A reader asked a question the other day about superficial loss rules when Spouse A sells a security for a loss but Spouse B buys that same security within 30 days. I thought I would post the answer for all to see as it is an interesting question.
Remember, anything you read here should be verified with your own professional advisor before making any decisions/transactions. I have no formal tax training.
Here’s the original question:
If I trigger the superficial loss rules after completing a prescribed rate loan to my spouse, does the asset assume my original cost base? ie: I buy RY shares at $60, sell at $50 within 30 days following this sale, [then] I make a loan to my spouse and she uses the loan proceeds to buy RY at $50 – is her ACB $60?
You can read about superficial loss rules in more detail here (and why they aren’t THAT big of a deal). Essentially, if you sell a security at a capital loss and then buy back that same security within 30 calendar days you lose the ability to claim that capital loss – this is known as a superficial loss.
The reader is trying to figure out a way to avoid the superficial loss rules while still acquiring back the security within 30 days. He refers to a loan to his spouse at a prescribed interest rate, this is in reference to “income splitting”. If you give your spouse money to invest, then the income on those investments are normally “attributed” back to you – this falls under what is known as the “attribution rules”. To avoid this, instead of giving the money to your spouse you would loan it to them and you must charge interest to them which is at least the prescribed interest rate set out by CRA. If you do that, you can avoid attribution back to you of the income generated by those investments.
Superficial loss rules and attribution rules can be thought of as two separate discussions. In fact, we don’t even need to talk about attribution rules here and the use of a loan at a prescribed rate to avoid attribution. Perhaps I’ll write about that tomorrow.
In this case, you can actually avoid the superficial loss rules as long as Spouse B holds the security for at least 30 days after they bought it. The superficial loss of Spouse A is added to the purchase price of that security for Spouse B. So in this particular case, Spouse B’s ACB (Adjusted Cost Base) would indeed be $60 ($50 purchase price + $10 superficial loss from Spouse A). There is no need to even bring up a prescribed rate loan to your spouse if we are focusing on circumventing the superficial loss rules.
What we’ve just described is a mechanism to transfer capital losses from one spouse to another. This would be a prudent strategy to discuss with your advisor if Spouse B has capital gains from the last three years that have not been offset and they do not have securities with unrealized capital losses but Spouse A does hold securities with non-realized capital losses – this could reduce the household tax bill.