Applying the Superficial Loss Rule for a Partial Disposition of Shares

The superficial loss rule defines certain circumstances when capital losses are denied.  The details of the superficial loss rule are discussed here:

What Is the Superficial Loss Rule?

Here we’ll expand on the superficial loss rule by discussing some cases when a loss can be partially denied instead of being denied in full.

When the quantity of property reacquired (or pre-acquired or remaining) in the superficial loss period is equal to the quantity of property that was sold, the superficial loss rule denies the capital loss in full.  However, in some cases where these quantities (i.e., the number of shares or units) are not equal, the superficial loss rule will sometimes allow a portion of the capital loss to be claimed while the remainder is denied.  The Canada Revenue Agency describes its position on applying the superficial loss rule to the partial disposition of shares in section 12 of interpretation bulletin IT-456R:

When more items are sold than acquired, an allowable capital loss will occur. For example, if a taxpayer having initially 50 identical properties on hand sells 20 items at a loss and reacquires 15 in the relevant period, thus reducing the properties on hand to 45, the superficial loss will be limited to the 15 properties considered to be reacquired.

The partial application of the superficial loss rule can be explained in different ways, depending on the circumstances.  For certain cases, the application of the rule is simpler than in others.  The rule will be described below in the context of a couple classes of simpler cases, followed by a general formula that can be applied for more complex cases.  The simpler cases are the following:

  • When shares are sold at a loss and then partially reacquired within the superficial loss period
  • When shares are purchased and then partially sold within the superficial loss period

When Shares are Sold at a Loss and then Partially Reacquired within the Superficial Loss Period

This is the case where you own A or more shares, sell A shares at a loss (more than 30 days after the last acquisition date), and then reacquire B shares (within 30 days after the sale date) where B is less than A.  No other sales or acquisitions occur during the superficial loss period.

In cases like this, the superficial loss rule will be applied based on the proportion of shares reacquired compared to the number of shares sold.  If more shares are reacquired than sold (B > A) then the entire capital loss would be deemed a superficial loss. Let’s look at the following example (commissions are omitted for simplicity):

Example 1

  • Buy 100 shares at a total cost of $300.00 ($3.00/share) on January 2, 2015
  • Sell 100 shares with total proceeds of $200.00 ($2.00/share) on April 9, 2015
  • Buy 25 shares at a total cost of $55.00 ($2.20/share) on April 10, 2015
  • Shares are held for at least 30 more days and no other transactions on identical property occur within the 61-day superficial loss period

From the sale on April 9, 2015 a loss of $100.00 is realized ($200.00 – $300.00).  However, since 25 shares are reacquired on the following day and the reacquired shares are held for at least 30 more days, the superficial loss rule applies.  According to the CRA’s administration of the rule for the partial disposition of shares, 25% (25 / 100) of the loss would be denied.  A capital loss of $75.00 can be claimed, while the remaining $25.00 would be deemed a superficial loss and can be added to the adjusted cost base of the reacquired shares (making the total ACB of the reacquired shares ($25.00 + $55.00) = $80.00).

In cases where the number of shares reacquired (B) is greater than the number of shares sold (A) then the superficial loss rule will deny the entire capital loss.  In the example above, if 100 or more shares were reacquired instead of 25 shares, then the loss would be fully denied.

In cases like this where B is less than A then the following formula can be applied to determine the superficial loss:

Superficial Loss = (B / A) x (Total Loss)
                 = ((Number of Shares Reacquired) / (Number of Shares Sold)) x (Total Loss)

The allowable capital loss can be found by subtracting the superficial loss from the total loss:

Allowable Capital Loss = Total Loss – Superficial Loss

When Shares are Purchased and then Partially Sold within the Superficial Loss Period

This is the case where you purchase A shares, and then sell B shares at a loss within the superficial loss period (within 30 days following the acquisition date) where B is less than A.  No other sales or acquisitions occur within the superficial loss period.

