Selling an investment at a loss can lower your taxes: a capital loss offsets capital gains. But if you, or someone the tax law treats as close to you, buys the same investment back too soon, the loss is denied. This is the superficial loss rule, and it catches many investors doing year-end tax-loss selling.
This guide is general information, not tax advice. Check the CRA's pages on capital losses or an accountant for your own situation.
The rule in one sentence
A loss on the sale of a property is a superficial loss when both of these are true:
- During the period that starts 30 days before the sale and ends 30 days after it, you or a person affiliated with you acquire the same property or an identical one (the "substituted property").
- At the end of that period, you or that affiliated person still own the substituted property, or have a right to acquire it.
That makes a 61-day window: the 30 days before, the day of the sale, and the 30 days after. Note that buying before the sale counts too. If you buy more units of a fund on November 20, then sell your older units at a loss on December 5, the rule can apply even if you never buy again.
For the CRA, properties are identical when each one is the same as all the others: shares of the same class of the same company, for example. Two ETFs from different providers that track the same index are a grey area; if you rely on that, ask a professional first.
Who counts as "affiliated"
The Income Tax Act has a precise list of affiliated persons. For an individual investor, the ones that matter most are:
- Your spouse or common-law partner. If you sell at a loss and your spouse buys the same shares within the window, your loss is denied.
- A corporation controlled by you or by your spouse, or by a group of affiliated persons, such as the two of you together.
- A trust of which you are a majority-interest beneficiary. Your own TFSA and RRSP are trusts of which you are the beneficiary, so a purchase in your TFSA or RRSP counts as a purchase by an affiliated person.
People who are not on that list are not affiliated just because they are family: a child, a parent, a sibling or a friend buying the same shares does not, by itself, trigger the rule.
What happens to the denied loss
A superficial loss is not simply erased in most cases. You cannot deduct it this year, but the person who acquired the substituted property usually adds the denied loss to the adjusted cost base (ACB) of that property. The loss is deferred, not lost: it lowers a future gain or increases a future loss when the replacement units are sold.
An example:
- You bought 100 shares for $5,000.
- On December 1 you sell them for $4,000: a $1,000 loss.
- On December 15 you buy 100 shares back for $4,100.
- The $1,000 loss is denied. Your new ACB is $4,100 + $1,000 = $5,100.
- In March you sell the 100 shares for $4,500. Your capital loss then is $4,500 − $5,100 = $600, and that one is allowed (as long as you don't buy back within the window again).
Over the whole story you put in $5,000 + $4,100 and took out $4,000 + $4,500, a $600 loss, and that is what you finally deduct. The rule only moved the loss to a later year.
When the loss is gone for good
The deferral only helps if the replacement property sits where gains and losses are taxed. Two cases destroy the loss instead:
- Buying back in a TFSA or RRSP. If you sell at a loss in your non-registered account and buy the same shares in your TFSA or RRSP within the window, the loss is denied. In principle it is added to the cost of the units in the registered account, but gains and losses there are never reported, so that addition is worth nothing. The loss is lost forever.
- Selling or contributing to a registered plan at a loss. Moving shares that have dropped in value into your TFSA, RRSP, FHSA, RRIF or RDSP (or a spousal RRSP where your spouse is the annuitant) is a sale for tax purposes, and the Income Tax Act sets any loss on it to nil. This applies even without a buy-back. If you want to contribute an investment that is down, selling it in the non-registered account first and contributing the cash is the usual alternative, but the 30-day rule then applies to any buy-back in the TFSA or RRSP.
Situations the rule does not cover
The CRA lists some sales where a loss is generally not superficial, including:
- a sale that is deemed to happen because you became or stopped being a resident of Canada;
- a deemed sale because of a change in use of the property;
- a deemed sale at death;
- the expiry of an option.
There are also special rules for corporations, trusts and partnerships, under which the loss is deferred differently. Those cases are worth a conversation with an accountant.
How to avoid an unwanted superficial loss
- Wait 31 days after the sale before buying back, and make sure no purchase happened in the 30 days before.
- Check your automatic purchases. A dividend reinvestment plan, a pre-authorized purchase plan or a regular contribution that buys the same security inside the window can trigger the rule.
- Check the whole household. Your spouse's accounts, your TFSA, your RRSP and any company you control all count.
- If you want to stay invested, consider buying a security that is not identical for the 30 days, then decide again. Ask a professional if you are unsure what counts as identical.
- Keep the paper trail. Note the trade dates, units and prices of every sale at a loss and every purchase around it.
How Indivia helps
Indivia checks superficial losses when it calculates your capital gains, on every plan including Free. A loss is denied when you, your spouse or a company you control bought the same security within 30 days before or after the sale and still held it 30 days after, using the people, spouses and company ownership you entered in People & companies.
For each denied loss, the sale shows why and where the loss went: added to the cost of the units bought back, added to the cost of a spouse's units, or "Bought back in a registered account (TFSA, RRSP…)", lost and added to no cost. A sale into a registered account is shown as a loss that is never allowed. If a flagged loss is not in fact superficial, you can mark it so on the sale.
On the Investor plan, the Tax pack gives each taxpayer's capital gains for the year with superficial losses and affiliated persons included, ready to check and export to CSV or PDF. Indivia only sees the accounts you have entered: purchases made in accounts you have not added cannot be checked.
Sources
- Capital losses and deductions: superficial loss, CRA
- Income Tax Act, section 54: definition of superficial loss
- Income Tax Act, section 40: paragraph 40(2)(g), denied losses
- Income Tax Act, section 53: paragraph 53(1)(f), adjustment to cost base
- Income Tax Act, section 251.1: affiliated persons
In Indivia’s help
Indivia keeps the numbers these guides talk about, for every property, account and person in your household.