When is a Loss Considered to be Superficial?

Walter Harder

If you sell a capital property and the net proceeds from the sale are less than your adjusted cost base, you have a capital loss – but only if you don’t purchase (or acquire the right to purchase) an identical property within 30 days before or after the sale of the capital property.

The key concept here is the acquisition of an identical property.  CRA considers two properties to be identical if they are the same in all material aspects.  The following are examples of identical properties:

• Shares – in the same class issued by the same company (regardless of which exchange they are listed on)
• Units in the same mutual fund trust or corporation
• Bonds – issued by the same debtor with the same rights and return rates, regardless of the principal amount except in the case of stip bonds where bonds with the coupons attached are not identical to the same bond with the coupons removed
• Bullion or certificates for the same precious metal

When identical properties are purchased, the adjusted cost base is aggregated, and the adjusted cost base of each property is the total cost base divided by the number of properties owned.

When identical properties are disposed of, the investor is deemed to have disposed of average properties, not any particular property.  The seller is never deemed to have sold the newest or oldest of the properties, and the cost base of each of the remaining properties is not changed by the disposition.

Two exceptions to this rule are:

1. The proceeds are less than the adjusted cost base of the properties disposed of, the seller acquired at least some of the properties in the period starting 30 days before the sale, and he does not dispose of all of the properties.
2. The proceeds are less than the adjusted cost base of the properties disposed of, and the seller reacquires (or obtains the right to acquire) identical properties within 30 days after the disposition.

In volatile markets, sellers may sell properties when the price begins to fall and then reacquire them at a lower price point.  Were it not for the superficial loss rules; the seller would have a capital loss on the disposition and have a lower adjusted cost base on the reacquired properties.  However, the superficial loss rules provide that the loss of the disposition is deemed to be nil and that the adjusted cost base of the properties owned or reacquired is increased by the amount of the loss.

Example: Jill owned 1000 common shares of Air Canada.  The adjusted cost base of her shares was $25.00 per share.  A few weeks ago, when the shares dipped below $20.00 per share, she decided to sell 500 of her shares for $20.00 per share (after commission). 

At that time, she suffered a $5.00 per share loss on the $500 shares for a $2,500 capital loss.  The adjusted cost base of her remaining 500 shares was still $25.00 per share.

However, last week, when the shares had fallen to $16 per share, she decided to reacquire the 500 shares at that price. 

Because of the superficial loss rules, she cannot claim the $2,500 loss but instead must add it to the adjusted cost of her shares.  After the reacquisition, the adjusted cost base of her 1000 shares is $25.00/share x 500 shares + $16.00/share x 500 shares + $2,500 = $12,500 + $8,000 + $2,500 = $23,000 ($2.30 per share).

Jill’s brokerage firm will issue a T5008 slip showing the $2,500 loss, so care must be taken when preparing Jill’s return unless she disposes of all of her Air Canada shares before the end of the year.