What Is a Superficial Loss and How Does CRA Deny It in Canada?

You sold a stock or fund at a loss, perhaps to claim the loss against gains, and then bought the same thing back a few weeks later. Many investors do this without realizing the Income Tax Act has a rule aimed at exactly this pattern.

This article explains in plain terms what a superficial loss is, who counts as affiliated with you, what happens to the denied loss, and the situations that are treated differently. Your own facts matter, so treat this as general information.

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

What makes a loss superficial

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. The rule also requires that the person still owns the property, or has a right to acquire it, at the end of that period.

Buying back before you sell can trigger the rule just as buying back afterward can. The idea is that if you end up holding the same investment, you have not really given up your position, so the loss is not treated as a true loss.

Who counts as affiliated with you

The rule is not limited to your own purchases. Affiliated persons include your spouse or common-law partner and a corporation that you or your spouse control. So a repurchase by your partner, or by a company you control, can bring the rule into play.

• You sell at a loss and buy the same shares back yourself within the window.
• You sell at a loss and your spouse or common-law partner buys identical shares within the window.
• You sell at a loss and a corporation you or your spouse control buys identical shares within the window.

Whether someone else is affiliated with you in a more unusual setting depends on the facts, and it is worth confirming with a lawyer or accountant.

What happens to the denied loss

A superficial loss cannot be deducted. It is not simply lost, however. It is usually added to the cost base of the substituted property, meaning the shares or units that were bought back.

In practice, the deferred loss comes back later. A higher adjusted cost base (ACB) means a smaller gain, or a larger loss, when you eventually sell the replacement property. Cost base is generally the cost of the property plus expenses to acquire it. Only one-half of a capital gain is taxable and only one-half of a capital loss is allowable, so the benefit of a higher cost base is felt at that rate.

Situations that are treated differently

Certain situations, such as the owner becoming a non-resident or the owner's death, are not treated as superficial losses. If you are leaving Canada or dealing with an estate, the timing of sales and purchases can therefore be analysed differently.

The rule also turns on the words same or identical property. Whether a particular replacement investment qualifies, such as a similar but not identical fund, depends on the details, and a lawyer or accountant can confirm it.

What to do next

• List every sale at a loss and every purchase of the same security in the 30 days before and after.
• Check purchases made by your spouse or common-law partner and by any corporation you or your spouse control.
• A superficial loss cannot be deducted, so do not claim a loss that meets the test, and note that it is usually added to the cost base of the substituted property, so keep a record of it.
• Keep trade confirmations and account statements that show dates, quantities and prices.
• If you already claimed a loss and later realize it was superficial, speak to a lawyer or accountant about correcting your return.

Frequently asked questions