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

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Ditching a dropping inventory, for instance, to offset features after which shopping for it again too quickly will price you

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Many monetary markets are sharply down in 2022, so there’s been loads of discuss prior 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 so as to use that loss to get well tax paid or payable on capital features.

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For this technique to be efficient, you have to have capital features, since capital losses can solely be used to offset capital features. It’s essential to first web any capital losses realized in 2022 towards 2022 capital features. 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 acquire in some future 12 months.

Within the context of depressed markets and tax-loss promoting, nonetheless, a typical sentiment amongst traders is that the markets will, ultimately, 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 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 may get caught by the “superficial loss” guidelines when you purchase again too quickly. The superficial loss guidelines apply if property (or an “equivalent 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 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).

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

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Often, 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 printed 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 offered them for $10 per share.

On Sept. 7, 2021, his partner, Ms. B, who has her account with a distinct adviser at a distinct 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 originally of September. The following 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 get rid of her shares of the corporate no later than Sept. 28, 2021 (because of the two-business-day deadline following the day of the transaction for the commerce to choose 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 isn’t a “superficial loss” in that case, as a result of despite the fact that 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 an excellent, long-term funding for her RRSP, regardless of her partner’s determination 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 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, nonetheless, that the Earnings Tax Act comprises a common anti-avoidance rule, however refused to touch upon its potential utility on this scenario.

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One closing caveat concerning the superficial loss guidelines within the context of equivalent 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 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 the same 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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