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 particular scenarios?
Position: No in one, yes in the other.
Reasons: Application of the Law
2002-017850
XXXXXXXXXX Karen Power, CA
(613) 957-8953
January 15, 2003
Dear XXXXXXXXXX:
Re: Superficial Losses
We are writing in response to your letter of December 6, 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 specific situations related to the purchase and sale of securities. We assume for the purpose of our comments that the securities disposed of are capital property.
You have provided us with the following scenarios:
Scenario 1:
1. Mr. A acquires 200 shares of Aco for $100 per share on January 15, 2002.
2. Mr. A sells 100 shares of Aco at $50 per share on June 30, 2002.
3. Mr. A does not purchase or sell any additional shares in Aco, or any other shares that could be deemed to be identical to such shares during the remainder of 2002.
Scenario 2:
Items 1 & 2 are the same as in scenario 1 above.
3. Mr. A purchases 100 additional share of Aco at a cost of $25 per share on July 15, 2002.
Under scenario 1, it is your opinion, that since there has been no acquisition of property that is the same or identical to the Aco shares during the period beginning 30 days before the disposition and ending 30 days after the disposition, the resulting loss would not be considered a "superficial loss" as that term is defined in section 54 of the Act.
On the other hand, you acknowledge that the loss that results under scenario 2 would be properly characterized as a "superficial loss" as that term is defined in section 54 of the Act.
As you know, 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.
We agree with your analysis. Under scenario 1, provided the disposing taxpayer or a person affiliated with the disposing taxpayer has not acquired or does not have a right to acquire the same or identical property during the period that begins 30 days before the disposition and ends 30 days after the disposition the loss would not be a superficial loss.
Furthermore, we would agree that the loss which results under scenario 2 will be a "superficial loss" as defined in section 54 of the Act, provided the taxpayer or an affiliated person still owns or has a right to acquire the same or identical property at the end of the 30-day period following the disposition.
Although the superficial loss cannot be deducted immediately, the denied loss can generally be added to the adjusted cost base of the remaining same or identical property pursuant to paragraph 53(1)(f) of the Act.
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Customs and Revenue Agency.
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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