

  4. The Blunt Bean Counter:
    Thanks for your reply! That is my understanding as well, but my pension plan administer seems to have no clue about these new RRSP rules. I can't see how this would be a swap since there is no exchange happening, its only a one way transfer from my Life Income Fund to my RRSP? It would in my mind be more of a contribution and in this case an over contribution, but it is not considered a contribution since it is just converting one registered vehicle to another and my plan administer has confirmed this as they have done quite a few of these since the provision to do this was done in 2008, but they don't understand these swap rules. Any help or information you could provide would be very helpful and appreciated. I need to be careful as if this 100 percent tax applied and I proceed with this unlocking I could be faced with close to a million dollar tax bill and the loss of a good portion of my retirement savings.


  5. Hi Jeff, unfortunately since this is a public blog all I can say is what I said in my prior post, my understanding is the same as yours; but if you want a definitive answer, I cannot provide it on a blog. Sorry, based on the quantum of your LIF you should call your accountant to confirm your understanding if your pension regulator cannot confirm.

  6. That is certainly understandable. Thanks for your help and time