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 a whole lot 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 with a view 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 could have capital beneficial properties, since capital losses can solely be used to offset capital beneficial properties. You should first internet any capital losses realized in 2022 in opposition to 2022 capital beneficial properties. Solely you probably have 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 yr.

Within the context of depressed markets and tax-loss promoting, nonetheless, a typical sentiment amongst buyers is that the markets will, ultimately, 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 would 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 offered 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 consists of your partner or accomplice, a company managed by you or your partner or accomplice, or a belief of which you or your partner or accomplice is a majority-interest beneficiary (reminiscent of your registered retirement financial savings plan or tax-free financial savings account).

Below the principles, your capital loss will likely 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 finally offered.

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Often, the superficial loss rule can journey up unaware taxpayers in surprising methods. Some planning eventualities have been introduced 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 offered them for $10 per share.

On Sept. 7, 2021, his partner, Ms. B, who has her account with a special adviser at a special 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 first of September. The subsequent day, whereas talking along with his adviser, Mr. A learns that his capital lack of $20,000 will likely 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 choose the change). 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 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 , long-term funding for her RRSP, regardless of her partner’s determination to promote the identical shares at first 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 further 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 common anti-avoidance rule, however refused to touch upon its potential utility 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 said that, in its view, index funds from completely 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 the same one from one other issuer may set off the superficial loss guidelines if it hasn’t been not less than 30 days.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. [email protected]

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