Not all losses on the sale of capital property can be used to offset gains. The claim of capital losses on a disposition of shares can be denied if both of the following apply:
- The identical shares are repurchased 30 days before or after the disposal by the taxpayer or by an affiliated person; and
- The taxpayer or the affiliated person still own or has a right to buy the shares 30 days after the sale.
Affiliated persons include, in relation to the taxpayer, a spouse/common-law partner, corporation controlled by the taxpayer or his spouse/common-law partner, and taxpayer’s or taxpayer’s spouse’s RRSP, TFSA, or RRIF.
Note: Since children are not included in the definition of affiliated persons, shares can be sold to a taxpayer’s children without triggering the superficial loss rules.
What happens to the denied loss?
The loss is not lost, it is only deferred. Instead of the transferor being allowed to use the loss, the acquiring person can usually add an amount equal to the superficial loss to the cost base of the substituted property. This will reduce any gain or increase any loss on the subsequent disposition of the share.
The superficial loss rules can provide for a neat tax planning opportunity. This would enable the transfer of capital losses between spouses, allowing the spouse with accrued and about to be realized gains to use them to reduce their tax payable on capital gains.
