Jamie Golombek: Tax-loss promoting? Beware the ‘superficial loss’ guidelines

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Many monetary markets are sharply down in 2022, so there’s been loads of discuss up to now month about tax-loss promoting, a subject that typically solely comes up at year-end. Tax-loss promoting is the act of promoting a safety, say a inventory, bond or mutual fund, that’s in a loss place as a way to use that loss to recuperate tax paid or payable on capital good points.

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For this technique to be efficient, you could have capital good points, since capital losses can solely be used to offset capital good points. You need to first internet any capital losses realized in 2022 in opposition to 2022 capital good points. Solely when you’ve got extra losses, can they then be carried again three years to recuperate taxes paid in 2021, 2020 or 2019, or be carried ahead indefinitely to offset a capital achieve in some future yr.

Within the context of depressed markets and tax-loss promoting, nevertheless, a standard sentiment amongst traders is that the markets will, finally, rebound, and promoting a inventory at a loss, merely for tax functions, might imply lacking out on the worth restoration if issues flip round. To this finish, wouldn’t or not it’s good to have your cake and eat it, too? In different phrases, promote your dropping tech inventory, notice the loss after which purchase it again once more to catch the restoration?

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The issue with doing so, as common readers will know, is that you possibly can get caught by the “superficial loss” guidelines if you happen to purchase again too quickly. The superficial loss guidelines apply if property (or an “an identical property”) that’s offered at a loss is repurchased inside 30 days, and continues to be held on the thirtieth day by you or an “affiliated particular person.” An affiliated particular person consists of your partner or companion, an organization managed by you or your partner or companion, or a belief of which you or your partner or companion is a majority-interest beneficiary (comparable to your registered retirement financial savings plan or tax-free financial savings account).

Below the foundations, your capital loss might be denied and added to the adjusted price base (tax price) of the repurchased safety. Meaning any advantage of the capital loss can solely be obtained when the repurchased safety is in the end offered.

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Sometimes, the superficial loss rule can journey up unaware taxpayers in sudden methods. Some planning eventualities have been offered to the Canada Income Company final fall on the Affiliation for Tax and Monetary Planning convention, and the CRA in June revealed its formal response in a technical interpretation.

The primary situation concerned spouses who had separate brokerage accounts, every with totally different funding advisers at totally different monetary establishments. On Sept. 1, 2021, Mr. A determined to promote 1,000 shares of ABC Corp. in his non-registered account. He incurred a capital lack of $20,000, as a result of he had paid $30 per share again in 2018, and offered them for $10 per share.

On Sept. 7, 2021, his partner, Ms. B, who has her account with a unique adviser at a unique brokerage agency, bought, in her RRSP, 1,200 shares of ABC Corp. Whereas having dinner on Sept. 20, the couple mentioned their respective portfolios and shortly realized that, coincidentally, Ms. B had acquired the identical shares that Mr. A had offered at the start of September. The following day, whereas talking along with his adviser, Mr. A learns that his capital lack of $20,000 might be denied as a superficial loss.

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To keep away from the loss being denied, Mr. A’s adviser suggests his spouse get rid of her shares of the corporate no later than Sept. 28, 2021 (as a result of two-business-day deadline following the day of the transaction for the commerce to decide on the trade). Thus, neither Mr. A nor an affiliated particular person (on this case, Ms. B’s RRSP) would personal the property on the finish of the 30-day interval.

The CRA agreed that Mr. A’s loss is just not a “superficial loss” in that case, as a result of although Ms. B’s RRSP is affiliated with Mr. A and it acquired the an identical shares, it didn’t personal them on the finish of the 30-day interval. Thus, Mr. A might declare the loss.

However what if Ms. B’s adviser insists that ABC Corp. shares are an excellent, long-term funding for her RRSP, regardless of her partner’s choice to promote the identical shares at the start of September 2021? The adviser means that on Oct. 1, 2021, she repurchase the 1,200 shares in her RRSP that she simply offered on Sept. 28.

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The CRA commented that if she did, Mr. A’s loss would, certainly, be superficial since Ms. B reacquired the shares on Oct. 1, 2021, so her RRSP owned the shares within the interval ending 30 days after Mr. A offered his shares (on Sept. 1, 2021). That’s as a result of the calculation of the 30-period begins with the day after the disposition, making Oct. 1, 2021, the final day of the 30-day interval.

But when Ms. B waits one additional day, till Oct. 2, to repurchase the shares in her RRSP, the CRA confirmed that the superficial loss rule wouldn’t apply. The company did warning, nevertheless, that the Earnings Tax Act accommodates a basic anti-avoidance rule, however refused to touch upon its potential software on this scenario.

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One ultimate caveat concerning the superficial loss guidelines within the context of an identical properties and index funds or exchange-traded funds. In 2001, the CRA said that, in its view, index funds from totally different monetary establishments are thought-about to be an identical properties in the event that they monitor the identical index (say, the S&P/TSX composite), so merely promoting one index fund and changing it with an identical one from one other issuer might set off the superficial loss guidelines if it hasn’t been a minimum of 30 days.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com

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