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: A taxpayer who owns 60 shares of a corporation disposes of 50 shares at a loss. Of the 60 shares owned at the time of the disposition, 10 shares were acquired during a period of 30 days before the disposition. Moreover, another 10 shares were acquired during a period of 30 days after the disposition such that the taxpayer owns 20 shares of that corporation at the end of that period. To what extent will the loss realised on the disposition of the 50 shares be considered a "superficial loss" ?
Position: The loss on the disposition of 20 shares will be considered a "superficial loss".
Reasons: The taxpayer has acquired 20 identical shares during the 61-day period described in the definition of "superficial loss" in s.54 of the Act (the "substituted property") and the taxpayer still owns the 20 identical shares at the end of the 30-day period following the disposition.
P. Massicotte, CA, M.Fisc.
September 22, 2004
Re: Superficial Loss
This is in response to your email of April 22, 2004 requesting our comments in connection with the application of the definition of "superficial loss" described in section 54 of the Income Tax Act (the Act) in the hypothetical situation described below.
The facts of the situation, as we understand them, are as follows:
1. An employee ("Mr. A") purchases common shares of his employer ("Canco") on a regular basis as part of a "stock purchase plan" offered to all the employees of Canco ("the Plan"). We have not been provided with a copy of any documentation regarding the Plan.
2. As of May 31, 2003, Mr. A owned 50 common shares of Canco.
3. During the month of June 2003, Mr. A acquired another 10 common shares of Canco and owned, as of June 30, 2003, 60 common shares of Canco.
4. As of July 1, 2003, the shares had lost substantial value and Mr. A decided to sell 50 common shares of Canco at that time. The adjusted cost base for the 50 common shares sold exceeded the proceeds of disposition obtained for those shares and a loss was realised, pursuant to paragraph 40(1)(b) of the Act.
5. Notwithstanding its substantial loss of value, Mr. A continued to buy common shares of Canco. During a period of 30 days that followed the disposition of the 50 shares on July 1, 2003, Mr. A acquired another 10 common shares of Canco.
6. All the common shares of Canco owned by Mr. A were on capital account. In addition, all the common shares of Canco acquired during the period described above are identical and cannot be distinguished from each other.
You ask to what extent the loss realised on the disposition of the 50 shares in the above situation would be considered a "superficial loss" for the purposes of the Act. You suggest that the two (2) blocks of 10 shares acquired during the relevant 61-day period are not the same or identical to the block of 50 shares disposed of because they are not of the same quantity.
The particular situation outlined in your letter appears to be a factual one, involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to provide you with the following general comments.
Based on our telephone conversation (Massicotte/XXXXXXXXXX), it is our understanding that the "stock purchase plan" referred to above consists of an arrangement whereby participating employees of Canco can acquire from their employer shares of its capital stock at 85% of their fair market value. Although no documentation has been provided to us with respect to the Plan, you suggest it is not a "stock option plan" as described in section 7 of the Act. Based on our understanding of the arrangement described above, it appears the shares of Canco are acquired in circumstances described in section 7 of the Act. Further discussion of what constitutes a "stock option agreement" for the purposes of section 7 of the Act can be found in IT-113R4, Benefits to Employees - Stock Options, which can be found on our website at: www.cra-arc.gc.ca.
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.
The issue of whether a particular property is identical to another property is discussed in our Interpretation Bulletin IT-387R2, Meaning of "Identical Properties" (Consolidated), which you can also find on our website. As indicated in paragraphs 1 and 2 of that publication, "identical properties", for the purposes inter alia of the definition of "superficial loss" in section 54 of the Act, are properties which are the same in all material respects, so that a prospective buyer would not have a preference for one as opposed to another. To determine whether properties are identical, it is necessary to compare the inherent qualities or elements which give each property its identity. The identical nature of properties is not affected by the fact that ownership is evidenced by means of certificates which may represent different quantities of the properties, as in the case of share certificates or gold certificates.
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 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".
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.
As explained in paragraph 11 of Interpretation Bulletin IT-456R, Capital Property - Some Adjustments to Cost Base, 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" 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.
When fewer items are bought during the period described in the definition of "superficial loss" than were sold during that period, 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
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, a portion of the loss realized in the situation described above would be considered a "superficial loss", as defined in section 54 of the Act, because "substituted property" was acquired during the 61-day period described in that definition, and the same or identical properties were still owned at the end of the 30-day period following the disposition. Applying the formula above to the situation described in this letter would result in the loss on the disposition of 20 common shares being considered a "superficial loss" for the purposes of subparagraph 40(2)(g)(i) of the Act. However, the amount of the denied "superficial loss" may be added to the adjusted cost base of the 20 common shares owned at the end of the 30-day period following the disposition, pursuant to paragraph 53(1)(f) of the Act.
We trust the above comments are of assistance to you.
Milled Azzi, CA
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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