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 plenty of speak 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 to be able 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 will need to first web any capital losses realized in 2022 towards 2022 capital good points. Solely if in case you have 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, nonetheless, a standard sentiment amongst buyers is that the markets will, ultimately, rebound, and promoting a inventory at a loss, merely for tax functions, might imply lacking out on the value 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, understand 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 should you purchase again too quickly. The superficial loss guidelines apply if property (or an “equivalent property”) that’s bought at a loss is repurchased inside 30 days, and continues to be held on the thirtieth day by you or an “affiliated individual.” An affiliated individual contains your partner or companion, a company managed by you or your partner or companion, or a belief of which you or your partner or companion is a majority-interest beneficiary (akin to your registered retirement financial savings plan or tax-free financial savings account).

Beneath the principles, your capital loss will probably be denied and added to the adjusted value base (tax value) of the repurchased safety. Meaning any advantage of the capital loss can solely be obtained when the repurchased safety is finally bought.

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Often, the superficial loss rule can journey up unaware taxpayers in surprising methods. Some planning situations have been offered to the Canada Income Company final fall on the Affiliation for Tax and Monetary Planning convention, and the CRA in June printed 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 bought 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 bought originally of September. The subsequent day, whereas talking together with his adviser, Mr. A learns that his capital lack of $20,000 will probably 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 eliminate 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 individual (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 shouldn’t be a “superficial loss” in that case, as a result of although Ms. B’s RRSP is affiliated with Mr. A and it acquired the equivalent 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 a superb, long-term funding for her RRSP, regardless of her partner’s resolution to promote the identical shares originally of September 2021? The adviser means that on Oct. 1, 2021, she repurchase the 1,200 shares in her RRSP that she simply bought 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 bought 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, nonetheless, 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 remaining caveat in regards to the superficial loss guidelines within the context of equivalent 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 equivalent 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 at the very least 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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