Selling stock or shares at a loss could be tax advantageous if you have capital gains income which the loss could be applied against. However, you need to be sure that your losses are not considered superficial losses as there are special rules pertaining to these losses.
What is a superficial loss?
In basic terms, a superficial loss is generated when identical property is acquired either 30 days before the loss or 30 days after the loss occurs. The property acquired remains the property of the individual 30 days after the loss.
For example, if you owned 100 shares of XYZ Company which you sold for a loss of $100 and then 15 days later you acquired another 100 shares of XYZ to hold onto, the loss would be considered a superficial loss. Under section 40(2)(g) of the Income Tax Act, a taxpayer’s loss from the disposition of property as a result of a superficial loss is deemed to be nil.
How does a superficial loss affect my tax return filing?
Under section 53(1) (f) of the Income Tax Act, the superficial loss that is denied is added to the adjusted cost base of the shares. Investors will have to carefully track this balance as investment statement reports may not always include these adjustments. It is important to include these losses in your adjusted cost base because when these shares are eventually sold, a higher cost base will result in a smaller income and save you on taxes.
In the example of the XYZ shares above, the loss of $100 will be added to the cost of the new XYZ shares purchased. When those new shares are sold, the higher cost base will reduce the taxable income.
What else do I need to know about superficial losses?
What constitutes identical property and the various exceptions to the superficial loss rules can make the application of these rules confusing.
Where possible, it is best to plan dispositions so that your losses are not considered superficial and therefore can be deducted on disposition rather than deferred to the future.
If you would like help with managing the tax implications of your investment transactions, contact us today!