What Is the Superficial Loss Rule?

The superficial loss rule defines certain situations in which capital losses are disallowed.  Section 54 of the Income Tax Act indicates that a superficial loss is a loss occurring from the sale of property when both of the following two conditions are met:

  1. During the period that begins 30 days before and ends 30 days after the disposition, the taxpayer or a person affiliated with the taxpayer acquires a property (in this definition referred to as the “substituted property”) that is, or is identical to, the particular property.

AND

  1. At the end of that period, the taxpayer or a person affiliated with the taxpayer owns or had a right to acquire the substituted property.

Overview of the Superficial Loss Rule

In cases where a superficial loss occurs, the capital loss cannot be claimed.  Depending on the circumstances, the loss may be either permanently denied, denied but added to the adjusted cost base of any remaining or repurchased shares (with the effect of deferring the capital loss and reducing the capital gain when the remaining shares are eventually sold), or in some cases partially denied.

The superficial loss rule applies to the period beginning 30 days before the settlement date of the sale transaction for the capital loss in question, until 30 days after the settlement date.  This encompasses a 61-day period (the 30-day period before the settlement date of the sale, the settlement date itself, and the 30-day period after the settlement date).  This time period is illustrated in the diagram below:

Superficial Loss Timeline

As an example, suppose that a settlement date for a sale occurs on September 5th, 2014.  The 61-day superficial loss period would be from August 6th, 2014 to October 5th, 2014 inclusive, as shown below:

Superficial Loss Example Timeline

Note that this time period is defined in terms of calendar days  not business days or stock market trading days.

If a sale transaction triggers a loss, the superficial loss rule will apply if the following conditions are met: you’ve bought the same or identical property during this 61-day period, and you still own or have the right to acquire the same or identical property at the end of the 61-day period.  In such a case, all or part of the capital loss will be denied.

The superficial loss rule is in place in order to prevent taxpayers from partaking in artificial transactions for the purpose of triggering an immediate capital loss.  Without the existence of the superficial loss rule, a taxpayer would be able to sell shares, trigger a capital loss, then immediately repurchase the same shares.  In other words, a capital loss could be harvested without any meaningful change in ownership.  Note that if this were allowed, the total capital loss (or gain) over the holding period would be the same regardless of whether or not the loss harvesting transaction takes place (as we’ll see with some examples below).  However, triggering the capital loss immediately has the advantage of providing a tax advantage sooner rather than later.  This is because the capital loss can be applied against any capital gains right away, as opposed to when the shares are sold in a more permanent fashion in the future.  This can be viewed as advantageous due to the time value of money (a dollar today is worth more than a dollar tomorrow).  The purpose of the superficial loss legislation is to remove the advantage that would result from these kinds of artificial transactions.

To be clear, transactions that fall under the conditions of the superficial loss rule are not illegal (for example, they’re not akin to insider trading).  You’re perfectly within your rights to engage in transactions that follow under these conditions.  However, you must make sure that you don’t claim a capital loss in a case where it’s disallowed by the superficial loss rule.

Example #1

Let’s look at an example.  Suppose that you purchase 100 shares of XYZ Inc. for $50 per share with a settlement date of January 6th, 2014.  The ACB becomes $5,000 or $50 per share (assuming no transaction costs for simplicity).  Then the share value declines to $30 per share.  Let’s assume that you believe the shares are undervalued and that the share price will increase in the future so you want to maintain ownership of the shares.  But with the decline in value, you see the opportunity to trigger a capital loss to reduce your tax bill for the current year.  So, you sell all 100 shares on November 3rd, 2014 for $30 per share.  You record a loss equal to $2,000 ((100 shares x $30/share)  $5,000).  Then, because you’d like to maintain ownership, you repurchase 100 shares for $30 per share with a settlement date of November 4th, 2014 (since it’s only been a day, it’s likely that the share price hasn’t changed by much).  Ignoring the superficial loss rule, your ACB becomes $3,000 or $30 per share.  5 years later, the share price has risen to $80.  You sell your 100 shares with a settlement date of December 2nd, 2015, and realize a capital gain of $5,000 ((100 shares x $80/share) $3,000).  These transactions are summarized below:

Violation of the Superficial Loss Rule

Settlement Date Transaction Shares Bought or Sold Price Per Share Share Balance ACB ACB per Share Capital Gain (Loss)
1. 2014-01-06 Buy 100 $50 100 $5,000 $50
2. 2014-11-03 Sell 100 $30 0 $0 $0 ($2,000)
3. 2014-11-04 Buy 100 $30 100 $3,000 $30
4. 2015-12-02 Sell 100 $80 0 $0 $0 $5,000

Note that the net capital gain over the holding period is $3,000 ($5,000  $2,000).  Claiming the capital loss for the November 3rd, 2014 transaction is not allowed according to the superficial loss rule.  This is because a repurchase of shares happens within the 61-day period centred around the sale settlement date (specifically, the repurchase happens just 1 day after the sale).  Also, the shares are still owned at the end of the 61-day period, satisfying the other half of the superficial loss rule.

