Superficial Loss Rule: When the CRA Denies Your Capital Loss in Canada

Selling an investment at a loss can reduce your tax, but only if the loss is allowed. If you sell at a loss and then buy the same security back, the CRA may treat the loss as superficial and deny it for now.

This article walks through the 30-day window, who counts as an affiliated person, what happens to the denied loss, and the situations the rule does not catch. Individual cases can be tricky, so a short check with an accountant before you trade is sensible.

This article covers Canadian federal tax law, which applies in every province.

What a superficial loss is

Under section 54 of the Income Tax Act, a loss on a disposition is superficial if you or a person affiliated with you acquires the same or identical property during the period starting 30 days before and ending 30 days after the sale, and still owns it, or has a right to acquire it, at the end of that period. The rule is aimed at selling to claim a loss while keeping the same position.

If the loss is allowed, half of it is an allowable capital loss under the Income Tax Act, and it can be used only against taxable capital gains. That is why a denied loss can matter.

The 30-day window in practice

The window covers 30 days before the sale and 30 days after it. That means a repurchase made before you sell can trigger the rule just as a repurchase made afterward can. Both of these are covered:

• You buy the same shares in the month before you sell other shares of that kind at a loss and still hold the purchased shares at the end of the period.
• You sell at a loss and buy the same security back within the following 30 days, and still hold it or a right to acquire it at the end of the period.

The test is about holding the property, or a right to acquire it, at the end of the period. If you buy back but sell again before the period ends, your facts may be different. Confirm the timing with a professional before relying on that.

Affiliated persons and common traps

The rule is not limited to your own purchases. Affiliated persons include your spouse or common-law partner and a corporation you or your spouse control. If your spouse buys the same security a week after you sell at a loss, the loss may be superficial.

A common trap is overlooking purchases made by someone other than you. A purchase by your spouse or common-law partner, or by a corporation you or your spouse control, can count for this test. Each purchase made in the window by you or an affiliated person is worth checking. Whether other accounts or arrangements are caught depends on the facts, so ask an accountant.

What happens to a denied loss

A superficial loss cannot be deducted, and it is usually added to the cost base of the substituted property. The loss is not necessarily gone for good. Because it increases the ACB, it can reduce the gain, or increase the loss, when the substituted property is later sold. ACB is generally calculated by adjusting cost under section 53, and it can never be negative.

The rule also has exceptions. Certain situations, such as the owner becoming a non-resident or the owner's death, are not treated as superficial losses.

What to do next

• List every sale at a loss and every purchase of the same security by you or your spouse, or a corporation either of you controls, around the sale date.
• Count 30 days before and 30 days after each sale.
• Check whether anything bought in the window is still held, or a right to acquire it, at the end.
• If a loss is denied, adjust the ACB of the substituted property and keep a record of it.
• Report your dispositions on Schedule 3 for the year they occurred.

If you are planning to sell at a loss near year-end, or you hold the same security in several accounts, speak with an accountant or tax lawyer before you sell.

Frequently asked questions