20 October 2025 External T.I. 2023-0972451E5 - Subsection 7(1.31) and 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.

Principal Issues: The impact of subsection 7(1.31) on the calculation of superficial loss in given example, and whether securities designated under subsection 7(1.31) are excluded from being identical properties for the purposes of the superficial loss rules.

Position: No.

Reasons: Subsections 7(1.3) and 7(1.31) are provisions that dictate the order in which certain securities are disposed, and are not provisions that deem otherwise identical properties to not be identical. Subsection 47(3) deems shares designated under subsection 7(1.31) to not be identical to any other shares for the purposes of subsection 47(1) only.

XXXXXXXXXX	 								2023-097245
										Kah foo Koh

October 20, 2025

Dear XXXXXXXXXX:

Re: Subsection 7(1.31) and Application of Superficial Loss Rules

We are writing in response to your inquiry contained in a letter dated May 1, 2023, with respect to the interaction of subsection 7(1.31) of the Income Tax Act (the “Act”) (footnote 1) , section 47, and the rules in section 40 pertaining to a “superficial loss”, as defined in section 54 (the “superficial loss rules”), in the context of a hypothetical scenario involving an employee (“Employee A”) who was granted restricted stock units (“RSUs”) by Employee A’s employer (“X Inc.”). It is assumed that the issuance or acquisition of shares under the RSUs fell under the purview of section 7.

Pursuant to your hypothetical scenario, Employee A acquired the following shares of X Inc. under the RSUs, and on each date of acquisition realized a benefit under paragraph 7(1)(a) in an amount equal to the fair market value (“FMV”) of the shares on the relevant date:

• November 1, 2021: 1 share with FMV of $60, with resulting benefit of $60;
• December 1, 2021: 3 shares with FMV of $80 each, with resulting benefit of $240; and
• January 1, 2022: 1 share with FMV of $50, with resulting benefit of $50.

On December 15, 2021, Employee A sold 3 shares of X Inc., for net proceeds of $70 per share (or $210 in total). Pursuant to subsection 7(1.31), Employee A identified the 3 particular shares that were acquired on December 1, 2021 (the “Dec. Acquired Shares”) as being the 3 particular shares that were sold on December 15, 2021, which resulted in a loss of $30.

You asked if any portion of the $30 loss is a superficial loss such that it is deemed to be nil under subparagraph 40(2)(g)(i). In particular, you would like our views on whether the Dec. Acquired Shares identified under subsection 7(1.31) are excluded from being identical property for purposes of the superficial loss rules.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Subsection 7(1.31)

Subsection 7(1.31) is an exception to the ordering rule for the disposition of securities described in subsection 7(1.3). Subsection 7(1.3) deems a taxpayer to dispose of securities that are identical properties in the order in which the taxpayer acquired them for the purposes of specific provisions in the Act, including Subdivision C. Under subsection 7(1.31), when a taxpayer acquires a particular security and has disposed of a security that is identical to the particular security no later than 30 days after acquisition of the particular security, and provided certain conditions are met, the particular security is deemed to be the security disposed of.

Subsections 7(1.3) and 7(1.31) are provisions that dictate the order in which certain securities are disposed; they are not provisions that deem otherwise identical properties to not be identical for purposes of the Act.

Paragraph 47(3)(b) provides that securities to which subsection 7(1.31) applies are deemed, for the purpose of the cost-averaging rule in subsection 47(1), not to be identical to any other securities owned by the taxpayer. Consequently, the adjusted cost base (“ACB”) of each such security, and thus the capital gain or loss on the disposition of the security, is determined without regard to the ACB of any other securities owned by the taxpayer which would otherwise be identical. This deeming provision has limited application and does not apply for purposes of the superficial loss rules. In addition, there are no provisions in the Act which deem property identified in subsection 7(1.31) as not being identical for purposes of the superficial loss rules.

Accordingly, it is our view that the Dec. Acquired Shares identified under subsection 7(1.31) are not excluded from being identical property for purposes of the superficial loss rules.

Superficial Loss

Subparagraph 40(2)(g)(i) deems a capital loss to be nil if it is a “superficial loss” as defined in section 54.

Very generally, a superficial loss arises on the disposition of property where the same taxpayer or an affiliated person acquires the same or an identical property (the “substituted property”) within 30 days before and 30 days after the date of disposition (the “Relevant Period”), and the taxpayer or an affiliated person owns the substituted property at the end of the Relevant Period. Subject to certain conditions, paragraph 53(1)(f) may apply to add the amount of the disallowed loss to the ACB of the substituted property.

The hypothetical scenario presented satisfies the criteria for a superficial loss. Employee A both acquired and disposed of shares in X Inc. (the substituted property) during the Relevant Period and, at the end of the Relevant Period, Employee A continues to own shares in X Inc. As a result, subparagraph 40(2)(g)(i) deems Employee A’s loss of $30 to be nil.

However, when fewer items are bought during the Relevant Period than were sold during that period, or when fewer items are left at the end of the period than were bought during the period, the Canada Revenue Agency (the “CRA”) administratively accepts the use of a formula to calculate a superficial loss (the “Superficial Loss Formula”), described as follows:

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.

With reference to Variable B of the Superficial Loss Formula, it is the CRA’s view that the number of securities left at the end of the Relevant Period means all securities that are identical, including securities acquired before that period.

Applying the Superficial Loss Formula to the hypothetical scenario results in a superficial loss of $20 (2/3 x $30) for Employee A.

We trust these comments will be of assistance to you.

Yours truly,

Irina Schnitzer
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Unless otherwise stated, all statutory references in this note are references to the provisions of the Act.