In cases like this, the superficial loss rule will be applied based on the proportion of shares remaining compared to the number of shares sold.  If more shares are remaining than sold ((A – B) > B) then the entire capital loss would be deemed a superficial loss. Let’s look at another example (commissions are omitted for simplicity):

Example 2:

  • Buy 100 shares at a total cost of $300.00 ($3.00/share) on April 9, 2015
  • Sell 80 shares with total proceeds of $160.00 ($2.00/share) on April 10, 2015
  • The remaining shares are held for at least 30 more days and no other transactions on identical property occur in the 61-day superficial loss period

From the sale on April 10, 2015 a loss of $80.00 is realized ($160.00 – ($300.00 x (80 shares / 100 shares))).  However, since the shares were acquired on the previous day (within the superficial loss period) and the remaining shares are held for at least 30 more days, the superficial loss rule applies.  According to the rules for partial disposition of shares, 25% (20 / 80) of the loss would be denied.  This means that a capital loss of $60.00 can be claimed, while the remaining $20.00 would be deemed a superficial loss and can be added to the adjusted cost base of the remaining shares (making the total ACB of the remaining 20 shares (($300.00 x 20 / 100) + $20.00) = $80.00).

In cases where the number of shares remaining (AB) is more than the number of shares sold (B) then the superficial loss rule would deny the entire capital loss.  In the example above, if 50 or fewer shares were sold instead of 80 shares, the loss would be fully denied.  In other words, in cases like this, when less than half the shares are sold then the loss is fully denied.  When more than half the shares are sold then the loss is partially denied.

In cases where (AB) is less than B (more than half the shares are sold) then the following formula can be applied to determine the superficial loss:

Superficial Loss = ((A – B) / B) x (Total Loss)
                 = ((Number of Shares Remaining) / (Number of Shares Sold)) x (Total Loss)

The allowable capital loss can be found by subtracting the superficial loss from the total loss:

Allowable Capital Loss = Total Loss – Superficial Loss

When Multiple Acquisitions and/or Multiple Dispositions Occur Within the Superficial Loss Period

When the superficial loss period (the time window beginning 30 days before and ending 30 days after the date of disposition) contains multiple sales and/or multiple acquisitions then it can become more complex than the two types of scenarios described above.

In such cases the following general formula for the superficial loss rule for partial dispositions of property can be used:

Superficial Loss = (min(S, P, B) / S) x (Total Loss)

where S is the number of shares sold, P is the total number of shares acquired during the 61-day superficial loss period, and B is the number of shares remaining at the end of the superficial loss period.  Note that min(S, P, B) indicates the minimum value among S, P and B.

And once again:

Allowable Capital Loss = Total Loss – Superficial Loss

If we apply the general formula with the two simpler cases above (where only one acquisition and one disposition occur during the superficial loss period) it should yield the same results.  But the formula can also be used for more complex cases where there are multiple sales and/or multiple acquisitions during the superficial loss period.

Avoid Headaches by Deferring the Entire Capital Loss for Simplicity

The conditions for partially applying the superficial loss rule for partial dispositions provide an advantage to Canadian investors.  Instead of using a strict interpretation of the superficial loss rule in these kinds of cases that denies losses in full, the CRA allows investors to partially claim the loss.

But you’re not obligated to partially claim the loss; you can opt for the entire loss to be denied (and carried forward in most cases).  If the loss is relatively small it may not be worth the headache of performing these calculations to determine the partially allowable loss.  And remember that when the superficially loss rule denies a capital loss, the amount of the capital loss can usually be added to the ACB of the reacquired shares, so that the loss is effectively carried forward as opposed to being permanently denied.

Applying the Superficial Loss Rule to the Partial Disposition of Shares with AdjustedCostBase.ca

AdjustedCostBase.ca is a web-based application that allows Canadian investors to track ACB and calculate capital gains. AdjustedCostBase.ca supports the superficial loss rule by identifying many cases where the rule may apply and allowing users to apply the rule.  It can also be used to partially deny a capital loss.

