The intent of the “superficial loss” rules is to prevent you from claiming a loss if you sell property at a loss and reacquire it within a specified period. Basically, the government doesn’t want you to dump your loss properties, use the capital losses to offset capital gains, and then repurchase the loss properties within the specified period. More particularly, the superficial loss rules apply in the following circumstances:
- You dispose of capital property (typically shares or mutual fund units) at a loss;
- Either you or an “affiliated person” 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
- You or the affiliated person owns the property or identical property at the end of the period.
In these circumstances, your loss on the sale of the property is deemed to be nil. Although the loss is denied, it is normally not lost forever, because the amount of the loss 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 or will serve to reduce a gain at a later time.
On December 1, 2014, you sold 1,000 common shares in Acme Ltd. and incurred a $10,000 capital loss. On December 19, 2014, your repurchased 1,000 common shares in Acme Ltd. for $40 each, for a total cost of $40,000. You subsequently sold the 1,000 shares in April 2015 for $50,000.
The superficial loss rules will apply because the above criteria have been met. As a result, your $10,000 capital loss from the December 1 sale is denied. However, the $10,000 amount is added to the total cost of your shares acquired on December 19, which becomes $50,000. Therefore, on the sale of the shares in 2015, you will have no gain. Effectively, the previous $10,000 loss has been preserved through the addition to your cost of the shares, and has been allowed to offset the $10,000 gain that you would have otherwise realized in 2015.
As noted, the superficial loss rules can apply where either you or an “affiliated person” acquires or re-acquires the new property or identical property within the period of time described above. For these purposes, an affiliated person includes your spouse or common-law partner, a corporation that you control, and a partnership in which you are a majority-interest partner, among others. An affiliated person does not include your child or other relative, so that your losses can be triggered on sales of property to these individuals.
Taxpayers other than individuals
For taxpayers other than individuals, namely corporations and trusts, the result of the application of the superficial loss is somewhat different. The rules still apply in the same circumstances, i.e. a corporation sells a property at a loss, it or an affiliated person acquires the same property or identical property within the 30-day before and 30-day after period described earlier, and the corporation or the affiliated person continues to own the property at the end of the period.
However, the denied loss is not added to the cost of the acquired or re-acquired property. Instead, in general terms, the loss is subsequently allowed for the corporation once the property is sold to a non-affiliated person, as long as the corporation or affiliated persons do not own the property or identical property for a period of at least 30 days.