In the table above, we have incorrectly assumed that the superficial loss rule does not apply and that the capital loss can be claimed.  But according to the superficial loss rule, the loss should in fact be denied, and the amount should be added back to the ACB.  So the transactions should be recorded as follows:

Applying the Superficial Loss Rule

Settlement Date Transaction Shares Bought or Sold Price Per Share Share Balance ACB ACB per Share Capital Gain (Loss)
1. 2014-01-06 Buy 100 $50 100 $5,000 $50
2. 2014-11-03 Sell 100 $30 0 $0 $0 ($2,000) $0
3. 2014-11-04 Buy 100 $30 100 $3,000 $5,000 $30 $50
4. 2015-12-02 Sell 100 $80 0 $0 $0 $5,000 $3,000

Applying the superficial loss rule results in a capital loss of $0 for November 3rd, 2014 and a capital gain of $3,000 on December 2nd, 2015.  The denied capital loss of $2,000 is subsequently added to the ACB.  The total net capital gain, $3,000, is the same as above when we ignore the superficial loss rule.  Although the net capital gain is identical in both cases, the first interpretation of the transactions is likely to be more desirable from the taxpayer’s point of view due to the time value of money.  But the CRA does not allow a capital loss to be claimed on November 3rd, 2014 because it’s deemed to be a superficial loss.

Example #2

As you can see, the superficial loss rule disallows claiming a capital loss when you sell shares and then repurchase them shortly after (within 30 days following the settlement date of the sale).  But what about the other way around?  What if you own shares that have declined in value – can you purchase more shares and then sell them immediately after to trigger a capital loss?

Let’s look at a second example, similar to the one above but with a slightly different set of transactions:

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

If we ignore the superficial loss rule, the transactions can be summarized as follows:

Violation of the Superficial Loss Rule

Settlement Date Transaction Shares Bought or Sold Price Per Share Share Balance ACB ACB per Share Capital Gain (Loss)
1. 2014-01-06 Buy 100 $50 100 $5,000 $50
2. 2014-11-03 Buy 100 $30 200 $8,000 $40
3. 2014-11-04 Sell 100 $30 100 $4,000 $40 ($1,000)
4. 2015-12-02 Sell 100 $80 0 $0 $0 $4,000

Should the superficial loss rule apply here?  It’s more common to discuss the superficial loss rule in cases where shares are sold and repurchased shortly after.  But the superficial loss rule can also apply when shares are bought and subsequently sold.  In this case both conditions of the superficial loss rule are satisfied: a purchase occurs during the 61-day period centered around the sale (it occurs the day before) and some shares are still held at the end of the 61-day period.  So according to the superficial loss rule, the capital loss on November 4th, 2014 is denied.

The correct recording of the transactions is as follows:

Applying the Superficial Loss Rule

Settlement Date Transaction Shares Bought or Sold Price Per Share Share Balance ACB ACB per Share Capital Gain (Loss)
1. 2014-01-06 Buy 100 $50 100 $5,000 $50
2. 2014-11-03 Buy 100 $30 0 200 $8,000 $40
3. 2014-11-04 Sell 100 $30 100 $4,000 $5,000 $40 $50 ($1,000) $0
4. 2015-12-02 Sell 100 $80 0 $0 $0 $4,000 $3,000

Note that in both cases the net capital gain over the entire holding period is $3,000 (this was also the case in the first example).  The artificial transactions would not affect the net capital gain over the entire holding period, regardless of whether the superficial loss rule is applied.  But in the first (incorrectly calculated) case, the cash flow would typically be considered better for the taxpayer due to the time value of money.  Due to the superficial loss rule, the second account of the transactions must be used.

In these cases the superficial loss rule does not deny the loss permanently (although there are some cases where a permanent denial would occur).  When the superficial loss rule is applied in both examples, the ACB is increased by the amount of the denied loss, so the capital loss (or reduction in capital gain) is deferred into the future.

Identical Property and Affiliated Persons: Additional Conditions for the Superficial Loss Rule

The definition of the superficial loss rule includes a couple of notions that require further explanation: identical property and affiliated persons.  Shares of the same class of the same corporation would be considered identical property.  However, shares of two similar companies, in the same industry, would not be considered identical property.  Two ETF’s tracking the same index would be considered identical property.  But if the ETF’s do not track the same index, they would not be considered identical property, even if they track the same sector, industry, or asset class.

