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Discussion Starter · #1 ·
I have few transaction that I think will be considered superficial loss by CRA as I was switching between CGL.C and MNT based on the premium/discount of MNT.
Both funds track Gold in Canadian dollars and should be considered identical for tax purposes. Please, correct me if I am wrong.

Should I enter these superficial loss transactions in Schedule 3 of the tax return?
I am supposed to report all dispositions resulting in loss/gain on Schedule 3, but the form doesn’t seem well designed to accommodate superficial losses, so I'm not sure how to report transactions involving superficial loss.

I can't decide between these 2 options, which both make sense to me and CRA is not very clear of the requirements:

  • Don't record the superficial loss in Schedule 3 and adjust (increase) the ACB of the substituted property with the loss amount
  • Record the superficial loss transactions in Schedule 3, but adjust the ACB such that it equals the proceeds of disposition less the commission resulting in zero loss/gain. Still adjust (increase) the ACB of the substituted property with the loss amount

I'd really appreciate if someone can shed some light on this situation.
 

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Discussion Starter · #3 ·
If you have an online CRA account, you may want to check what slips CRA has on file for these investments before deciding to skip reporting it.


Cheers
I assume later this year CRA will receive the T5008 forms from TD showing that I had a loss, but CRA won't automatically know it was superficial loss.
 

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Questions for clarification -did you carry this position into 2020? does the net effect of it all result in an open position entering 2021? If so how does the position size compare to the size at the beginning of the year?
 

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Discussion Starter · #6 ·
Questions for clarification -did you carry this position into 2020? does the net effect of it all result in an open position entering 2021? If so how does the position size compare to the size at the beginning of the year?
The positions were opened in 2020. Due to the superficial loss the ACB of the replacement fund was increased twice in 2020. One of the funds had open position in 2021 and I switched half of the position with the other fund in January 2021. I am planning on Schedule 3 the sales on Jun 10 and Nov 25 to show nil gain/loss due to superficial loss. Please, see below for details.

MNT transactions: Nov 25th ACB increased with $313.36
DateTransactionPrice / ShareSharesCommissionCapital GainsShare BalanceACB ChangeACBACB/Share
2020-May-12Buy$26.98957
$9.99​
$0.00​
957​
$25,829.85​
$25,829.85​
$26.99​
2020-Jun-10Sell$26.95957
$9.99​
-$43.97
0​
-$25,829.85​
$0.00​
#DIV/0!​
2020-Nov-25Buy$24.501,270
$9.99​
$0.00​
1270​
$31,443.95​
$31,443.95
$24.76​
2021-Jan-15Sell$26.83600
$9.99​
$1,232.60​
670​
-$14,855.41​
$16,588.54​
$24.76​


CGL.C transactions: June 10th ACB increased with $43.97
DateTransactionPrice / ShareSharesCommissionCapital GainsShare BalanceACB ChangeACBACB/Share
2020-Jun-10Buy$19.94600
$9.99​
$0.00​
600​
$12,016.96​
$12,016.96
$20.03​
2020-Jun-11Buy$20.30682
$9.99​
$0.00​
1282​
$13,854.59​
$25,871.55​
$20.18​
2020-Oct-30Buy$21.63259
$9.99​
$0.00​
1541​
$5,612.75​
$31,484.30​
$20.43​
2020-Nov-25Sell$20.231,541
$9.99​
-$313.36
0​
-$31,484.30​
$0.00​
#DIV/0!​
2021-Jan-15Buy$20.082,539
$9.99​
$0.00​
2539​
$50,993.11​
$50,993.11​
$20.08​
2021-Jan-15Buy$20.05599
$9.99​
$0.00​
3138​
$12,019.94​
$63,013.05​
$20.08​
 

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If you are of the view that they are identical properties shouldn’t you treat all the transactions as one group? Suggest you write to the CRA via your local tax office with all details and formally request verification that this is accurate. Tax law precludes you from using the loss to offset other gains. As long as you start the enquiry and don’t use the loss it’s in their court.

That said, I am not convinced they are identical properties. While they both point back to gold that doesn’t make them identical. These are not both index ETFs. They have different legal structure (ETR, ETF), different redemption/conversion characteristics, etc. The importance of these types of differences is how they impact the arbitrage opportunity and in turn are reflected in the price of the security which is cause for a difference in price for reasons other than the price of gold. These must be examined to arrive at whether an investor would have a preference of one over the other. If you want to be certain you can write the CRA on this as well and they will tell you their interpretation.
 

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it Is my view that
If you are of the view that they are identical properties shouldn’t you treat all the transactions as one group? Suggest you write to the CRA via your local tax office with all details and formally request verification that this is accurate. Tax law precludes you from using the loss to offset other gains. As long as you start the enquiry and don’t use the loss it’s in their court.

That said, I am not convinced they are identical properties. While they both point back to gold that doesn’t make them identical. These are not both index ETFs. They have different legal structure (ETR, ETF), different redemption/conversion characteristics, etc. The importance of these types of differences is how they impact the arbitrage opportunity and in turn are reflected in the price of the security which is cause for a difference in price for reasons other than the price of gold. These must be examined to arrive at whether an investor would have a preference of one over the other. If you want to be certain you can write the CRA on this as well and they will tell you their interpretation.
In my view they are not identical properties.
 

