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.<\/p>\n
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.\u00a0 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.\u00a0 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<\/a>:<\/p>\n 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.<\/p><\/blockquote>\n The partial application of the superficial loss rule can be explained in different ways, depending on the circumstances.\u00a0 For certain cases, the application of the rule is simpler than in others.\u00a0 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.\u00a0 The simpler cases are the following:<\/p>\n When Shares are Sold at a Loss and then Partially Reacquired within the Superficial Loss Period This is the case where you own A<\/em> or more shares, sell A<\/em> shares at a loss (more than 30 days after the last acquisition date), and then reacquire B<\/em> shares (within 30 days after the sale date) where B<\/em> is less than A<\/em>.\u00a0 No other sales or acquisitions occur during the superficial loss period.<\/p>\n 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.\u00a0 If more shares are reacquired than sold (B<\/em> > A<\/em>) then the entire capital loss would be deemed a superficial loss. Let’s look at the following example (commissions are omitted for simplicity):<\/p>\n Example 1<\/span><\/p>\n From the sale on April 9, 2015 a loss of $100.00 is realized ($200.00\u00a0\u2013 $300.00).\u00a0 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.\u00a0 According to the CRA’s administration of the rule for the partial disposition of shares, 25% (25 \/ 100) of the loss would be denied.\u00a0 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).<\/p>\n In cases where the number of shares reacquired (B<\/em>) is greater than the number of shares sold (A<\/em>) then the superficial loss rule will deny the entire capital loss.\u00a0 In the example above, if 100 or more shares were reacquired instead of 25 shares, then the loss would be fully denied.<\/p>\n In cases like this where B<\/em> is less than A<\/em> then the following formula can be applied to determine the superficial loss:<\/p>\n The allowable capital loss can be found by subtracting the superficial loss from the total loss:<\/p>\n When Shares are Purchased and then Partially Sold within the Superficial Loss Period This is the case where you purchase A<\/em> shares, and then sell B<\/em> shares at a loss within the superficial loss period (within 30 days following the acquisition date) where B<\/em> is less than A<\/em>.\u00a0 No other sales or acquisitions occur within the superficial loss period.<\/p>\n 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.\u00a0 If more shares are remaining than sold ((A<\/em>\u00a0\u2013 B<\/em>) > B<\/em>) then the entire capital loss would be deemed a superficial loss. Let’s look at another example (commissions are omitted for simplicity):<\/p>\n Example 2:<\/span><\/p>\n From the sale on April 10, 2015 a loss of $80.00 is realized ($160.00\u00a0\u2013 ($300.00 x (80 shares \/ 100 shares))).\u00a0 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.\u00a0 According to the rules for partial disposition of shares, 25% (20 \/ 80) of the loss would be denied.\u00a0 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).<\/p>\n In cases where the number of shares remaining (A<\/em> \u2013 B<\/em>) is more than the number of shares sold (B<\/em>) then the superficial loss rule would deny the entire capital loss.\u00a0 In the example above, if 50 or fewer shares were sold instead of 80 shares, the loss would be fully denied.\u00a0 In other words, in cases like this, when less than half the shares are sold then the loss is fully denied.\u00a0 When more than half the shares are sold then the loss is partially denied.<\/p>\n In cases where (A<\/em> \u2013 B<\/em>) is less than B<\/em> (more than half the shares are sold) then the following formula can be applied to determine the superficial loss:<\/p>\n The allowable capital loss can be found by subtracting the superficial loss from the total loss:<\/p>\n When Multiple Acquisitions and\/or Multiple Dispositions Occur Within the Superficial Loss Period<\/strong><\/span><\/p>\n 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.<\/p>\n In such cases the following general formula for the superficial loss rule for partial dispositions of property<\/a> can be used:<\/p>\n 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.\u00a0 Note that min(S, P, B) indicates the minimum value among S, P and B.<\/p>\n And once again:<\/p>\n 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.\u00a0 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.<\/p>\n Avoid Headaches by Deferring the Entire Capital Loss for Simplicity<\/strong><\/span><\/p>\n The conditions for partially applying the superficial loss rule for partial dispositions provide an advantage to Canadian investors.\u00a0 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.<\/p>\n 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).\u00a0 If the loss is relatively small it may not be worth the headache of performing these calculations to determine the partially allowable loss.\u00a0 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.<\/p>\n Applying the Superficial Loss Rule to the Partial Disposition of Shares with AdjustedCostBase.ca<\/strong><\/span><\/p>\n AdjustedCostBase.ca<\/a> 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<\/a>.\u00a0 It can also be used to partially deny a capital loss.<\/p>\n Let’s take another look at example 1 from above:<\/p>\n After entering these transactions on AdjustedCostBase.ca<\/a> you should see the following:<\/p>\n 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.<\/p>\n To apply the superficial loss rule, click on the “Edit” link for the April 9 sale to edit the transaction.\u00a0 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.\u00a0 The form should appear as follows:<\/p>\n After editing the transaction the list of transactions should appear as follows:<\/p>\n\n
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Superficial Loss = (B \/ A) x (Total Loss)\r\n = ((Number of Shares Reacquired) \/ (Number of Shares Sold)) x (Total Loss)<\/pre>\n
Allowable Capital Loss = Total Loss \u2013 Superficial Loss<\/pre>\n
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Superficial Loss = ((A \u2013 B) \/ B) x (Total Loss)\r\n = ((Number of Shares Remaining) \/ (Number of Shares Sold)) x (Total Loss)<\/pre>\n
Allowable Capital Loss = Total Loss \u2013 Superficial Loss<\/pre>\n
Superficial Loss = (min(S, P, B) \/ S) x (Total Loss)<\/pre>\n
Allowable Capital Loss = Total Loss \u2013 Superficial Loss<\/pre>\n
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![\"Transactions](\"https:\/\/www.adjustedcostbase.ca\/blog\/wp-content\/uploads\/superficial_loss_rule_partial_example_1_transactions.png\")
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![\"Transactions](\"https:\/\/www.adjustedcostbase.ca\/blog\/wp-content\/uploads\/superficial_loss_rule_partial_example_1_transactions_after_applying_superficial_loss_rule.png\")
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