The definition of affiliated persons includes yourself, your spouse, or a corporation, partnership or trust controlled by you or your spouse.  If any of these individuals or entities purchase identical property within the 61-day period centered around a date you sell the property, the superficial loss rule will apply.

Also, special care needs to be taken for transactions within registered accounts, such as RRSPs, TFSAs, RRIFs, and RESPs.  The superficial loss rule will apply when a sale outside of a registered account coincides with a purchase of identical property inside a registered account within the 61-day period.  However, in these cases, the capital loss is permanently forfeited and cannot be added to the ACB of the non-registered shares.  You could also think of this as if the ACB is added to the ACB of the registered shares, but since ACB does not apply to registered shares, it’s as if the capital loss is permanently denied.

You’ll need to consider more than just the transactions that occur within the same account.  You’ll need to examine transactions occurring in all your accounts (including registered accounts) and other accounts controlled by you and your spouse.

Adding the Denied Capital Loss to Your Adjusted Cost Base

In the examples above, where a combination of a sale and repurchase occurs in the same account, the denied capital loss is directly added back to the ACB.  In situations where the repurchase occurs in a different account, the denied capital loss should be added to the ACB of the shares in the account where the repurchase occurs.

For example, suppose you sell some shares at a loss and the next day your spouse repurchases the same shares.  This would indeed trigger the superficial loss rule and the capital loss would be denied.  In this scenario, the denied capital loss should be added to your spouse’s ACB, not your own ACB.

Similarly, when you sell some shares at a loss in your non-registered account and repurchase the same shares the next day in your RRSP account, the superficial loss rule applies.  In this case the denied loss would be added to the ACB for the RRSP account since that’s where the repurchase occurred.  But ACB is completely meaningless in the context of a registered account since capital gains within the account are not taxable.  This is why the application of the superficial loss rule between a registered and non-registered account results in the loss being permanently denied.

What About “Superficial Gains”?

Since the superficial loss rule denies capital losses under certain circumstances, you might ask, can capital gains be avoided in certain cases?  For example, if you sell shares and realize a capital gain, but immediately repurchase the shares, can you call this a “superficial gain” and defer the capital gain?  The answer is no: you cannot defer the capital gain and there is no such thing as a “superficial gain.”  The capital gain is taxable immediately in the current tax year, even if the shares are repurchased within 30 days.

Capital Account vs. Income Account

The descriptions above apply for transactions recorded on capital account.  If the transactions are on income account, different rules will apply.  Some of the conditions that the CRA uses to decide whether your trading activity is on income account may be heavily correlated with the conditions for triggering the superficial loss rule.  For example, the CRA may consider your transactions to be on income account if you trade frequently and have short periods of ownership  two conditions that go hand in hand with the superficial loss rule.

The conditions for your trading activity to be considered on income account are complex and can be open to interpretation, so you should seek the help of a professional if you’re unsure where you stand.

When Shares are Fully Sold Quickly After Being Purchased

How about when shares and bought, and then fully sold immediately after?  Can a capital loss be claimed in this case?  As long as all the shares a sold, and you don’t repurchase the shares within the 30-day period following the sale’s settlement date, you can claim a capital loss.  Remember that two conditions must apply for the superficial loss rule: shares must be bought within the 61-day period, AND, some shares must still be owned at the end of the period.  In the case where all shares are sold (and nothing’s repurchased) the superficial loss rule does not apply as long as you don’t own any shares at the end of the 61-day period.

Again, this is assuming that you’re trading on capital account.  A high trading frequency and short holding period could result in your transactions being considered on income account (see above).

How Can You Avoid the Superficial Loss Rule?

To avoid triggering the superficial loss rule, you can simply wait.  After you’ve bough shares, make sure to wait at least 30 days before selling them (unless you sell all your shares).  After you’ve sold shares, make sure to wait at least 30 days before repurchasing them.  Note that share prices can fluctuate wildly over this time period, so there’s a risk that the share price can increase substantially by the time you plan to repurchase the shares.

Another option is to repurchase, similar, but not identical property.  For example, you could purchase shares of another company in the same industry, or you could purchase another ETF tracking a different index.

AdjustedCostBase.ca and the Superficial Loss Rule

AdjustedCostBase.ca has a feature to identify when superficial losses occur (but only in some cases).  The tool also allows you to manually apply the superficial loss rule to your sale transactions.  Further details on this are provided here.

