Superficial Losses and Other Disallowed Losses
Income Tax Act s. 53(1)(f), s. 54, s. 251.1(1) IT-456R Capital Property (Archived)
If shares (or other capital properties) are disposed of at a loss, this is considered a superficial loss and may not be deducted as a capital loss in the following circumstances:
A person affiliated with you includes, but is not limited to:
The superficial loss is added to the adjusted cost base (ACB) of the repurchased or substitute shares. When the repurchased or substitute shares are sold, the loss can be claimed.
Exceptions to Superficial Loss Rules
In some situations, such as when the disposal of the shares is the result of the expiry of an option, a superficial loss is deemed not to have occurred. See CRA's information on Non-superficial Losses.
If only some of the shares were disposed of during the 61-day time period (30 days prior + date of disposition + 30 days after), the remaining shares are considered "identical shares", and the superficial loss on that number of shares will be added to the ACB of the remaining shares.
Canada Revenue Agency's administrative policy, outlined in the above T.I., indicates how the superficial loss should be calculated when fewer items are bought during the 61-day period than were sold during that period. Formula from the T.I.:
SL (superficial loss) = (least of S, P and B)/S x L, where
Example using CRA administrative policy formula, assuming a loss of $1,000 on the sale of 50 shares, when the number of shares left at the end of the period are less than the number of loss shares sold in the period:
SL = 20/50 x 1,000 = $400
Example where the number of shares left at the end of the period are greater than or equal to the number of loss shares sold in the period (assume 20 shares owned prior to the period):
SL = 50/50 x $1,000 = $1,000
Using the superficial loss rules, capital losses can be transferred to a spouse or common-law partner by selling the loss shares, and having your spouse purchase those shares within 30 days (before or after you sell the shares). You are denied the superficial loss (see above), but the loss amount is used to increase the cost basis of your spouse's investment. Your spouse must hold the shares for more than 30 days after your disposition for this to work.
Losses will also be disallowed if shares are transferred to a Registered Retirement Savings Plan (RRSP) or to a Tax Free Savings Account (TFSA) at a loss. You may decide you have a good reason to make a transfer of a loss investment to this type of account. If so, when completing your tax return, do not enter this disposal on your Schedule 3, as the loss cannot be claimed.
If shares are disposed of at a loss inside your TFSA, there will be no superficial loss if the shares are repurchased within the TFSA within 30 days, as gains and losses in a TFSA are not taxable or deductible. If shares in your TFSA are in a loss position and you transfer them out of the TFSA to a non-registered account, superficial loss rules have no effect on this transaction. The market value at the time of the transfer will become the ACB of the shares in your non-registered account.
Canada Revenue Agency (CRA) Resources
Tax Tip: If you have sold shares at a loss, do not buy them back within 30 calendar days before or after the disposal (really a 61-day rule).
Revised: September 22, 2021
Copyright © 2002 Boat Harbour Investments Ltd. All Rights Reserved. See Reproduction of information from TaxTips.ca