Superficial Loss

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.

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.

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.

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 … .

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".

Situation 1

The taxpayer’s spouse transferred her shares, with an ACB of $12,721 to the taxpayer at FMV for $2,300 in cash and realized a capital loss of $10,42, and the taxpayer then held the shares for at least 30 days. CCRA indicated that s. 40(2)(g)(i) applied to deem his spouse’s capital loss to be nil since it would be a superficial loss, and the ACB of the shares to him would therefore be $12,721.

Situation 2

The same as Situation 1 except that, a few months after the transfer, the taxpayer disposed of the shares to his spouse’s RRSP. CCRA indicated that this subsequent disposition resulted in a capital loss of $10,421, but that this capital loss was deemed to be nil pursuant to s. 40(2)(g)(iv)(B).

Situation 3

Same as Situation 2, except that the disposition to the spouse's RRSP occurred immediately after the transfer. CCRA indicated that s. 40(2)(g)(i) did not apply to the taxpayer’s spouse because at the end of the 30-day period following her disposition of the shares, neither she nor a person affiliated with her owned (or had a right to acquire) a substituted property (noting that generally an individual is not affiliated with a trust under s. 251.1(1).) Furthermore, the subsequent disposition by the taxpayer of the shares to the spousal RRSP did not result in a capital gain or loss, so that s. 40(2)(g)(iv)(B) did not apply.

However, the spouse’s capital loss might be denied under GAAR “since it appears that the series of transactions would circumvent the application of clause 40(2)(g)(iv)(B).”

The superficial loss rules did not apply where an individual sold his shares of a public corporation at a loss and, within 30 days of that sale, the individual's daughter purchased identical shares, given that a father and daughter are not affiliated under s. 251.1(1)(a).

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.

CCRA provided a numerical illustration of the application of the superficial loss rule and the application of the ACB increase under s. 53(1)(f) where there was a series of partial dispositions, and acquisitions, of identical shares.

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.

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