30 November 2005 External T.I. 2005-0150811E5 - Superficial loss on security transactions

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Calculation of 61 day period of the superficial loss rule

Position: Confirm and give example

Reasons: 30day period before and after the disposal refers to any acquisitions during that period.

							2005-015081
XXXXXXXXXX 								C. Tremblay, CMA
(613) 957-2139
November 30, 2005

Dear XXXXXXXXXX,

Re: Superficial Losses:

We are writing in response to your letter of September 15, 2005, and our telephone conversation (XXXXXXXXXX/Tremblay) of October 28, 2005, wherein you requested our comments to three questions regarding the application of the definition of "superficial loss" in section 54 of the Income Tax Act (the "Act") related to the purchase and sale of securities. You also asked a supplementary question dealing with identical properties and tracking shares. We assume for the purposes of the following comments that the securities disposed of are capital property.

Our Comments:

Written confirmation of the tax implications arising from particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request pursuant to Information Circular 70-6R5. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide you with some general comments, which may be of assistance.

In general terms, subparagraph 40(2)(g)(i) of the Act provides that a taxpayer's loss from the disposition of property is nil to the extent that it is a "superficial loss". Although the superficial loss cannot be deducted immediately, the denied loss can generally be added to the adjusted cost base of the same or identical property pursuant to paragraph 53(1)(f) of the Act. These rules operate to defer the recognition of losses for income tax purposes.

Section 54 of the Act defines in which circumstances a loss from the disposition of property will be a superficial loss. Generally, a superficial loss will occur when a taxpayer disposes of capital property at a loss and:

a) during the period that begins 30 days before the disposition and ends 30 days after the disposition, the disposing taxpayer or a person affiliated with the disposing taxpayer acquired the same property or an identical property (referred to as "substituted property"); and

b) at the end of the period discussed in a) above, the disposing taxpayer or a person affiliated with the disposing taxpayer owned or had a right to acquire the substituted property.

The Canada Revenue Agency administratively accepts that the amount of the superficial loss may be determined by using the following algebraic formula:

	SL = (Least of S, P and B)/S x L
	Where:
		SL is the superficial loss,
	S	is the number of items disposed at that time,
	P	is the number of items acquired in the 61-day period,
	B	is the number of items left at the end of period, and
	L	is the loss on the disposition as otherwise determined.

In answer to your 1st question, we agree that the number of items acquired in " ...the 60 day period..." as stated in document 2002-014035 should read "...the 61 day period...". This has since been revised in documents 2002-0176785 and 2004-0073011.

Your second enquiry asks whether the initial purchase of a security that is followed by a partial disposition at a loss within 30 days after the initial purchase would be considered a superficial loss, which would be added to the adjusted cost base (the "ACB") of the remaining shares/units.

Your question refers to an initial purchase. The superficial loss provision requires an acquisition of substituted property that is identical to the property during the period that begins 30 days before and ends 30 days after the disposition and at the end of the period, the taxpayer or a person affiliated with the taxpayer own or have a right to acquire the substituted property. In your example, there would need to be a secondary purchase after the initial purchase in order for the provision to apply. Further, if the taxpayer or a person affiliated with the taxpayer does not own the same property or an identical property (the "substituted property"), or does not have a right to acquire such property, at the end of the 30-day period following the disposition the loss would not be a "superficial loss".

In your third enquiry, you give us an example and ask us to confirm that B in the above formula which represents "the number of items left at the end of the period" actually means the number of items left of the total number acquired during the period, minus the total number disposed of during the period. Generally, we are of the view that the number of items left at the end of the period means all the items that are identical to the particular property including the initial purchase.

In your example, you state the following:

January 1, 2005 - bought 100 shares of X Inc. for $300.

March 1, 2005 - bought 100 additional shares of X Inc. for $100.

Result: Total owned at March 1,2005 - 200 shares of X Inc. at an ACB of $2.00 per share

The following day, on March 2, 2005 100 shares of X Inc are sold for $100 with a resulting capital loss of $100.

No further transactions occur in the 30-day period following March 2, 2005.

You ask whether this $100 capital loss is allowable and not be considered a superficial loss because although there are still 100 shares remaining 30 days after the disposition, the quantity of shares acquired in the 61-day period does not exceed the quantity disposed of during the period.

In your example, the capital loss of $100 is a superficial loss because 30 days prior to the disposition of March 2, 2005 (backwards from March 1, 2005 to January 31, 2005), shares of X Inc. are acquired that are identical to the initial purchase of January 1, 2005. Accordingly the provisions of section 54 "superficial loss" would be applicable and a superficial loss would occur.

SL= (least of S ($100), P ($100), and B ($100) / S ($100) x L ($100)
= $100

You provide a supplemental question where you include a mutual fund information sheet as background to your question. You ask whether or not different share classes in the same mutual fund corporation need to be tracked separately as identical properties for ACB share values. In our opinion, the shares need to be tracked separately, as the ACB of those shares are relevant in determining the capital gain or capital loss from a disposition. However, a disposal of one class of share, and an acquisition of a different class of share within the same corporation will not be considered a disposition pursuant to section 51 of the Act; the ACB in total remains the same, the ACB per share is simply adjusted.

We trust our comments are of assistance to you.

Yours truly,

For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch