Applying the Superficial Loss Rule with AdjustedCostBase.ca

The superficial loss rule prohibits claiming a capital loss when you (or your spouse or other entity affiliated with you) repurchase identical property within the period beginning 30 days before the sale and ending 30 days afterwards, and the property is still owned at the end of this period.

The onus is on the taxpayer to determine when the superficial loss rule applies.  AdjustedCostBase.ca is a free web-based application that allows Canadian investors to calculate their adjusted cost base and capital gains.  The service provides some features to assist you with identifying when the superficial loss rule may apply and for applying the rule.  The methodology for using these features is described below through some examples.

Example #1

Let’s start with the following example (this happens to be the same as Example #1 in What Is the Superficial Loss Rule?):

  • January 6th, 2014: Buy 100 shares for $50 per share
  • November 3rd, 2014: Sell 100 shares for $30 per share
  • November 4th, 2014: Buy 100 shares for $30 per share
  • December 2nd, 2015: Sell 100 shares for $80 per share

For simplicity we assume that no transaction fees are applicable.  First, let’s enter these transactions into AdjustedCostBase.ca.  After doing so, you should see the following list of transactions:

Superficial Loss Rule Not Applied

Note that the superficial loss rule should apply for the sale transaction on November 3rd, 2014 because the shares have been repurchased the very next day.  The capital loss of $2,000 cannot be claimed according to the superficial loss rule.  AdjustedCostBase.ca does not automatically apply the superficial loss rule it’s up to you to do so.

You’ll see a warning icon for the “Sell” transaction and when you move your mouse over it a message pops up indicating that the superficial loss rule may apply to this transaction:

Superficial Loss Warning
In general, AdjustedCostBase.ca will not always correctly inform you when the superficial loss rule applies.  The are many scenarios where the rule may apply, but AdjustedCostBase.ca does not have all the information that’s necessary to determine this (more on this below).  But in simple cases where all the transactions are entered into AdjustedCostBase.ca in the same account and portfolio, AdjustedCostBase.ca will present you with the warning above.

Once you’ve determined that the superficial loss rule should apply, you need to instruct AdjustedCostBase.ca to apply the rule.  AdjustedCostBase.ca will not automatically apply the rule even if the warning message appears.  To apply the superficial loss rule, you need to edit the “Sell” transaction:

Transactions for SLR

In the form for editing the transaction you’ll see a checkbox labeled “”  This checkbox should be checked off in order to apply the superficial loss rule.  Then two new fields will appear:

  • Adjusted Capital Loss
  • Add Reduction in Capital Loss to ACB

The “Adjusted Capital Loss” is the dollar amount to which the capital loss is reduced.  In the majority of cases, the superficial loss rule completely denies the loss, and you should enter $0.

The “Add Reduction in Capital Loss to ACB” checkbox indicates whether or not the reduction in capital loss should be added back into the ACB for this security.  In this example, you’ll this box should be checked off because the denied capital loss should indeed to added back to the ACB.

In some circumstances, such as when the repurchase occurs in a registered account or in your spouse’s account, this box should be unchecked.  This is because the ACB adjustment should occur in the account where the repurchase occurs.

For this example, you should enter $0 as the “Adjusted Capital Loss” (the loss is fully denied) and the “Add Reduction in Capital Loss to ACB” checkbox should be checked (the reduction in capital loss should be added back to the ACB).  The form should appear as follows:

Edit Transaction

After successfully editing the transaction, the list of transactions should be as follows:

Transactions for SLR

You’ll notice that the $2,000 is crossed off and replaced with $0.  Instead of the ACB on 2014-Nov-03 being reduced to $0, it’s now $2,000 (because the $2,000 denied capital loss is added back to the ACB).  The capital gain on 2015-Dec-02 is now reduced to $3,000 from $5,000.

Example #2

Let’s now modify Example #1 slightly:

  • January 6th, 2014: Buy 100 shares for $50 per share
  • November 3rd, 2014: Sell 100 shares for $30 per share
  • November 4th, 2014: Buy 100 shares for $30 per share in your RRSP account
  • December 2nd, 2015: Sell 100 shares for $80 per share in your RRSP account

The buy transaction on 2014-Nov-04 and the sell transaction on 2015-Dec-02 now occur in your RRSP account instead of your non-registered account.  First let’s enter the first 2 transactions into AdjustedCostBase.ca (the last two transactions should not be entered because ACB need not be tracked for registered accounts):

Transactions for SLR
No warning about the superficial loss rule is present because the repurchase transaction isn’t included.  But the superficial loss rule does nonetheless apply.  To apply the rule, you’ll need to click on the “Edit” link for the “Sell” transaction.

Again, you should enter $0 as the “Adjusted Capital Loss” (the loss is fully denied).  But this time, the “Add Reduction in Capital Loss to ACB” checkbox should be unchecked because the denied capital loss should not be added back to the ACB of the security in your non-registered account.  The form should appear as follows:

Edit Transaction

After applying the superficial loss rule, the list of transactions is now:

Transactions for SLR

The capital loss is denied and reduced from $2,000 to $0 (as was the case in Example #1).  But the reduction in the capital loss is not added to the ACB here, because the repurchase occurred in a registered account.  The ACB is $0 following the “Sell” transaction.

A similar situation would apply when the repurchase occurs in a spouse’s account or a corporate, trust, or partnership account controlled by you or your spouse.  But in these cases, the ACB of the security in the account where the repurchase occurs should be increased by the amount of the denied capital loss.

Can I Always Rely on AdjustedCostBase.ca to Tell Me When to Apply the Superficial Loss Rule?

