Superficial loss

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The superficial loss rules are outlined in Section 54 of the Income Tax Act and are part of the Stop Loss Rules.[1][2]

This rule applies where a person or affiliated person[notes 1] acquires or had the right to acquire the same or identical property[3] within 30 days after the disposition or 30 days before the disposition of the property in question. The disposition could have been made to anyone. In these cases, the capital loss on the disposition is denied and the amount of the loss is added to the cost of the substituted property.

In the US, the terminology used is wash sale and mentions substantially identical instead of identical properties.

Exceptions to the rule

There are some exceptions to this rule including:

  1. a deemed disposition of a loan or deposit ceasing to be an eligible loan of an international banking centre business (paragraph 33.1(11)(a))
  2. a deemed disposition where a taxpayer acquires property for some purpose and later uses it for the purpose of gaining or producing income, or vice versa (subsection 45(1))
  3. a deemed disposition of a bad debt or a share, under the provisions of section 50
  4. a deemed disposition on the death of the taxpayer (section 70)
  5. a deemed disposition by a trust under subsection 104(4)
  6. a deemed disposition when a taxpayer becomes, or ceases to be, resident in Canada
  7. a disposition under the mutual fund reorganization rules of paragraph 132.2(1)(f)
  8. a deemed disposition where a life insurer changes the use of the property (subsection 138(11.3)
  9. certain dispositions under the mark-to-market rules applicable to financial institutions under subsection 142.5(2) and paragraph 142.6(1)(b)
  10. a deemed disposition of assets by an employee profit sharing plan under subsection 144(4.1) or 144(4.2)
  11. a deemed disposition where a corporation ceases to be exempt from Part 1 tax (subsection 149(10))
  12. the expiration of an option
  13. a disposition of a debt obligation where the loss was denied under paragraph 40(2)(e.1)
  14. a disposition by a corporation the control of which is acquired within 30 days after the disposition
  15. a disposition by a person that becomes or ceases to be exempt from tax under Part 1 within 30 days after the disposition

The purpose of this rule is to prevent taxpayers from realizing deductible capital losses without any real intention to dispose of the property in question.

What to do you while you wait

If you intend to repurchase the security after one month, perhaps as part of a tax loss harvesting strategy, there are alternatives to leaving cash in your brokerage account. To approximately maintain your previous exposure you could:

  • Buy bank B as a temporary substitute for bank A
  • Buy an ETF that tracks a slightly different index than the ETF that was sold (in which case repurchasing the original ETF may not be needed)

Notes

  1. An affiliated person is defined very broadly. It includes family members, trusts whose beneficiaries are family members (including Registered Retirement Savings Plans (RRSPs), Registered Education Savings Plans (RESPs), and Tax-Free Savings Accounts (TFSAs)), and Canadian controlled private corporations belonging to family members.

See also

References

  1. CA Business Advisor, Superficial Loss Rules,[dead link] viewed February 15, 2009.
  2. Capital Gains CRA guide (see page 35),[dead link] viewed February 15, 2009.
  3. CRA interpretation bulletin, viewed February 15, 2009.

External links