Superficial Loss (Canada)
This is from one prospectus I was working on:
A superficial loss is deemed to occur when a client sells a security to trigger a capital loss, and the identical security is then purchased by either the client, the spouse or a corporation controlled by either person, within 30 calendar days before or after the sale, AND that person still owns the same security 30 calendar days after the sale date. In this case the loss on the sale will be considered a superficial loss and cannot be used to offset realized capital gains. This superficial loss amount is then added to the cost base of the substituted investment.
Finally, recall that superficial losses also apply to purchases up to 30 days before the sale.
Note: Professional tax advice should be sought when trying to determine what constitutes an identical security, as these rules can be quite complicated.
Potential Strategies
In order to avoid the superficial loss rules, you may consider the following:
1. The most straightforward strategy is simply to delay the repurchase of the identical security until the 30 calendar day waiting period is over. (i.e. after 31 days).
2. If the purchase is made by someone other than the client, the spouse or corporation controlled by either person, then the superficial loss can be avoided. Having the client’s children, grandchildren, or siblings acquire the security will allow the client to claim the loss and avoid the superficial loss rules.
3. Purchase a similar but not “identical securityâ€. i.e. common shares of a company in the same industry as the company whose shares were disposed of.