Superficial Loss Rules in Canada

A reader had a question about claiming capital losses in a non-registered account and why you would want to avoid the superficial loss rule (which states that if you sell something at a loss and then buy it right back within 30 days you are not allowed to claim the capital loss for tax purposes). It’s best demonstrated with an example with explanations along the way. We will assume a fictitious 50% tax bracket to make the math easy.

Example

Let’s say we bought 1 share of company ABC for $5000. It later loses value over the year and is now only trading at $3000. Let’s assume we sell this share now for $3000. Let’s further look at buying it back at $3000 within 30 days and buying it back at $3000 after 30 days (obviously the stock will not just wait around to be bought at the price we want, so understand that this is for demonstrative purposes). Finally, we will assume that ABC increases to $6000 later on and we will sell it at that time.

We Immediately Buy It Back

In this case we are not allowed to claim the capital loss because the superficial loss rules apply, but we can add the loss to the adjusted cost base. We have a new investment with a cost base of $3000 + $2000 = $5000. When we eventually sell it for $6000 we now have a capital gain of $1000. The “taxable capital gain” is 1/2 of your capital gain which means that 1/2 of $1000 is subject to tax. $500 multiplied by the Marginal Tax Rate of 50% means we pay $250 in tax in this case.

If we did not sell the stock and just held it from $5000 to $6000, we would have had a capital gain of $1000, a taxable capital gain of $500 and tax payable of $250. The same result. What’s the big deal about avoiding the superficial loss rules you say??? Read on.

We Wait 31 Days Before Buying It Back

In this case we now have the ability to claim the capital loss. The “allowable capital loss” is 50% of the capital loss. This means the “allowable capital loss” is $1000. This allowable capital loss can be used to offset taxable capital gains in the year the disposition was made and up to three calendar tax years prior or carried forward indefinitely.

When we re-purchase ABC at $3000 after 30 days and then later sell it at $6000 again we have a capital gain of $3000, and a taxable capital gain of $1500. The taxable capital gain can be reduced by the $1000 allowable capital loss for a total taxable capital gain of $500. When multiplied by the Marginal Tax Rate of 50% we find that in this case only $250 of tax is owing. Wait a sec, this is the same tax payable as above. So really, what’s the big deal?

The Big Deal

The big deal is that by avoiding the superficial loss rules you can save money in tax today AND/OR in the future as opposed to only in the future if you trigger the superficial loss rule.

By being allowed to claim the loss you have more flexibility as to the timing of your tax savings.

Disclaimer: Check with a tax professional before making any financial decisions based on anything written by me (a NON tax professional!). Ditto with investing and other planning information I write. I reserve the right to be wrong. Always look both ways before crossing the street and for heaven’s sake don’t eat yellow snow! :P

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 30 comments
  • Jordan

    I think I have a way to avoid the 30 day holding period before buying it back. If you have a number of different investment accounts shouldn’t you be able to “harvest” the loss in one account, and buy it back immediately in another. For example sell something in my un-registered account and buy it in my RRSP, or sell it in my kid’s trust and buy it in my TFSA, sell it in my RESP and buy it in my corporation, etc.

    Yeah, I have 9 different investment accounts, it’s crazy like juggling chain saws.

  • Antony Pranata

    Hi Preet, thanks for the explanation. So, if we buy and back the same shares within “the same year”, both of them have the same result.

  • Millionaireby45

    Jordan,

    What you have described is not allowed. Even if your spouse were to buy the same security within 30 days then you can no longer claim the loss. You have to be very careful about this.

  • Millionaireby45

    Jordan,

    I forgot to mention in my previous post, but the worst mistake that you can make is to sell a security from a non-registered account for a loss and then buy that same security within a registered account in less than 30 days. By doing this, you will never be able to claim the loss on this stock.

  • Jordan

    @ Millionaireby45

    Really? The rules of a capital loss extend to other members of your family and between entirely separate accounts? Wow I’m glad I posted my idea, so where are the CRA rules on capital gains, I’d like to read them.

  • Charles in Vancouver

    One idea that came up on the Financial Webring Forum was to sell the XYZ stock, hold the cash and maintain exposure by writing a deep-in-the-money XYZ put option with a long expiry (so you’d now have a cash-covered put). There is always some risk you will be assigned within the 31 days, but if you aren’t, you still get to share in gains and losses of XYZ’s market price.

    The reasoning was that tax law denies the loss even if you acquire “the right” to purchase the shares during the 31 days (so buying a call option is out of the question). But when you write a put, you have no rights – it’s the counterparty who has all the rights.

    • TJ Machado

      Do you have confirmation from CRA that this is legit? I have been told a deep in the money put option is akin to a right for the most part.

