10 July 2002 External T.I. 2002-0143035 - SUPERFICIAL LOSS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Does the superficial loss rule apply to a number of scenarios submitted.

Position: General comments.

Reasons: Application of the Act.

XXXXXXXXXX 2002-014303

P. Massicotte, CA, M.Fisc.

July 10, 2002

Dear XXXXXXXXXX:

Re: Superficial Loss

We are writing in response to your letter of May 17, 2002, wherein you requested our comments regarding the application of the definition of "superficial loss" in section 54 of the Income Tax Act (the "Act") in a number of specific situations related to the purchase and sale of securities. We assume for the purpose 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. The Edmonton tax services office is located at Suite 10, 9700 Jasper Avenue, Edmonton AB T5J 4C8. However, we are prepared to provide you with some general comments which may be of assistance.

As you may know, in general terms, the Act provides that a loss from the disposition of property that is considered to be a superficial loss cannot be deducted immediately but rather must be added to the adjusted cost base of the same or identical property acquired within a prescribed period of time. 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:

? the taxpayer, or a person affiliated with the taxpayer, acquires the same or identical property (referred to as "substituted property") during the period starting 30 days before the disposition and ending 30 days after the disposition; and

? the taxpayer, or a person affiliated with the taxpayer, still owns, or has a right to acquire, the substituted property 30 days after the disposition.

For purposes of the definition of "superficial loss", a right to acquire a property is generally deemed to be property that is identical to the property.

If the taxpayer or a person affiliated with the taxpayer does not own a 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.

Persons affiliated with a taxpayer may include for example the taxpayer's spouse or common-law partner, a corporation that is controlled by the taxpayer or the taxpayer's spouse or common-law partner, or a partnership in which the taxpayer is a majority-interest partner.

If a taxpayer has a superficial loss and the taxpayer is the person who acquires the substituted property, the taxpayer can generally add the amount of the superficial loss proportionately to the adjusted cost base of the substituted property held after the disposition. This will either decrease the taxpayer's capital gain or increase the taxpayer's capital loss when he or she disposes the substituted property.

With respect to a number of questions you submitted, please note that where fewer securities are acquired during the relevant period than were of disposed during the period or when fewer securities are left at the end of the period than were acquired during the period, the Canada Customs and Revenue Agency ("CCRA") administratively accepts that the amount of the superficial loss be determined by using the following algebraic formula:

S/L = (Least of S, P and B)/S x L

where
	S/L	is the superficial loss,
	S	is the number of items disposed at that time,
	P	is the number of items acquired in the 60 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 such circumstances, a reasonable portion of the total loss incurred on the disposition of the securities is eliminated, resulting in a reasonable application of the superficial loss provisions of the Act.

For example, where a taxpayer disposes of all of his or her 100 class A common shares of X Inc. at a loss and acquires 5 identical shares within 30 days subsequent to such a disposition and still owns the shares at the end of the 30 day period, the superficial loss provisions will apply to reduce the loss in respect of 5 of the shares disposed as a block of 100 shares to nil and add that superficial loss to the adjusted cost base of the 5 shares subsequently acquired.

Similarly, where for example a taxpayer acquires 200 shares of a particular corporation and shortly thereafter disposes 100 of those shares at a loss within 30 days of the acquisition, it is our opinion that the 100 remaining shares constitute identical property of the taxpayer and the loss incurred would be a superficial loss, provided the remaining 100 shares were held by the taxpayer at the end of the 30 day period immediately following the disposition. In that case, the amount of the superficial loss would be added proportionately to the adjusted cost base of each of the remaining 100 shares.

Please note that the CCRA is responsible for administering the Act as adopted by Parliament and strives to carry out this goal fairly and uniformly for all taxpayers. Tax policy concerns, such as those raised in your letter, and amendments to the Act are the responsibility of the Department of Finance. Should you wish to pursue these concerns further, we suggest that you contact the Tax Policy Branch of the Department of Finance by writing to L'Eplanade Laurier, 140 O'Connor Street, Ottawa, Ontario K1A 0G5.

We trust the above comments are of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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