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Discussion Starter · #9 · (Edited)
If you want to be certain you can write the CRA on this as well and they will tell you their interpretation.
Thanks for the suggestion. You are correct that the price movements of CGL.C and MNT are quite different in short periods of time.
CGL.C ETF trades very close to NAV. MNT is Gold ETR and at times trades 15% above NAV and I was trying to capture the premium, but still own gold.
I don't think an investor will be indifferent to one or the other, but it really matters what CRA's interpretation is.

Here are the returns since the beginning of 2020:

TickerReturn %Average %VarianceStd DevCorr SPYBetaMax DDownVol/yearRisk-Adj vs SPYSharpeCAGR
SPY
20.33%​
0.09%​
0.04193%​
2.05%​
1.00​
1.00​
-33.72%​
32.50%​
0.00%​
9.87​
18.91%​
MNT
24.40%​
0.10%​
0.03968%​
1.99%​
0.12​
0.12​
-25.93%​
31.62%​
2.32%​
12.19​
22.67%​
CGL.C
17.54%​
0.07%​
0.01636%​
1.28%​
0.04​
0.02​
-16.29%​
20.30%​
3.78%​
13.62​
16.33%​

21178
 

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I don't think an investor will be indifferent to one or the other, but it really matters what CRA's interpretation is.

TickerReturn YTD %Average %VarianceStd DevCorr SPYBetaMax DDownVol/yearRisk-Adj vs SPYSharpeCAGR
SPY
20.33%​
0.09%​
0.04193%​
2.05%​
1.00​
1.00​
-33.72%​
32.50%​
0.00%​
9.87​
18.91%​
MNT
24.40%​
0.10%​
0.03968%​
1.99%​
0.12​
0.12​
-25.93%​
31.62%​
2.32%​
12.19​
22.67%​
CGL.C
17.54%​
0.07%​
0.01636%​
1.28%​
0.04​
0.02​
-16.29%​
20.30%​
3.78%​
13.62​
16.33%​
Agreed it matters what CRA says but they are going to look at whether investors in general see them as different to arrive at their conclusion. The CRA test is as follows from their interpretation bulletin;
"Identical properties . . . are properties which are the same in all material respects, so that a prospective buyer would not have a preference for one as opposed to another."

A simple test of whether investors in general see them as substitutes (ie the same in all material respects) is whether their returns move in tandem. IE their returns are correlated. If one looks at the correlation of daily price return for these two securities in 2020 it is quite obvious they are less than perfectly correlated. Conversely the correlation is 1.0 (ie perfectly correlated) for two ETFs tracking the same index.
 

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By treating the losses as superficial you lose out on $350 in capital losses. So you'd have to pay tax on $175 of cap gains. Seems to me it's better to stay on the good side of CRA and just pony up the tax on that $175. It won't be a lot of money we're talking about here.
 

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Discussion Starter · #12 ·
By treating the losses as superficial you lose out on $350 in capital losses. So you'd have to pay tax on $175 of cap gains. Seems to me it's better to stay on the good side of CRA and just pony up the tax on that $175. It won't be a lot of money we're talking about here.
Wait, when I add the superficial loss to the ACB of the substituted property as I did above, wouldn't I save on the $175 cap gains tax later when I sale?

According to CRA: "You can usually add the amount of the superficial loss to the adjusted cost base of the substituted property. This will either decrease your capital gain or increase your capital loss when you sell the substituted property."
 

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Wait, when I add the superficial loss to the ACB of the substituted property as I did above, wouldn't I save on the $175 cap gains tax later when I sale?

According to CRA: "You can usually add the amount of the superficial loss to the adjusted cost base of the substituted property. This will either decrease your capital gain or increase your capital loss when you sell the substituted property."
Oh, good call. There you go. :)
 

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Spudd is likely writing about what has to be reported now.

Assuming no changes to the inclusion rate when it is sold in the future, income as well as tax brackets are reasonably similar when the sale happens - then yes, the "lost" CL will be re-captured.


Cheers

PS
As long as the superficial loss transactions are all in a non-registered account, the net effect is a deferral of the capital loss.

If the superficial loss is from an in-kind registered account then the CL is permanently lost.
 

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... Seems to me it's better to stay on the good side of CRA and just pony up the tax on that $175. It won't be a lot of money we're talking about here.
Agreed.

Plus there's the possibility that a different investment was sold for a CL or there is a carried forward CL that can reduce/eliminate the CG.

If there isn't - a charitable donation in Dec could have taken care of it. At this late a time, the main option left is if there is RRSP contribution room to make a first sixty day contribution that can be deducted against 2020 income.
 

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Discussion Starter · #16 ·
Agreed.

Plus there's the possibility that a different investment was sold for a CL or there is a carried forward CL that can reduce/eliminate the CG.

If there isn't - a charitable donation in Dec could have taken care of it. At this late a time, the main option left is if there is RRSP contribution room to make a first sixty day contribution that can be deducted against 2020 income.
Thanks. I am still not clear if CGL.C and MNT are identical properties. It seems the opinions differ. I may have to contact CRA to confirm or just be aggressive and claim the loss to see if CRA will object. There is a pretty good argument to be made that due to the different legal structures (ETR vs ETF), different redemption/conversion characteristics and different returns (24% vs 17% in 2020) these are not identical properties.
 

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My understanding is they both hold the same thing so I would think writing it up as a superficial loss would be the conservative approach.

I'm not sure the structure or privileges matter where the purpose is the same (i.e. gold). But I have never had to look into it as the one time I might have had a superficial loss, I was re-buying the same stock so it was definitely identical. :)


Cheers
 
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