Conclusions

Indeed, the superficial loss rule can be tricky and cumbersome to follow.  A large onus has been placed on taxpayers to understand the rules and apply them towards calculating capital gains and losses.  It’s been argued that the superficial loss rule is a “trap for the unwary, unknowledgeable, and unlucky.”  The superficial loss rule has been criticized for being easy to circumvent by knowledgeable people aiming to harvest capital losses, while also easy to inadvertently violate by those without any ill intentions.  But for the time being, Canadian investors must either take precautions not to violate the rule, or recognize when the rule applies and defer capital losses accordingly.

58 thoughts on “What Is the Superficial Loss Rule?

  1. Tyler

    Hi, thanks for another informative post. To be clear: if I bought (more than 30 days ago) 100 shares of something for $100 each, and today I sell half of them for $90, I can still claim this as a capital loss? (assuming I don’t re-purchase them)

    Thanks

  2. AdjustedCostBase.ca Post author

    Hi Tyler,

    You’re correct that in that scenario the superficial loss rule would not apply. Although one condition (you still own shares after the 61-day period) for the superficial loss rule has been met, the other condition (buying shares within the 61-day period) has not been met.

  3. Jordan Hamilton

    Hi, ty for the in depth info and example. I have a question similar to Example 2. For instance: If the settlement date of the last sell was “2014-11-05” instead of “2015-12-02” (assume no more repurchase) how will the (captial gain / loss) deferred? Will it still be reported in April 2015 or 2016 since on CRA website stated “If you have a superficial loss in 20XX, you cannot deduct it when you calculate your income for the year.

    Thankyou!

  4. AdjustedCostBase.ca Post author

    Jordan,

    Assuming the settlement date for the last sale transaction were 2014-11-05 in Example 2, the superficial loss rule would not apply to either sale transaction. Although shares are purchased within the 61-day period, the second condition of the superficial loss rule is not satified: no shares would be still owned 31 days after 2014-11-05 nor 31 days after 2014-11-04. You’d be able to claim the entire capital loss for the 2014 tax year.

  5. Jordon Hamilton

    Hi, ty for the quick reply. Sorry I didn’t stated my second question too clear. Using Example 2 again, If the entire stock were sold on 2015-12-02 with a (capital loss of $3000 instead of gain). Will the capital loss gets claim on 2015 tax year or will it get deferred to 2016…etc, since you mention it gets deferred into future when a superficial loss occurs.

    Thankyou!

  6. AdjustedCostBase.ca Post author

    If all shares are sold on 2015-12-02 the superficial loss rule would not apply as long as no shares were still held at the end of the 61-day period (2016-01-01). The capital loss can be claimed for the 2015 tax year.

  7. Jordan Hamilton

    Thank you so much everything it’s clear for me on the superficial loss rule now, really appreciate your effort on helping.

  8. SS

    Regarding superficial loss, if you buy in and out of a stock several times throughout the year, but sell it all before December (no more purchases within the last 30 days of the year) does it matter? All the gains and losses would have to be claimed for that year anyway. In other words, if all your purchases and sales of a stock were between January and November of the same year, does it matter? Thanks in advance!

  9. AdjustedCostBase.ca Post author

    SS,

    That’s correct – the net capital loss or gain would apply for that year, as long as no more units are owned 30 days after the last sale. The superficial loss rule may cause losses in the earlier transactions to be deferred, but in this particular case this has no effect on capital gain/loss reporting since all the transactions occur in the same year.

  10. JJ

    Does the superficial loss rule apply to capital losses due to disposition of foreign currency cash? With a foreign currency brokerage account, it strikes me that unless it was being used very infrequently, that nearly all capital losses due to currency exchange would classify as a superficial loss.

  11. P

    This post has been a big help. In my specific case, with regard to Example 1, could I claim the final capital loss of $3000 because of transactions in my non-registered even though I continue to hold shares of the same stock in my RRSP at the time? Note that I made no purchases of the stock in the 61 day window in any account.

  12. AdjustedCostBase.ca Post author

    If you didn’t make any purchases in the 61-day window but still own shares 31 days following a sale that triggers a capital loss, the superficial loss rule does not apply and you’re eligible to claim the loss. For the superficial loss rule to apply, both of the conditions mentioned must be met.

  13. Flame

    Hi, first of all I’d like to thank you for writing up this guide, its incredibly helpful. This will my first time filing for taxes, I have some transactions I’m not entirely sure about as to whether or not they break the superficial tax loss rule. If you could clarify whether or not any of these transactions break that rule I would really appreciate it!

