Superficial Loss

See Also

Graphic Packaging Canada Corp. v. The Queen, 2001 DTC 861 (TCC), aff'd 2003 DTC 5007 (FCA)

In applying the version of the definition of superficial loss that applied to 1988 transactions, Archambault T.C.J. rejected the argument on behalf of the taxpayer that once a corporation controlled by the taxpayer in (i) of the definition had been identified, there was no requirement to determine whether that corporation was still controlled by the taxpayer at the end of the relevant period. Because, instead, there had been an intervening change of control of a corporation controlled by the taxpayer, the superficial loss definition did not apply to the transactions.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base 126

IRC v. Beveridge, [1979] T.R. 305

Shares transferable at will which were acquired in place of shares which had been subject to restrictions on the right to transfer, were not of the "same class" within the meaning of a particular provision of the Finance Act, 1965.

Words and Phrases
same class

Administrative Policy

7 October 2022 APFF Financial Strategies and Instruments Roundtable, Q.4

formula for prorating superficial loss is inapplicable where the number of shares held by affiliated persons has increased at the end of the 61-day period

On March 15, 2022, an individual disposes of all of his shares (being 2,000) of Pubco, and realized a capital loss of $10,000. On March 16, 2022, his spouse acquired 2,000 shares of Pubco. In addition, his RRSP had acquired 1,000 shares of Pubco on March 10, 2022. Finally, the individual acquired 500 shares of ABC Pubco on April 13, 2022.

CRA noted that since the number of substituted properties on hand at the end of the period beginning 30 days before and ending 30 days after the disposition of the shares to the taxpayer or an affiliated person was greater than at the time of the disposition, the formula (Deemed nil loss = (the lesser of S, P and B) / S x L) referred to in some CRA positions was inapplicable (i.e., the full $10,000 loss was denied).

In addressing the question of how the denied superficial loss of $10,000 should be allocated to the replacement shares pursuant to s. 53(1)(f), CRA stated that, in accordance with IT-456R, para. 12, the loss should be determined as if all the affiliated persons involved were one person, and then prorated on the basis of all the substituted properties held by each person at the end of the 61-day period.

Consequently, the $10,000 superficial loss would be allocated in proportion to the fractions 1000/3500, 2000/3500 and 500/3500 to increase the ACB of the 1,000 shares acquired by the RRSP, the 2,000 shares acquired by the individual’s spouse and the 500 shares acquired by the individual, respectively.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(f) superficial loss allocated on a pooled basis to shares held at the end of the 61-day period by affiliated persons 241
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.3) suspended loss rules engaged by shareholder, and shareholder’s RRSP acquiring and then holding identical shares during the 61-day period 107

7 October 2021 APFF Financial Strategies and Instruments Roundtable Q. 3, 2021-0896031C6 F - Règles sur les pertes apparentes

application of superficial loss rule to reacquisition of identical shares by spousal RRSP on the 30th day

Mr. A sold 1,000 shares of a listed company in a non-registered account on September 1, 2021 at a capital loss of $20,000. The RRSP of his spouse, Ms. B (who dealt with a different brokerage firm) acquired 1,200 shares of the same company on September 7, 2021. Ms. B’s RRSP sells the shares no later than September 28, 2021 (with settlement occurring two days later).

Does such sale (a) avoid the superficial loss rule, and (b) does the answer change if the shares so sold by the RRSP were reacquired by it on October 1, 2021?

(a)

After quoting the superficial loss definition, CRA stated:

Mr. A's loss is not a "superficial loss" … . [T]he RRSP trust under which Ms. B is the annuitant (a majority interest beneficiary) is a person affiliated with Mr. A who acquired a substituted property to Mr. A's property. However, the RRSP trust does not own the substituted property or have the right to acquire it at the end of the [30-day] period … .

(b)

[S]ubsection 27(5) of the Interpretation Act … specifies that where a time is expressed to begin after or to be from a specified day, the time does not include that day. In the situation presented, since the day of disposition would be September 1, 2021 and that day does not count, the last day of the period ending 30 days after that disposition would fall on October 1, 2021.

Consequently, in this situation, a person affiliated with Mr. A would have acquired a substituted property during the 30-day period after that disposition and would still own it at the end of that period. In these circumstances, subparagraph 40(2)(g)(i) would apply to Mr. A, with the result that his capital loss would be deemed to be nil.

Assuming that Ms. B's RRSP trust had instead reacquired the shares on October 2, 2021 … subparagraph 40(2)(g)(i) would not apply … .

