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 previously 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 with the intention to use that loss to get well tax paid or payable on capital beneficial properties.

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For this technique to be efficient, you should have capital beneficial properties, since capital losses can solely be used to offset capital beneficial properties. You have to first internet any capital losses realized in 2022 towards 2022 capital beneficial properties. Solely when you’ve got extra losses, can they then be carried again three years to get well taxes paid in 2021, 2020 or 2019, or be carried ahead indefinitely to offset a capital achieve in some future 12 months.

Within the context of depressed markets and tax-loss promoting, nonetheless, a standard sentiment amongst traders is that the markets will, finally, rebound, and promoting a inventory at a loss, merely for tax functions, may imply lacking out on the worth restoration if issues flip round. To this finish, wouldn’t 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 can get caught by the “superficial loss” guidelines for those who purchase again too quickly. The superficial loss guidelines apply if property (or an “an identical 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 particular person.” An affiliated particular person contains your partner or associate, an organization managed by you or your partner or associate, or a belief of which you or your partner or associate is a majority-interest beneficiary (resembling your registered retirement financial savings plan or tax-free financial savings account).

Below the principles, your capital loss shall be denied and added to the adjusted value base (tax value) of the repurchased safety. Which means any advantage of the capital loss can solely be obtained when the repurchased safety is in the end bought.

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Sometimes, the superficial loss rule can journey up unaware taxpayers in surprising methods. Some planning situations had 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 completely different funding advisers at completely 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 at the start of September. The subsequent day, whereas talking together with his adviser, Mr. A learns that his capital lack of $20,000 shall 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 alternate). 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 isn’t a “superficial loss” in that case, as a result of though 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 may declare the loss.

However what if Ms. B’s adviser insists that ABC Corp. shares are a very good, long-term funding for her RRSP, regardless of her partner’s resolution 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 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 incorporates a basic anti-avoidance rule, however refused to touch upon its potential software on this state of affairs.

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One remaining caveat in regards to the superficial loss guidelines within the context of an identical properties and index funds or exchange-traded funds. In 2001, the CRA acknowledged that, in its view, index funds from completely different monetary establishments are thought of to be an identical properties in the event that they observe 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 may 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 Non-public Wealth in Toronto. Jamie.Golombek@cibc.com

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