    [redacted]

  14. AdjustedCostBase.ca Post author

    Flame,

    I would suggest that you enter these transactions into AdjustedCostBase.ca. In many cases a warning will be shown when the superficial loss rule may apply, as described here:

    http://www.adjustedcostbase.ca/blog/applying-the-superficial-loss-rule-with-adjusted-cost-base-ca/

    Note, however, that further information would be required in some cases to determine with certainty whether the superficial loss rule applies (such as transactions in your spouse’s accounts, in registered accounts, and transactions involving other property that would be considered identical).

  15. Harold Leroux

    How is the situation handled where a stock in a company held in a non-registered account is sold at a loss and repurchased the next day in a registered account (RRSP) but sold 29 days after re-purchase (i.e. just within the 30 day time limit) so that no stock remains in either account 30 days after the first sale. Having no stock left in either account would appear to satisfy the second requirement and thus allow the capital loss in the non-registered account to be recognized.
    If the above argument is valid then presumably the stock could be repurchased in the non-registered account again the next day.

    Along the same line using Example 1 and assuming all transactions are within a non-registered account, what if the second sale of the stock in the Example was just within the 30 day limit such that no stock of this company remained in the account after this second sale. Presumably the capital loss of the first sale would be recognized because it meets both criteria. Then what if the stock was repurchased the next day just beyond the 30 day limit of the first sale assuming this was arranged so the settlement date of the purchase would occur in the following year. Presumably this new purchase would trigger the superficial loss provisions once again but it is not clear at what ACB. In any case it would appear this should allow the loss to be used in the previous year. Please comment on this.

    Thanks,
    Harold

  16. AdjustedCostBase.ca Post author

    Harold,

    Regarding your first question, yes, you would be able to apply the capital loss since the second condition of the superficial loss rule is not satisfied. (As long as the dates you’re talking about are settlement dates and not trade dates. It’s important to be careful about the trade date vs. settlement date when pushing the boundaries of the superficial loss rule window. The window is defined in terms of calendar days, and a trade towards the end of the week could push the settlement date into the following week due to weekend days or holidays, which could put it outside the window.)

    For your second question, could you provide and example with specific transactions and dates? I would also encourage you to try this out using AdjustedCostBase.ca, as you should see warning if the superficial loss rule is violated (in cases like this where all transactions are in a non-registered account, and as long as all relevant transactions are inputted).

  17. Harold Leroux

    Here is an example:
    Transactions
    Date Trans Amount Shares Amt/Share Gain (Loss) Share Balance Change in ACB New ACB New ACB/Share
    2014-Jan-02 Buy $10,000 100 $100 100 $10,000 $10,000 $100
    2014-Dec-01 Sell $5,000 100 $50 -$5,000 0 -$10,000 $0
    2014-Dec-02 Buy $5,000 100 $50 100 $5,000 $5,000 $50
    2014-Dec-31 Sell $5,000 100 $50 0 -$5,000 $0
    2015-Jan-02 Buy $5,000 100 $50 100 $5,000 $5,000 $50

    The above is a modified excerpt from the transactions in adjustcostbase.ca. It was not clear to me that the date to be provided in the calculator is to be the transaction date or the settlement date. I assumed the settlement date as the transaction date would appear to be meaningless as far as interpretation of the Act. Transaction dates would have be 3 business days earlier if that worked out (i.e. a day when the markets are open). Otherwise some adjustment to the settlement dates in this example would be required. It was also not clear to me whether to select the “Apply Superficial Loss Rule” button in the calculator or not. In applying it the calculator simply disallowed the loss. However as of December 31 there are no shares of the Company in the account at the 30 day limit after the December 1 Sell date (i.e at the end of the day on December 31 there are no shares). So it would then seem that the loss for this transaction should be allowed.

  18. AdjustedCostBase.ca Post author

    Harold,

    For the sell transaction on 2014-Dec-01 there are no shares owned after 30 days later, so the superficial loss rule would not apply in either case. For the sell transaction on 2014-Dec-31, shares are still owned after 30 days, so the superficial loss might apply, however, in this case the sale of 2014-Dec-31 has a capital gain of $0. Since there is no loss, the superficial loss rule is not applicable.

    See the following for an explanation about trade dates and settlement dates:

    http://www.adjustedcostbase.ca/blog/understanding-trade-dates-and-settlement-dates/

    And a tutorial about using the “Apply Superficial Loss Rule” option on AdjustedCostBase.ca is available here:

    http://www.adjustedcostbase.ca/blog/applying-the-superficial-loss-rule-with-adjusted-cost-base-ca/

  19. Harold

    Thanks for all the information. It seems the spaces between the columns of the example disappear when posting which makes for difficult reading. In any case, my example shows a purchase of 100 shares on Jan 2, 2015 which is the first trading day in 2015 and 2 days after the second sale. So in my example I am showing ownership of shares within the 30 days of the second sale but not the first.

  20. Bob

    Hi There,

    I would love some help here. I recently sold a stock for a 43k loss….29 days later I repurchased the stock and made 10000 in the day and sold it. I realize my mistake now but just wondering what the tax consequences will be? Also I am interested in repurchasing this stock and am wondering if somehow if I can make capitla gains if that could offset the initial loss of 43k.

    thanks very much,
    Bob

  21. AdjustedCostBase.ca Post author

    Bob,

    It looks like the superficial loss rule would apply for the first sale and the $43k loss would be initially denied. But the amount of the denied loss should be added back to the ACB for the repurchased shares. Although I can’t say with certainty without knowing all the details, it would appear that due to the ACB being increased by $43k, the gain of $10k may actually be a capital loss of $33k ($10k – $43k).

  22. Andy

    Hi, thanks for the examples on this blog. It makes things quite clear.
    I was wondering what they mean by “right to acquire”?

  23. Sherry

    Hi,

    Just found out I may have made a mistake. Incorrect advice from my on line brokerage!
    I recently sold all the shares of a stock (1000) for a 21,100K loss. A week later I bought back 200 shares at 13.00. After reading your articles I assume this means I can only claim the other 800 shares for a capital loss. Is this correct. How do I figure out the ACB of the the 200 shares I now own. Original share price was $36.00

    Thanks for your help.

  24. Jacob

    Hello,

    Thanks for the in depth information regarding this important topic. Here is the situation I will like clarity on. I buy and sell same stock ABC on the same day (i.e. stock is sold the same day it was purchased) and this happens everyday throughout the year. Most of the times I sell for gain and at other times I sell for loss such that the net at the end of the year is positive (gain). Note that when I sell, I sell in full (not partial sell). Here are now my questions based on this:

    1. For all the transactions (buy/sell) that happen in the same year, can I use my capital gains to offset my losses as capital losses?
    2. If the answer to question 1 is YES and considering the 61-day requirement, will losses I make in the last 30 days of the year trading the way I explained qualify to be claimed as capital losses against capital gains for the year if the losses and gains settled by the last settlement day in the year? Or I the loss activities in the last 30 days of the year will trigger superficial loss situation?
    3. Can I use the capital gain I made from daily buying/selling to offset the capital loss from sale of another stock XYZ that I actually held for over 3 months and never purchased it again more than 3 months after selling it for loss?
    4. You wrote about “Capital Account” and “Income Account” and how CRA may view an account as income account if the stocks in the account trade frequently and are held for short period like I currently do. In this case will making an election to CRA using for T123 allow the account to always be treated as “Capital Account” despite the high frequency of trading and short holding period?

    Your answers and comments to each of these questions individually will be very much appreciated.

    Warn regards,
    Jacob

  25. Stephen

    Hi,
    Could you please clarify: does the superficial loss rule apply if I am a high frequency trader reporting trading profits as business income (income account)?
    Many thanks,
    Stephen

  26. Marc

    After selling a stock for a loss, what happens if I immediately sell naked puts on the same underlying and a) they expire worthless or b) the naked puts are closed out for a profit/loss?

    Thanks!

  27. medalik

    Hello,

    Thanks for this great article! I had this question: as I trade options exclusively, I’d like to know whether everything explained in this article also applies to stock options? i.e. if I replace the buying/selling of “100 shares” in the examples with “100 call option contracts” do the superficial rules apply? So, for example, if I sell 100 contracts with a loss on Nov 3rd then buy the same contracts on Nov 4th and keep them beyond the following 30 days. If yes, then do options of different strike prices and/or expiry dates count as “identical”?
    Buy the way, the fact that I don’t see the entries related to the superficial loss rule in the transaction form makes me feel that there’s something different for the stock options.

    Thank you so much!

  28. AdjustedCostBase.ca Post author

    medalik,

    I believe that each type of option with a different expiry date or strike price would be considered a unique type of security, so a transaction with an option of one expiry date/strike price would not trigger a superficial loss for another option with a different expiry data/strike price. Also:

    – According to the Income Tax Act, the expiry of an option does not trigger the superficial loss rule.

    – The superficial loss rule can be triggered by a sale of the underlying shares if you own call options at the end of the superficial loss period (since call options constitute the right to acquire the underlying shares).

  29. Roz

    how do you calculate the acb for shares bought with a discount given by company of your employment. what is claimed as cap gain/loss, what cost base is used, the discounted price upon purchase or the real price it was purchased at. will the discount need to declared as part of employment income as taxable benefits? thanks a lot in advance.

