How to transfer capital losses to your spouse who has earned capital gains during the year in his/her non-registered investment account?
Under the Income Tax Act (the Act), there is no provision that allows for a direct transfer of capital losses between spouses. Also, unlike in the US, it is not possible for spouses to file a consolidated tax return in which gains and loss would be netted. However, there is a planning option available to effectively transfer a capital loss to your spouse. This option is best illustrated by way of an example:
An individual (“Spouse1”) has a certain number of shares of XYZ company (the “Old Shares”) in respect of which he has unrealized capital losses of $15K while his spouse (“Spouse2”) has realized capital gains in excess of $15K in the 2020 taxation year. The Old Shares, which are capital property to Spouse1, have a fair market value of $5K, and cost Spouse1 $20K. Spouse1 sells the Old Shares on the open market for $5K. Immediately following the sale of the Old Shares by Spouse1, Spouse2 purchases for $5K on the open market the same number and type of XYZ shares (the “New Shares”). A short time following the expiration of 30 days after the sale of the Old Shares by Spouse1, Spouse2 sells the New Shares on the open market for their fair market value of $5K.
In this example, by virtue of the application of special rules in the Act referred to as the “superficial loss rules”, Spouse2 would realize a capital loss of $15K on the sale of the New Shares. In particular, the loss incurred by Spouse1 would be deemed to be a “superficial loss” since Spouse2 purchased identical shares within 30 days of the disposition by Spouse1 (the superficial loss rules apply if, at the end of 30 days after the sale by Spouse1, either Spouse1 or Spouse2 still owns shares that are identical to the Old Shares). Although the capital loss incurred by Spouse1 is deemed to be nil, the loss is added to the ACB of the New Shares acquired by Spouse2.
Consequently, when Spouse2 later sells the New Shares in the open market, a capital loss of $15K is realized by Spouse2 (i.e. Spouse1 will have effectively transferred his capital loss to Spouse2). Note that if Spouse2 sold the New Shares within 30 days of Spouse1’s sale of the Old Shares, Spouse1’s capital loss would not be a superficial loss (i.e. it is important to wait for the end of the 30-day period before selling the New Shares—the 30 days should be counted after the “settlement date” on the disposition of the shares, which is typically two to three days subsequent to the trade date).
The above technique can also be implemented in an alternative fashion. Under the alternative method:
the shares of XYZ company are sold by Spouse 1 to Spouse2 and an election is filed under a special provision of the Act (subsection 73(1)) for the transfer to occur at fair market value; and
more than 30 days after the sale of the shares by Spouse1 to Spouse2, Spouse2 disposes of the shares on the open market.
In this scenario, the capital loss incurred by Spouse1 in the first step would again be a superficial loss. Thus, provided Spouse2 waits 30 days before selling the shares in the open market, the capital loss on the shares would effectively be transferred to Spouse2 (i.e. as the capital loss in step 1 would be added to the ACB of the shares held by Spouse2). The election under subsection 73(1) must be submitted in writing to the CRA in the form of a letter. If the election were not filed, special rules under the Act (the “attribution rules”) would attribute the loss incurred by Spouse2 back Spouse1.
We will be pleased to work with you in implementing the capital loss transfer strategy if desired.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA