In general terms, a superficial loss occurs where a person disposes of a capital property at a loss, and either the person or an “affiliated person” acquires the same property or an identical property in the period beginning 30 days before the disposition and ending 30 days after the disposition, if the person or affiliated person owns (or has a right to acquire) the property at the end of the period.
The loss is deemed to be nil and therefore cannot be claimed at that time.
If the disposing person is an individual, the amount of the denied loss is added to the cost of the new property acquired by that person or the affiliated person. In other words, the accrued loss becomes embedded in the cost of the new property to that person. As a result, on a later disposition of the property, the loss can be triggered, or serve to offset a gain that would otherwise result but for the addition to the cost of the property.
Corporation’s or trust’s or partnership’s loss
If the disposing person is a corporation or trust, or a partnership, the superficial loss is treated differently. The amount of the denied loss can be claimed by the corporation or trust or partnership at a later time, generally when the property is disposed of by the affiliated person and no affiliated person reacquires the property within 30 days after that subsequent disposition.
Meaning of “affiliated person”
The meaning of “affiliated person” is fairly simple when dealing with individuals only. Only spouses and common-law partners are affiliated. Therefore, for example, if you transfer a property with an accrued loss to your child or other relative, the superficial loss rules do not apply to deny your loss.
When dealing with corporations, the issue can become more complex. For example, a corporation is affiliated with the person that controls the corporation. A corporation is also affiliated with each member of an “affiliated group of persons” that controls the corporation. An affiliated group of persons means a group in which every person is affiliated with each other person of the group. In either case described above, the spouse or common-law partner of the person or member of the affiliated group that controls the corporation is also affiliated with the corporation.
More examples: Two corporations are affiliated if they are controlled by the same person, or one is controlled by one person and the other is controlled by a person affiliated with the first person. Additionally, two corporations are affiliated if each corporation is controlled by a group of persons, and each member of each group is affiliated with at least one member of the other group.
A partnership is affiliated with each “majority interest partner” of the partnership. In general terms, a majority interest partner is a partner whose share of partnership income from all sources of the partnership, plus the share of the partnership income of any person affiliated with the taxpayer, exceeds one-half of the total partnership income from all sources for the relevant period. Additionally, two partnerships are affiliated if each member of a majority-interest group of partners of each partnership is affiliated with at least one member of a majority-interest group of partners of the other partnership.
Confused yet? You’re not alone. The affiliated person rules are complex. When dealing with the superficial loss rules and not-so-obvious affiliated persons, it is important to get advice from a tax professional.