  30. AdjustedCostBase.ca Post author

    Jacob,

    1. If you’re fully selling your entire position at the end of each day, then I don’t believe that the superficial loss rule would apply. Although the first condition for the superficial loss rule above would be met, the second condition would not be. This you should be able to use all capital losses to offset capital gains.

    2. Yes, in this case you should still be able to claim losses for trades that settle in the last 30 days of the year in that same year. However, whether or not the superficial loss rule applies will depend on whether you own the shares at the end of each of the first 30 days of the following year. As long as you continue your strategy of liquidating at the end of each day than I don’t think the superficial loss rule would apply.

    3. Capital losses can be used to offset losses for capital gains resulting from any capital property (not just the gains from identical property). These losses can be applied against gains for the current year, or be carried back up to 3 years, or be carried forward indefinitely (for further information about this please see http://www.adjustedcostbase.ca/blog/applying-capital-losses-to-previous-tax-years/).

    4. I hope to address the issue of capital account vs. income account in a future post. In the meantime some additional information about this is provided by the CRA here: http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html.

  31. james

    So what if you sold some shares but still held many more, received your dividends and that was automatically used in a drip and repurchased a few shares within 30 days? It was kind of an accident and I need to know what to do as it affected a loss that I wanted to claim on that sale although only partially.

  32. jmc

    Hello AdjustedCostBase.ca,

    To try and better understand the superficial loss rule, I entered both Example #1 and Example #2 (your examples from this posting) into adjustedcostbase.ca. Example #1 returns with a warning that the superficial loss rule may apply. Example #2 returns no warning about the superficial loss rule. Any insight as to why Example #2 returns no warning would help my understanding of the superficial loss rule.

    Thank you.

  33. AdjustedCostBase.ca Post author

    jmc,

    Thank you for reporting the issue. It should be resolved now and you should see the warning for both cases.

  34. John

    If i buy 100 shares of a stock for $120 in year 1 and then sell 200 (becomes net short position of -100) at $260 in year 2 what is the tax treatment?

    Does this change if instead i said the stock was actually usd currency? I buy 100usd for 120cad and then buy 260cad worth of US shares using 200usd (100usd is “borrowed” or shorted).

    Struggling with the tax treatment for USD denominated futures (obviously using leverage) as i know how to calculate the capital gains on futures but not sure about the currency. The way the USD has appreciated seems like i get hit paying gains on the futures related to currency (on the borrowed funds) but the loss incurred on shorting USD never gets realized because i don’t plan to convert my USD back to CAD anytime soon.

    Your advice is appreciated.

  35. AdjustedCostBase.ca Post author

    John,

    Gains and losses on short sales are generally considered to be on income account as opposed to capital account (with a few exceptions such as when the short forms part of a hedge position).

  36. jmc

    AdjustedCostBase.ca,

    Thank you for your quick reply to my comment and for resolving the issue. Both Example #1 and Example #2 return a warning about the superficial loss rule.

    Do I report a sell that results in a superficial loss?

    If no, do I just keep tracking ACB as usual? If yes, I am not clear how to report a sell that results in a superficial loss. If I am understanding correctly, from a sell transaction using adjustedcostbase.ca, the absolute value of the “change in ACB” is the ACB of the units sold. If this is correct, when the superficial loss rule is applied to the sell transaction, the ACB of the units sold becomes equal to the sell amount (or proceeds of disposition).

    Do I report the sell on Schedule 3 with Proceeds of Disposition and Adjusted Cost Base being the same value resulting in a gain (or loss) of zero?

    Thank you.

  37. AdjustedCostBase.ca Post author

    jmc,

    The CRA isn’t clear about whether they want transactions involving superficial losses to be reported on Schedule 3. In cases where the superficial loss rule reduces a capital loss to zero, I would suggest not reporting the loss as it could cause confusion. If you would like to still report the loss then the adjusted cost base can be changed such that it equals the proceeds of disposition less the commission.

  38. Rob

    Would Class A shares of a mutual fund and class F shares of the same mutual fund be considered “identical properties” for the superficial loss rule?

    (The only real difference between Class A and Class F relates to fees. Class F units have lower fees and are only available for sale through an investment advisor (who charges his or her own additional fees!)).

    P.S. I found a similar discussion on the internet. It looks like the CRA does not consider voting and non voting common shares of a company (e.g. Class A vs Class B) “identical properties” unless there is a right of conversion (to non voting shares) attached to the voting shares. But I am not sure how that logic extends to Class A vs Class F units of a mutual fund. Often one is able to convert the class F units to class A units (typically if you fired your advisor and transferred converted class A units to a discount brokerage account). Is that a right of conversion?

