In Davidson & Company’s May newsletter they provide information on superficial loss rules under the Income Tax Act, where “taxpayers sell property at a loss and then purchase or repurchase the same or identical property within a specified period of time.”
They outline the following instances where the rule “more particularly” applies:
- A taxpayer (whether an individual or a corporation) disposes of property at a loss;
- The taxpayer or an “affiliated person” (described below) acquires the same property or an identical property in the period that begins 30 days before the disposition and ends 30 days after the disposition; and
- That taxpayer still owns the property or identical property at the end of the period.
Superficial Loss Rules for Individuals
The Davidson & Company May Tax Update newsletter goes on to provide the following information, as it concerns individuals.
When the superficial rules apply to a taxpayer who is an individual, the taxpayer’s loss on the sale of the property is denied and deemed to be nil. However, the loss is not necessarily lost forever, because it is added to the cost of the newly acquired property or identical property. As a result, that property effectively inherits the accrued loss, which will either be realized at a later time and/or serve to reduce a gain at a later time.
On December 1, 2013, Jake sold 1,000 common shares in XCorp at a loss of $10,000. On December 20, 2013, in a different brokerage account, he bought 1,000 common shares in XCorp for $30 each, for a total cost of $30,000. He sold the 1,000
shares on March 1, 2014 for $42,000.
As a result of the superficial loss rules, Jake’s $10,000 capital loss is denied and deemed to be nil. However, the $10,000 denied loss is added to the total cost of his 1,000 shares acquired on December 20, 2013, which becomes $40,000. Therefore, on the sale of the shares in March 2014, his capital gain is $2,000 rather than $12,000. One-half of the $2,000 gain, or $1,000, is included in his income as a taxable capital gain.
As discussed above, the rules can apply where either you or an ‘affiliated person’ acquires or re-acquires the new property or identical property within the specified period of time. For these purposes, an affiliated person includes your spouse or common-law partner, a corporation that you control, a partnership in which you are a majority-interest partner, among others.
Interestingly, an affiliated person does not include your child or other relative, so that the rules do not apply if you sell property at a loss to such individuals.
Link to download: Davidson & Company May Tax Update newsletter