  • Antony Pranata

    @Jordan: Check this out, http://www.cra-arc.gc.ca/E/pub/tg/t4037/t4037-e.html (section Superficial loss)

    It is mentioned there that “affiliated person” includes spouse, common-low partner, corporation controlled by you/spouse, etc.

  • tyler

    does anyone know if such a thing as “superficial gains” exists? Let’s say I own EWC (iShares TSX composite ETF on the NYSE) and wanted to sell it in order to buy XIC (iShares TSX composite ETF on the TSX). The obvious reason for doing so is that the latter has tax preferred dividends when filing Canadian taxes. If I had capital gains on the first trade then they’re made superficial by buying the equivalent stock. I’ve never come across such a thing within the Canadian Revenue Agency but thought I’d see if anyone else knew.

    • John Q Public

      Nope. No superficial gain rule. If you owe taxes, the government wants them immediately.

  • Mike

    Is the 30 day rule, calender rule business or calender days ?

  • Jordan

    @ Antony

    Thanks very much, it’s always good to find out the facts instead of just making guesses and assumptions like I first did. I’m surprised to the extent that a relationship is defined, I’ll have to be careful not to trip this condition even by accident.

    Cheers

  • Jordan

    @ Mike

    I can help with that after just reading the CRA link Antony shared, it says 30 calendar days.

  • Preet

    @Tyler: I have never heard of superficial gains, but best to confirm that with a tax specialist (although they will probably say the same thing).

  • The Tax Blogger

    Tyler,
    Superficial gains do not exist. When you sell a security at a gain and immediately buy it back, you have a real gain that is taxable.

  • Laura

    Hello, you can sell in your non-registered account for a loss and buy back immediately in your RRSP or TFSA – they are considered separate legal entities for tax purposes. SEE link below from CBC news: http://www.cbc.ca/money/story/2001/12/17/taxloss171201.html

  • Charles in Vancouver

    Laura, the CBC link you just potsed is 8 years old… check out this post from Canadian Capitalist:
    http://www.canadiancapitalist.com/2008/01/27/superficial-loss-rules-regarding-rrsps

    Quote: “After March 2004, CRA considers a loss as superficial if “a trust and its majority interest beneficiary (generally, a beneficiary who enjoys a majority of the trust income or capital) or one who is affiliated with such a beneficiary” buys (or has the right to buy) a property during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale. Since the RRSP is considered to be a trust and I am the beneficiary, my little plan won’t work anymore.”

  • Laura

    Hello,
    Go to Chapters and take a look at Gordon Pape’s new little red book on Tax Free Savings Accounts – you can read there about tax free savings acccounts and rrsp’s – selling in your non-reg account and then immediately making a cash contribution and buying back same stocks in your tfsa or rrsp is a recommended strategy versus an in-kind contribution to these accounts, where you lose your ability to claim a tax loss but must claim any gain. Ask Gordon Pape.

    • john

      How would the CRA know that you rebought stocks in the registered accounts as you do not report them on your taxes?

      • Preet

        If you ever get audited, it could certainly be dug up that way.

  • Charles in Vancouver

    Laura: CRA says the capital loss will be denied. Canadian Financial DIY contacted CRA in 2007 and they confirmed it:

    http://canadianfinancialdiy.blogspot.com/2007/09/capital-losses-and-superficial-loss.html

    “Update Oct.10 – Finally got a call back from Revenue Canada and the answer is now NO, you are not allowed to do it, or more precisely, your capital loss will be declared superficial and denied on your tax return. The relevant subsection is 251.1 (g) of the Income Tax as modified in 2005.”

    However since we seem to have a conflict between two sources, I will e-mail Gordon myself and ask him if his advice is in conflict with those links.

  • Preet

    @ Laura, Charles in Vancouver has kindly taken the words right out of my mouth – I am in full agreement with his comments. My belief is that you CANNOT sell, contribute and re-purchase the same securities (or even substantially the same securities) inside a TFSA or RRSP within 30 days and expect to claim a capital loss. But again, best to refer to your own tax professional for specific advice. Thanks to you both for your comments.

  • Laura

    You’re right, I should have been more careful to check the date on the article. With that misinformation in my head you can interpret what Gordon is saying incorrectly – my apologies!!!
    Laura

  • Matt

    I i trigger the superfical loss rules after completing a precribed rate 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, I make a loan to my spouse and she uses the loan proceeds to buy RY at $50.
    Is her ACB $60?

  • Preet

    Hi Matt, especially with specific advice you will want to verify with your own professional, but:

    The loss (superficial loss in this case) is added to your spouse’s Adjusted Cost Base. In your specific example she would add $10 (your superficial loss) to her purchase price of $50 for an ACB of $60. She would need to hold on to the shares for at least 30 days though.

    Welch, LLP put out this information which might be of interest: http://www.welchllp.com/publications/news/Income_Splitting.pdf

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