However, the Income Tax Act contains a general anti-avoidance rule.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation Act - Section 27 - Subsection 27(5) counting 30 day period starting with disposition 150

7 July 2014 External T.I. 2014-0518561E5 F - Superficial loss

shares of Holdco as identical property to shares of Opco/transferred corporation wound-up but not dissolved within 30 days

Brothers A and B, who each hold 50% of the shares of Opco, dispose of those shares for their FMV to Holdco, another taxable Canadian corporation which is wholly-owned by Brother A, at a loss. In Scenario 1, Opco is wound-up into Holdco under s. 88(1) and dissolved before the end of the period terminating 30 days after the disposition (the "Period"). In Scenario 2, although the winding-up occurs within the Period (i.e., all assets are distributed and debts settled), all indications are that Opco will be dissolved in short order after the Period. Is the capital loss sustained by Brother A a superficial loss (on the basis that Holdco shares were identical property or that the Opco shares were not disposed of within the Period)? CRA stated (TaxInterpretations translation):

[I]nsofar as shares in the capital of Holdco...received by Brother A…were substituted property, the capital loss realized by Brother A would be a superficial loss… .[P]aragraph 1 of…IT-387R2…states that identical properties 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. …

Insofar as the shares…of Holdco were not received…as substituted property…[in Scenario 1] Holdco would be deemed by virtue of paragraph 88(1)(b) to dispose of the shares…of Opco at the moment of the dissolution of Opco, being within the Period. Therefore, neither Brother A nor Holdco was the owner of substituted property at the end of the Period. …

Scenario 2: …[W]here the particular requirements of paragraphs 5 and 9 of…IT-126R2 are satisfied and the capital loss sustained by Brother A is a genuine economic loss and not a theoretical or artificial loss…Holdco would be deemed to dispose of the shares...of Opco at the time of the liquidation, being before the end of the Period.

There was insufficient information for a GAAR analysis.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) transferred corporation wound-up but not dissolved within 30 days 149

12 September 2005 External T.I. 2005-0134631E5 F - Superficial Loss - Realization of Latent Loss

loss could be realized by 4 unrelated individuals transferring their equal shareholdings of Opco to Newco

Four unrelated individuals each holding 25% of the common shares of a small business corporation, transfer their shares to a corporation (“Newco”) with which they are not affiliated, thereby sustaining a capital loss. CRA indicated that, assuming that each of individual did not have de facto control over Newco, the loss sustained by each would not be a "superficial loss," and would not be denied by s. 40(2)(g)(i). Regarding s. 245((2), CRA stated:

[T]o the extent that there are no transactions carried out in the context of the Particular Situation with a view to circumventing those specific legislative provisions, it would probably be reasonable to consider that the Transaction would not directly or indirectly result in an abuse of the application of the provisions of the Act read as a whole … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) 4 unrelated individuals transferring their equal shareholdings of Opco to Newco could be a NAL transaction 179

22 September 2004 External T.I. 2004-0073011E5 - Superficial Loss

A taxpayer owning 60 shares disposes of 50 shares at a loss, with 10 of the 60 shares owned prior to the disposition having been acquired during the period of 30 days before the disposition and with there being a further 10 shares acquired during the period of 30 days after the disposition.

A loss on the disposition of 20 shares would be considered to be a "superficial loss".

15 January 2003 External T.I. 2002-0178505 - SUPERFICIAL LOSS

A definition of superficial loss would apply where Mr. A acquired 200 shares of ACO for $100 per share on January 15, 2002, disposed of shares of ACO for $50 per share on June 30, 2002, and purchased 100 additional shares of ACO at a cost of $25 per share on July 15, 2002.

30 October 1996 External T.I. 9632485 - SUPERFICIAL LOSSES AND NON-TAXABLE ENTITIES

As the cost amount of property is relevant for Part XI purposes, a pension fund that is exempt from tax under s. 149(1)(o) nonetheless is required to keep track of adjustments, such as superficial losses, to the adjusted cost base of properties owned by it.

IT387R2 "Meaning of Identical Properties" 14 July 1989

1. "Identical properties"...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. ...

2. 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.

4. Gold bullion and gold certificates (or bullion and certificates of the same precious metal) are considered... to be identical properties. Furthermore...a particular certificate and the bullion to which it relates are the same property, with the result that an exchange of a certificate for bullion or bullion for a certificate will not be considered a disposition.

7. ...Class X common shares of a corporation and Class Y common shares of the same corporation are the same in all respects, except that the Class X shares are voting and the Class Y shares are non-voting, and that the holders of the Class X shares are entitled to exchange them for Class Y shares. ...[T]he right or privilege of conversion or exchange attached to the Class X shares constitutes a right to acquire a property and that such a right is deemed to be a property that is identical to the Class Y shares... . The individual disposes of his or her Class Y shares. A loss arises on such disposition. Within the period described in paragraph (a) of the definition of "superficial loss" in section 54 of the Act, the individual acquires Class X shares. In such a case, the individual's loss from the disposition of the Class Y shares would be a "superficial loss"... .

8. ...[F]utures contracts for the same standard amount of the same commodity for delivery in the same month are considered to be identical.

17 March 1992 T.I. 920379

Discussion of RC formula for determining quantum of superficial loss where identical items are both disposed of and bought during the 60-day period.

89 C.R. - Q.41

s. 245 will not be applied where a taxpayer sells property to sustain a loss and then repurchases the property 31 days later. "Since this transaction would have been subject to the scrutiny of a specific provision of the Act, but would clearly be outside of its stated ambit, it would not result in a misuse."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) 54

IT-387R2 "Meaning of 'Identical Properties'"

Identical properties are the same in all material respects, so that a perspective buyer would not have a preference for one as opposed to another.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 47 - Subsection 47(1) 0