    Anyone have any insights?

  39. Michael

    Hi there,
    Thank you for posting this informative article. I have a question about how to calculate my new ACB in the case where I have repurchased the shares I had just sold the day before for a lower price. Here is the example:

    I own 1000 shares with a an ACB of $80 per share.
    I sell 500 shares at $75 for a capital loss of $2500 plus $10 in commission expenses.
    I buy the 500 shares back the next day for $70 plus $10 in commission expenses.

    How do I calculate my new ACB? Do I include the commission expenses into the ACB?

    Have the transactions above resulted in a capital gain that needs to be claimed in the tax year (assume all these transactions occurred within the same tax year.

    Thank you for your time and consideration in responding to these questions.

  40. AdjustedCostBase.ca Post author

    Michael,

    There would be a capital loss of $2,510 ((($75/share x 500 shares) – $10) – ($80/share x 500 shares)). Assuming that there are no other transactions, both conditions for the superficial loss rule would be met, indicating that this is indeed a superficial loss.

    In that case, the superficial loss should be added back into the ACB, resulting in a total ACB (after the repurchase) of:

    $80,000 – $40,000 + $2,510 + ($70/share x 500 shares) + $10
    = $77,520

    Note that this can be calculated on AdjustedCostBase.ca as described here:

    http://www.adjustedcostbase.ca/blog/applying-the-superficial-loss-rule-with-adjusted-cost-base-ca/

  41. Michael

    Thank you for the response. Much appreciated. It seems so simple now that I see it. I knew I had generated a superficial loss, but I couldn’t figure out whether or not I had to claim a capital gain since I had repurchased the shares at a lower price. Now I see the logic of that specific ACB calculation.

    Thanks again for your reply.

  42. Jim

    Just came across this article and wanted a clarification on options. If I sold shares to create a loss but immediately bought some call options on stock to continue to have exposure to it, then sold the options and bought the stock back 30+ days later does this still trigger a loss or with the exposure to the options would the CRA consider this a superficial loss?

  43. AdjustedCostBase.ca Post author

    Jim,

    That would depend on the timing of when you sold the options. If you sell the options within 30 days after you sold the shares, then the loss on the sale of the shares would be a superficial loss. If you sell the options after 30 days, then the loss on the sale of the shares would not be a superficial loss.

    CORRECTION: If you sell the options within 30 days after you sold the shares, then there would be no superficial loss. If you sell the options after 30 days, however, there would be a superficial loss since you would still own the right to buy shares 30 days after the sale of the underlying shares.

  44. Maxx

    I had some shares that were below purchase price. I transferred those shares from a personal account to a joint account with my spouse. I assume I triggered a superficial loss?
    Now when we do dispose of those shares is the adjusted cost base only on my 50% of the shares or the entire amount of the shares? The shares have risen considerably and would result in a capital gain from both the original price I paid and the transfer price.
    Example purchased $10, transferred at $5, sold joint at $20.
    thank you for your assistance

  45. AdjustedCostBase.ca Post author

    Maxx,

    I believe the superficial loss rule would be triggered in that scenario. The superficial loss can be added to the ACB, resulting in a capital gain of $20/share when the shares are sold.

  46. Robert Skelton

    Your response to Jim (Aug 30, 2016)
    “If you sell the options within 30 days after you sold the shares, then the loss on the sale of the shares would be a superficial loss. If you sell the options after 30 days, then the loss on the sale of the shares would not be a superficial loss.”
    seems to conflict with what you told Medalic in Dec 2015: “The superficial loss rule can be triggered by a sale of the underlying shares if you own call options at the end of the superficial loss period (since call options constitute the right to acquire the underlying shares).”
    I am thinking the original (Dec 15) response is correct.
    Would you please clarify.
    Thanks

    Bob

  47. AdjustedCostBase.ca Post author

    Bob,

    Thank you for reporting the error. You’re right and I have corrected the comment above.

  48. ralph nicholson

    In regard to EXAMPLE#1- It appears that the STL rule should not apply since the purchase of the shares were not made within the 61 day window. The second condition obviously has met met – although the first condition, that the shares need to be bought within the 61 day period does not seem to have been met since the buy date was 11 months previous to the sell date.
    Can you please explain why?
    THX
    R Nicholson..

  49. AdjustedCostBase.ca Post author

    Ralph,

    The first condition for the superficial loss rule is satisfied in Example #1 because a purchase occurs on 2014-11-04, one day following the disposition on 2014-11-03.

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