Superficial loss

A seller or buyer meets this term when someone disposes of shares or other capital property at a loss and the property comes back soon after. The CRA gives a spouse or common-law partner, and a corporation controlled by the taxpayer or that spouse, as examples of affiliated persons, so a family company can be caught as well as the individual.

What happens to the loss

The CRA says a taxpayer with a superficial loss cannot deduct it in calculating income for the year. The CRA adds that the person who acquires the substituted property can usually add the amount to that property’s adjusted cost base, which lowers a later capital gain or raises a later capital loss. Section 54 lists exceptions, including the expiry of an option and a disposition by a taxpayer that was subject to a loss restriction event within 30 days after the disposition.

What to ask

• Whether the seller or an affiliated person bought back the same or an identical property near the sale date
• Whether an exception in the section 54 definition applies, which the accountant should confirm
• Whether the denied amount is being added to the cost base of the property that came back

For how gains and losses are treated on a sale, see how capital gains are taxed when you sell your business.