Let’s take another look at example 1 from above:

  • Buy 100 shares at a total cost of $300.00 ($3.00/share) on January 2, 2015
  • Sell 100 shares with total proceeds of $200.00 ($2.00/share) on April 9, 2015
  • Buy 25 shares at a total cost of $55.00 ($2.20/share) on April 10, 2015

After entering these transactions on AdjustedCostBase.ca you should see the following:

Transactions for Example 1

A capital loss of $100.00 is indicated for the sale on April 9, however, you’ll see a warning that the superficial loss rule may apply. Indeed, the rule applies in this case due to the reacquisition of 25 shares on the following day. However, since only a partial amount of shares were reacquired, you’re allowed to claim a loss of $75.00 while $25.00 of the loss is denied, as described above in the original example.

To apply the superficial loss rule, click on the “Edit” link for the April 9 sale to edit the transaction.  Then check off the “Apply Superficial Loss Rule” checkbox, set the “Adjusted Capital Loss” to $75.00 and ensure that the “Add Reduction in Capital Loss to ACB” is checked off.  The form should appear as follows:

Editing the Sale Transaction to Partially Apply the Superficial Loss Rule for Example 1

After editing the transaction the list of transactions should appear as follows:

Transactions for Example 1 After Partially Applying the Superficial Loss Rule

The capital loss has now been reduced from $100.00 to $75.00.  Also, the reduction in capital loss has been added back to the ACB.

Note that AdjustedCostBase.ca does not automatically apply the superficial loss rule for you.  Although you’ll see superficial loss rule warnings being displayed in many cases, it’s up to you to edit the transaction to apply the superficial loss rule.  Also, in cases where you’re partially claiming a loss due to the superficial loss rule, you’ll need to manually calculate the partial capital loss using the methods described above.

8 thoughts on “Applying the Superficial Loss Rule for a Partial Disposition of Shares

  1. Jas Rai

    Hi, I transferred 100,000 shares of Stock X and contributed it to my RRSP. The superficial loss amount is $4000. I still own shares of Stock X in my regular margin account. Do I need to put anything in the field “Adjusted Capital Loss” or leave it blank.
    thanks.

  2. Frank

    Hi,

    Does the superficial loss rule apply to the following example?

    I have owned 500 shares of Company A for more than 60 days with an ACB of $10/share ($5000 in total).
    Company B has agreed to purchase Company A for a total of $8 per share consisting of $6 per share in cash and $2 per share of Company B shares.

    The cash received for my 500 shares is $3000 and the value in shares of Company B is $1000.

    If I wish to keep the shares of Company B can I claim a loss of ($5000(0.75) – $3000) =$750 for the cash portion that I received or is that fully denied as a superficial loss.

    Would the ACB of the newly acquired shares with a present value of $1000 be $1250?

    Thanks.

  3. AdjustedCostBase.ca

    Frank,

    The tax rules for acquisitions can vary. Your best bet is to look for documentation on the tax implications for this specific merger.

    In general, the ACB allocation for Company B would be based on the ratio of the value of shares received and the total compensation, multiplied by your existing ACB for company A. So it would likely be equal to ($2/$8) * $5,000 = $1,250. But again you should look for the documentation that’s specific to this case.

    I don’t think that the superficial loss rule would apply because shares of Company A and Company B are not identical properties.

  4. CG

    Judging by the general formula, I think I have a partial capital loss I can claim in this situation, but the two basic cases don’t cover this case so I’m not positive.

    Shares acquired before 61 day period:
    5,457

    Shares acquired less than 30 days before sale:
    361

    Shares Sold:
    1393

    (No activity less than 30 days after sale)

    By my calculations, 361/1393 is a superficial loss (25.9%). The rest I could claim as a capital loss. This seems to go along with the rules in the CRA bulletin, but doesn’t seem to align with your blog post. Comments?

  5. AdjustedCostBase.ca

    CG,

    Your case does apply for either of the two simplified cases above (after making a purchase you sold more shares than were purchased) so you need to use the general formula:

    Superficial Loss = (min(S, P, B) / S) x (Total Loss)
    = (min(1393, 361, (5457 + 361 – 1393)) / 1393) x (Total Loss)
    = 0.2592 x (Total Loss)

    which matches what you calculated.

  6. ralph nicholson

    how can these losses be filed correctly to reflect superficial tax loss rule? THX

    [redacted]

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