14 January 2003 External T.I. 2002-0176785 - SUPERFICIAL LOSSES

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: Do the superficial loss rules apply to a particular scenario?

Position: Yes

Reasons: Application of the Law

XXXXXXXXXX 	2002-017678
		Karen Power, CA
(613) 957-8953
January 14, 2003

Dear XXXXXXXXXX :

Re: Superficial Losses

We are writing in response to your letter of November 26, 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") to a particular series of 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 XXXXXXXXXX services office is located at XXXXXXXXXX. However, we are prepared to provide you with some general comments which may be of assistance.

As you may know, 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.

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 are defined in subsection 251.1(1) of the Act and 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.

There are a number of exceptions to the superficial loss rules. For example the rules do not apply to deemed dispositions arising because of ceasing to be a resident of Canada; deemed dispositions arising because of death and deemed dispositions on a change in use of property among others.

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.

The Canada Customs and 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 our view, the realized loss in the example you provided, would be considered a superficial loss as defined in section 54 of the Act because substituted property was acquired within the 30-day period preceding the disposition, and the same or identical properties were still owned at the end of the 30-day period following the disposition. Applying the above formula to your situation will result in the entire loss being considered a superficial loss. However, the amount of the denied superficial loss may be added to the cost of the remaining same or identical properties pursuant to paragraph 53(1)(f) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

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