Superficial Loss Rules

The Income Tax Act contains several sections to disallow tax losses on transfers to affiliated persons. The meaning of Affiliated Person can be found HERE. The meaning of Transfer can be found HERE. 

Superficial Loss Rules

These rules are outlined in Section 54 of the Income Tax Act and are part of the Stop Loss Rules.

This rule applies where a person or affiliated person acquires or had the right to acquire the same or identical property within 30 days after the disposition or 30 days before the disposition of the property in question. The disposition could have been made to anyone. In these cases, the loss on the disposition is denied and the amount of the loss is added to the cost of the substituted property. 

There are some exceptions to this rule including:

1. a deemed disposition of a loan or deposit ceasing to be an eligible loan of an international banking centre business (paragraph 33.1(11)(a))

2. a deemed disposition where a taxpayer acquires property for some purpose and later uses it for the purpose of gaining or producing income, or vice versa (subsection 45(1))

3. a deemed disposition of a bad debt or a share, under the provisions of section 50

4. a deemed disposition on the death of the taxpayer (section 70)

5. a deemed disposition by a trust under subsection 104(4)

6. a deemed disposition when a taxpayer becomes, or ceases to be, resident in Canada

7. a disposition under the mutual fund reorganization rules of paragraph 132.2(1)(f)

8. a deemed disposition where a life insurer changes the use of the property (subsection 138(11.3)

9. certain dispositions under the mark-to-market rules applicable to financial institutions under subsection 142.5(2) and paragraph 142.6(1)(b)

10. a deemed disposition of assets by an employee profit sharing plan under subsection 144(4.1) or 144(4.2)

11. a deemed disposition where a corporation ceases to be exempt from Part 1 tax (subsection 149(10))

12. the expiration of an option

13. a disposition of a debt obligation where the loss was denied under paragraph 40(2)(e.1)

14. a disposition by a corporation the control of which is acquired within 30 days after the disposition

15. a disposition by a person that becomes or ceases to be exempt from tax under Part 1 within 30 days after the disposition

The purpose of this rule is to prevent taxpayers from realizing deductible capital losses without any real intention to dispose of the property in question. However, taxpayers are motivated to obtain some tax benefit from their poor performing investments without permanently disposing of them.

There are some tax planning ideas to avoid this problem HERE.

Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice. 

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