No.  AdjustedCostBase.ca does not have all the necessary information to do so in all cases.  The following cases are examples of when it’s necessary for you to determine if the superficial loss rule should apply:

  • A repurchase triggering the superficial loss rule that occurs in your spouse’s account or an account of a trust, corporation, or partnership controlled by you or your spouse.
  • When you repurchase another ETF within the superficial loss period that tracks the same index of an ETF you’ve sold at a loss.  AdjustedCostBase.ca does not know that the two securities are ETF’s tracking the same index.  It’s up to you to identify when this situation applies.
  • When you repurchase identical property in a registered account.  Transactions in registered accounts do not need to be entered into AdjustedCostBase.ca (and you should not be entering them in the same portfolio you use for non-registered accounts).
  • When you still own the right to purchase the identical security at the end of the superficial loss period.  For example, if you still own call options at the end of the superficial loss period, the superficial loss rule may apply.  AdjustedCostBase.ca will not inform you about this.

In general, AdjustedCostBase.ca will only warn you about the superficial loss rule when “Buy” and “Sell” transactions occur within the same portfolio (and even when a warning occurs, it’s up to you to apply the superficial loss rule).  In the situations mentioned above (and possibly some others) you’ll need to figure out when the superficial loss rule should be applied.

8 thoughts on “Applying the Superficial Loss Rule with AdjustedCostBase.ca

  1. Jeff

    In this situation would the superficial loss rule apply? Or since the the initial buy was closed out with a sell already that had a gain does it not apply to the second sell which had a loss?

    October 25th, 2014: Buy 100 shares for $50 per share
    November 3rd, 2014: Sell 100 shares for $60 per share
    November 4th, 2014: Buy 100 shares for $50 per share
    November 8th, 2014: Sell 100 shares for $40 per share

    Thank you,
    Jeff

  2. AdjustedCostBase.ca Post author

    Jeff,

    Assuming that there are no other transactions for the same security within 30 days following November 8th, 2014, then the superficial loss rule would not apply.

    One condition for the superficial loss rule is that shares need to be held 30 days after a sale that results in a capital loss. This is not the case in the example above because the share balance is zero after November 8th, 2014.

  3. Dave

    What about scenarios where the number of shares sold and repurchased is not the same, and the superficial loss only partially applies? For example, I sold some shares at a loss as I needed funds to help finance a house purchase, needed less of the money than I thought and so put the unneeded amount back into the same fund a week or so later (the share price had increased a little in the interim). So using round numbers for simplicity lets say I sold 10000 shares at a loss and then bought back 2500. When I edit the transaction and select Apply Superficial Loss Rule it’s left to me to enter the actual Adjusted Capital Loss, but what would it be? Would it be simply 2500/10000 multiplied by the actual loss, with the denied portion of 7500/10000 automatically added back to the ACB? Or is the math for partial superficial losses more complicated than just breaking it down by number of shares, especially when the share price changed between the sale and repurchase as it did in my case?

    Thanks

  4. Fred

    I have two “managed” portfolios containing assorted funds offered by a major bank’s financial services in non registered accounts. The managed funds in the portfolios have lots of withdrawals (it’s my income!) and regular fund rebalancing purchase sale transactions, and monthly dividend reinvestments. I have noticed that the “Suspect superficial loss rule applies” warning rarely applies when the funds that may have been sold have had more shares bought as a part of the reinvestments.

    I presume this means I must go through ALL the transactions manually and alter the SL rule application.

    This became more pronounced when I merged funds between the two portfolios.

    Can you confirm this ? Entering so many years of data has already been crazy arduous, the thought of going through all this again is scary. As suspected … it looks like for many years there will be no difference in my taxes as I go to correct this error.

  5. AdjustedCostBase.ca Post author

    Fred,

    The superficial loss rule still applies when the number of units bought during the superficial loss period exceeds the number of units sold (provided all requirements for the superficial loss rule are met).

    However, if the number of units bought in the superficial loss rule is greater than the number of units sold, then the loss may only be partially denied:

    https://www.adjustedcostbase.ca/blog/applying-the-superficial-loss-rule-for-a-partial-disposition-of-shares/

    The superficial loss rule is never applied automatically on AdjustedCostBase.ca, even when the warning appears. You must edit each transaction in order to apply the superficial loss rule, as described here:

    https://www.adjustedcostbase.ca/blog/applying-the-superficial-loss-rule-for-a-partial-disposition-of-shares/

  6. Ed

    What would the correct way to calculate the ACB in this scenario and how would the superficial loss rule apply?

    A. I purchase a security within my RIF.
    B. I make an in kind transfer of that security from my RIF to my unregistered trading account.
    C. I make an in kind transfer of the same security from my unregistered trading account to my TFSA at a lower market value than when transferred from the RIF
    D. same as C. but within the 30 day window for superficial loss.
    E. same as C but with a higher market value than when transferred from the RIF.
    F. same as C but with a higher market value than when transferred from the RIF and within the 30 day window.

  7. AdjustedCostBase.ca Post author

    Ed,

    The in-kind transfer from your RRIF to your non-registered account would not trigger any gain or loss. This would be equivalent to a purchase of the shares in your non-registered account, and your ACB for those shares would increase by the fair market value of the shares at the time of the transfer. When you transfer the shares in-kind into your TFSA, a deemed disposition occurs. Any capital loss would be permanently denied (this is the case regardless of the timing between the transfer out of your RRIF compared with the transfer into your TFSA). If a capital gain occurs, you will pay taxes on the gain. For further information, please see the following:

    https://www.adjustedcostbase.ca/blog/capital-gains-and-losses-for-in-kind-contributions-to-registered-accounts/

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