The superficial loss rules are intended to prevent you from selling a property at a loss where you or an “affiliated person” acquires the same or identical property within the time period described below. Where the rules apply, your capital loss will be denied.
The superficial loss rules apply where you sell capital property like securities, at a loss, and in the period beginning 30 days before the day of the sale and ending 30 days after the sale, you or an affiliated person acquire the same or identical property and own it at the end of that period. The period is therefore a total of 61 days (including the day of the sale).
An affiliated person includes your spouse or common-law partner, and a corporation that you or your spouse or partner control either together or individually. Control for these purposes normally means you and / or your spouse owning more than 50% of the voting shares of the corporation.
Interestingly, an affiliated person does not include your child, grandchild, parent or grandparent, or most other relatives. If one of these people acquires the property within the 61-day period, the superficial rules do not apply, so you can claim the capital loss. The benefit of claiming the capital loss is that it serves to offset any capital gains you have. And if you don’t have sufficient capital gains in the year, you can carry back the capital loss three years or carry it forward indefinitely, to offset capital gains in those years.
As noted, when the superficial rules do apply, your capital loss on your sale of the property is denied (technically, it is deemed to be nil). However, the amount of the denied capital loss is added to the adjusted cost base of the same or identical property acquired by you or the affiliated person. Because of this addition, a capital loss might be claimable in a future year.
You sell 1,000 common shares in Acme Ltd. for $10 each. Your adjusted cost base of the shares is $20 per share. Before considering the superficial loss rules, your capital loss would have been $10,000.
However, 20 days after sale, you purchase another 1,000 Acme common shares for $12 per share, and you still own them 30 days after the sale.
Due to the superficial loss rules, your initial capital loss of $10 per share is denied and deemed to be nil. However, the adjusted cost base of each new Acme share is increased by that denied loss, so your adjusted cost base of the new shares becomes $22 per share (your purchase price of $12 per share plus the denied capital loss of $10 per share).
Assume you later sell the new shares for $17 per share. You will have a capital loss of $5 per share. Half of that will be an allowable capital loss, which can be applied against any of your taxable capital gains.
As noted, the superficial loss rules can apply if you or the affiliated person acquires an “identical property”.
Usually, the rules apply to securities, although technically they can apply to any capital properties. For shares in corporations, identical properties basically mean shares of the same class of the same corporation but not shares in different classes of the corporation. Thus, if you sell common shares in Acme. at a loss and purchase preferred shares of a different class in Acme, the shares are not identical such that the superficial loss rules do not apply.
A similar rule applies to units in mutual funds or exchange traded funds. Basically, they will be considered identical if the units are in the same fund and of the same class of units.