Generally, capital losses can only be claimed to offset capital gains recognized during the year. A common strategy utilized by taxpayers is to trigger capital losses late in the year to offset a portion of the gains recognized throughout the year thereby reducing income taxes payable. You must be aware of the superficial loss rules if this is a strategy you are considering.
A capital loss is considered a superficial loss if the following two conditions are met:
You, or a person affiliated with you, buys, or has a right to buy, the same or identical property (called “substituted property”) during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale.
You, or a person affiliated with you, still owns, or has a right to buy, the substituted property 30 calendar days after the sale.
A person affiliated with you generally includes your spouse or common-law partner, a corporation controlled by you or your spouse, a partnership in which you have a majority interest, and a trust in which you or your spouse are the primary beneficiaries. It is important to note that these rules apply if you transfer securities with accrued losses to a registered account such as a RRSP or TFSA.
An identical property must be the same in all material respects. For example, different classes of shares of a corporation are generally not identical properties unless they have the same rights, such as dividend entitlement and voting rights. Mutual funds or exchange traded funds offered by different financial institutions may be identical if they hold the same securities. It is also important to note the “right to buy” part of the condition. A call option to purchase the same security could trigger the superficial loss rules.
If the above two conditions are met, the superficial loss can not be claimed to offset capital gains. Instead, the amount of the loss will be added to the cost base of the substituted property. In effect, the amount of the superficial loss gets deferred until a future sale of the substituted property.
To avoid application of these rules, you or the affiliated person must not purchase the identical property during the 61 days period beginning 30 days prior to the settlement date and ending 30 days after the settlement date. The rules will also not apply if the security is repurchased and then sold again within 30 days after the original settlement date. If you sell a security and purchase a lesser amount of an identical property, then a pro-rated portion of the loss will be denied as a superficial loss.
Superficial loss rules do not apply in certain circumstances. For example, it does not apply to deemed dispositions occurring as a result of emigrating from Canada, deemed dispositions occurring as a result of the death of a taxpayer or changes in use of property. As the rules only apply to dispositions of capital property, superficial losses will also not apply to sales of property that are considered inventory, such as for those in the business of selling real estate or securities.
The superficial loss rules are complex and should be considered when disposing of capital properties.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA