[PieMan]

My question is regarding Superficial Losses on shares due to the purchase of same shares from wife and myself.

Here is an example of some transactions in mine and my wife's non-registered accounts:

July 1, 2018 - I purchase 50 shares of Apple in my non-registered account
August 15, 2018 - Sell 10 shares (at a loss) in my non-registered account
August 16, 2018 - Wife purchases 60 shares of Apple in her non-registered account
August 16, 2018 - I purchase 30 shares of apple my non-registered account

In this scenario, the entire Capital Loss is denied because both my wife and I purchased more shares of the same entity (Apple) than I sold within the 61 day superficial loss period.

My question is: where does the denied Capital Loss go? I have to add this Adjusted Cost Base (ACB) somewhere. Does this ACB get added to the shares of Apple in my account, or my wife's account? Do I get to choose where this ACB gets added to? Can I split this ACB between my account and my wife's account in any ratio that I please?

 

[humble_pie]

My question is regarding Superficial Losses on shares due to the purchase of same shares from wife and myself.

Here is an example of some transactions in mine and my wife's non-registered accounts:

July 1, 2018 - I purchase 50 shares of Apple in my non-registered account
August 15, 2018 - Sell 10 shares (at a loss) in my non-registered account
August 16, 2018 - Wife purchases 60 shares of Apple in her non-registered account
August 16, 2018 - I purchase 30 shares of apple my non-registered account

In this scenario, the entire Capital Loss is denied because both my wife and I purchased more shares of the same entity (Apple) than I sold within the 61 day superficial loss period.

My question is: where does the denied Capital Loss go? I have to add this Adjusted Cost Base (ACB) somewhere. Does this ACB get added to the shares of Apple in my account, or my wife's account? Do I get to choose where this ACB gets added to? Can I split this ACB between my account and my wife's account in any ratio that I please?

if i understand correctly you & spouse each hold individual non-registered accounts & these are not joint accounts

what your wife would buy/sell should not have any effect on your own gain/loss trading record

the way i see it, your record is quite simple. (1) you bought 50 shares & (2) you sold 10 to hold 40. Then (3) you bought another 30 shares to hold 70.

step (1) will produce an average cost per share, if your broker has not already done that.

in step (2) you would multiply that cost per share by 10 shares to obtain the cost of the 10 shares you sold at a loss. Also in step (2) you would multiply the remaining shares (40) by the same cost-per-share to obtain the cost of the remaining holding (my column in spreadsheet is headed exactly that: cost remaining holding)

notice that following a partial sale/disposition, the cost per share does not change. All that changes is the total cost of the remaining holding. The only action that changes cost-per-share is a buy or acquisition of additional stock.

in step (3) you bought another 30 shares. Add the cost of this purchase to the cost of the 40-share holding to obtain the new total cost of the 70-share holding. Divide this amount by 70 = new ACB per share.

the above is the methodology for any swing trade record-keeping. Swing trading as in buy some shares; sell a few but not all; then buy some more shares; then sell a few more shares, etc.

in the case of AAPL the record keeping is complicated by the fact that, for canadian tax reporting purposes, investor must use FX rate of the day of each transaction. IE for this poster's set of 3 trades in which he bought, sold & bought again, he will have no less than 3 different FX rates & 6 calculations (hint: try not to swing-trade such a tiny quantity, the record-keeping is too burdensome)

as far as tax reporting is concerned, you are correct in that you cannot claim a loss. Just don't report the 10 share sale as a loss transaction.

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[PieMan]

Thank you for your response.

if i understand correctly you & spouse each hold individual non-registered accounts & these are not joint accounts

Yes, that is correct.

what your wife would buy/sell should not have any effect on your own gain/loss trading record

I've been reading up on superficial loss rules, and I came across this RBC pdf on the topic (I can't post the link because I don't have enough posts, but its the first link when you search "rbc superficial loss").

In it, they describe 2 conditions that have to be met for a Capital Loss on a sell-trade to be a superficial loss: if you or a spouse also purchased the same shares within the 61-day superficial loss period, and if you or a spouse are still holding onto those shares at the end of the 61-day superficial loss period:

Condition 1: During the period that begins 30 days before and ends 30 days after the settlement date of the disposition, you or a person “affiliated” with you acquires the identical property that was sold at a loss. Although the rules may be complex, affiliated persons include you, your spouse, a corporation controlled by you and/ or your spouse, and a trust where you and/or your spouse are majority interest beneficiaries

Condition 2: At the end of that period (i.e., on the 30th day after the settlement date of the disposition), you or a person affiliated with you owns or has a right to acquire the identical property.

This reads to me that I do have to pay attention to what my wife is purchasing in here non-reg account, and if she purchases identical property (i.e. AAPL) right after I sold AAPL at a loss, then that seems to me that this Capital Loss would be a Superficial Loss.

 

[humble_pie]

I've been reading up on superficial loss rules, and I came across this RBC pdf on the topic ...


... if she [spouse] purchases identical property (i.e. AAPL) right after I sold AAPL at a loss, then that seems to me that this Capital Loss would be a Superficial Loss.

one thing for sure is that, all by yourself, you individually have a superficial loss in AAPL & it will affect your personal ACB; ie as you've always mentioned, it's not a taxable loss that you can claim to the CRA

turning to the spousal rules you quoted above, the inference you are drawing seems to be a bit unusual. It suggests that a married couple anywhere in canada cannot truly have any kind of separate investment property. Perhaps the reality is related to the kind of formal marriage property agreement that a couple would have signed prior to wedding? this forum has some highly competent professional accountants as members; i'd be very interested in hearing their comments.

certainly i'm aware that brokers - even discount brokers - caution against clients one-offing trades between their RRSPs & their non-registered accounts, ie going long in one account while short in another (one can synthetic-short in RRSP with put positions). One-offing in the manner your quoted texts are referencing, ie with trades by affiliated persons such as spouse, private corporations, trusts, etc.

back to your question: if i were in your place i would instantly discard all thoughts of trying to allocate cost base between spouse & myself though. The methodology i illustrated with an example above is tried-&-true tax-authority-approved methodology.

can you check to see the cost base figures your broker is providing? these should be accurate under the recent CRM regulations. Some brokers will provide only one of the 2 necessary figs, ie they will provide either the cost of the total holding or else they will provide the cost per share. But from either fig, an investor can figure out the other.

 

[PieMan]

one thing for sure is that, all by yourself, you individually have a superficial loss in AAPL & it will affect your personal ACB;

I 100% agree, I have a superficial loss. No argument there.

back to your question: if i were in your place i would instantly discard all thoughts of trying to allocate cost base between spouse & myself though. The methodology i illustrated with an example above is tried-&-true tax-authority-approved methodology.

Let me simplify the transactions I gave in my original post to the following:

- July 1, 2018: I purchase 50 shares of Apple in my non-registered account
- August 15, 2018: Sell 10 shares (at a loss)of AAPL in my non-registered account
- August 16, 2018: Wife purchases 60 shares of Apple in her non-registered account

I removed the last transaction where I purchased 30 shares

What would happen in this instance? Here, I still have a superficial loss. But from my readings on the topic, the denied Capital Loss gets added to my wife's ACB of the same asset (AAPL). At least, that is my understanding.

And if that is the case... to bring back my original example:

- July 1, 2018: I purchase 50 shares of AAPL in my non-registered account
- August 15, 2018: Sell 10 shares (at a loss) of AAPL in my non-registered account
- August 16, 2018: Wife purchases 60 shares of AAPL in her non-registered account
- August 16, 2018 - I purchase 30 shares of AAPL my non-registered account

I'm back to my original question: How do I now allocate the denied Capital Loss between the ACB's of myself and my wife? Do I get to decide how it can be allocated?

 

[humble_pie]

^^

you don't allocate because there is no taxable capital loss to allocate to anybody

you have no taxable loss to report. What you have is an adjustment to cost base caused by the swing trading

me i'd keep my own records with accurate cost base reporting for my own shares as set forth above. These should be the figures your broker is providing to you

your wife should keep her own records separately as well

i'm still hoping a chartered accountant will comment on a possible spousal prohibition against claiming a true capital loss, ie a hypothetical situation in which husband buys & sells at a dollar loss; the wife immediately buys the very same stock; but the husband does not re-buy. In all the years i've been in this forum, i've never seen this prohibition even mentioned.


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[BigMFfan]

Superficial losses can occur if other family members are involved too:
... a superficial loss, ...the CRA does not allow you to claim it. Similarly, if your spouse, your child or another person affiliated with you arranged to buy the property within that time period, the loss would also be superficial, and you would not be allowed to claim it.
What Is a Superficial Loss? | 2019 TurboTax® Canada Tips
https://turbotax.intuit.ca/tips/what-is-a-superficial-loss-6270

OP, I'd say in your case, because you and your wife both bought Apple, you don't have to consider your wife's transaction at all. Your purchase created the superficial loss by itself, providing you still held the new Apple stock 30 calendar days after the original sale.

I think the CRA site is also clear: " What is a superficial loss?

A superficial loss can occur when you dispose of capital property for a loss and:

you, or a person affiliated with you, buys, or has a right to buy, the same or identical property (called "substituted property") during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale; and
you, or a person affiliated with you, still owns, or has a right to buy, the substituted property 30 calendar days after the sale.

If you have a superficial loss ..., you cannot deduct it when you calculate your income for the year.

However, if you are the person who acquires the substituted property, 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.

In certain situations, when you dispose of capital property, the loss may not be considered a superficial loss. " (These situations usually involve the person becoming a non-Canadian taxpayer.)

 

[humble_pie]

Superficial losses can occur if other family members are involved too ...

... If you have a superficial loss ..., you cannot deduct it when you calculate your income for the year.

However, if you are the person who acquires the substituted property, 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

thankx for the answer. Re the general situation, ie parallel buy/sell transactions carried out by spouse or child, i've never seen this mentioned in cmf forum so i'm assuming most members are blissfully unaware (fwiw holding cross positions in registered vs non-registered accounts is also frowned upon by brokers)

i can see the reasons for the above, because a clever couple could conspire to carry out that nightmare of all brokers. They could Short the Box, quel horreur. Not to speak of what one of those fiendishly precocious eight-year-old offspring might get up to when, acting in concert with a parent, he or she manages to short his alphabet building blocks!

still, judging from cmf lacunae on this topic over all the years i've been a member here, i don't think many DIYers or their brokers are keeping spousal prohibitions in mind when they sell for a loss.


could i turn now to your specific language above about adding the amount of a supericial loss to the ACB of the substituted - ie bought within 30 days - shares.

i thought that was what my methodology in steps (2) & (3) above was doing, when the adjusted cost base of remaining shares following partial sale/disposition gets re-calculated & then re-calculated again when additional shares are bought? i mean i thought my approach was taking into account the true cost base every step of the way?

if not, at what point would "the amount of the supericial loss" get added to the ACB of the substituted property?

(note that the language is a bit misleading because "the substituted property" in this context appears to mean the same property, just a differently timed purchase of it, rather than an entirely different & separate other property)

there are other solutions that might be easier than a full-blown family meeting to decide who may sell & when. Solutions such as Do Not Swing-Trade. Or Do Not Marry. Or at the very least, Do Not Marry a Propertied Mate.

 

[PieMan]

Similarly, if your spouse, your child or another person affiliated

This is the first I've seen a child mentioned as a possible affiliated person in my research. That actually contradicts the RBC document I mentioned before, which states the following:

The following are some transactions that may enable you to sell your investment that is in a loss position and realize the capital loss while possibly avoiding the application of the superficial loss rules: Transferring the security to an adult child, parent or sibling (i.e., anyone unaffiliated with you).

Here they state that a child is unaffiliated with you.

According to CRA on their website https://www.canada.ca/en/revenue-ag...at-a-superficial-loss/affiliated-persons.html:

Some examples of affiliated persons are:

- you and your spouse or common-law partner;
- you and a corporation that is controlled by you or your spouse or common-law partner;
- a partnership and a majority interest partner of the partnership; and
- after March 22, 2004, a trust and its majority interest beneficiary (generally, a beneficiary who enjoys a majority of the trust income or capital) or one who is affiliated with such a beneficiary.

I'm still grappling with my original issue: do I add the denied Capital Loss to my wife's ACB? Or my own ACB? Can I split it between myself and my wife?

 

[Eclectic12]

I agree with HP and BigMF fan that the superficial loss (SL) should be added to your cost base only.

I would expect that since your re-buy qualifies as the "repurchased or substitute shares" that where the CL is added to the cost. Given that your actions already meet the SL rules, I would think her buy would be interpreted as independent. Had her buy been first, say a couple of days before your re-buy then it would read like her shares would be considered the ones to apply the SL to.


Or to put it another way, I think you are letting the "other criteria" that covers different situations distract you from what seems a clear case of you meeting the SL rules on your own.


Maybe an accountant or similar can comment for sure.


Cheers

 

[Numbersman61]

I hesitate to comment since this is a very unusual situation but my view is that the superficial loss should increase the ACB of each spouse’s holdings in proportion to the quantity of new shares purchased (two-thirds to wife; one-Third to husband)
Here is the pertinent section of the Income Tax Act:
“Taxable Capital Gains and Allowable Capital Losses (continued)

Marginal note:Adjustments to cost base

53 (1) In computing the adjusted cost base to a taxpayer of property at any time, there shall be added to the cost to the taxpayer of the property such of the following amounts in respect of the property as are applicable:
(f) where the property is substituted property (within the meaning assigned by paragraph (a) of the definition superficial loss in section 54) of the taxpayer, the amount, if any, by which

(i) the amount of the loss that was, because of the acquisition by the taxpayer of the property, a superficial loss of any taxpayer from a disposition of a property

exceeds

(ii) where the property disposed of was a share of the capital stock of a corporation, the amount that would, but for paragraph 40(2)(g), be deducted under subsection 112(3), 112(3.1) or 112(3.2) in computing the loss of any taxpayer in respect of the disposition of the share;
Definitions

54 In this subdivision,
superficial loss of a taxpayer means the taxpayer’s loss from the disposition of a particular property where

(a) during the period that begins 30 days before and ends 30 days after the disposition, the taxpayer or a person affiliated with the taxpayer acquires a property (in this definition referred to as the “substituted property”) that is, or is identical to, the particular property, and

(b) at the end of that period, the taxpayer or a person affiliated with the taxpayer owns or had a right to acquire the substituted property,”

 

[humble_pie]

I hesitate to comment since this is a very unusual situation but my view is that the superficial loss should increase the ACB of each spouse’s holdings in proportion to the quantity of new shares purchased (two-thirds to wife; one-Third to husband)
Here is the pertinent section of the Income Tax Act:
“Taxable Capital Gains and Allowable Capital Losses (continued)

Marginal note:Adjustments to cost base

53 (1) In computing the adjusted cost base to a taxpayer of property at any time, there shall be added to the cost to the taxpayer of the property such of the following amounts in respect of the property as are applicable:
(f) where the property is substituted property (within the meaning assigned by paragraph (a) of the definition superficial loss in section 54) of the taxpayer, the amount, if any, by which

(i) the amount of the loss that was, because of the acquisition by the taxpayer of the property, a superficial loss of any taxpayer from a disposition of a property

exceeds

(ii) where the property disposed of was a share of the capital stock of a corporation, the amount that would, but for paragraph 40(2)(g), be deducted under subsection 112(3), 112(3.1) or 112(3.2) in computing the loss of any taxpayer in respect of the disposition of the share;
Definitions

54 In this subdivision,
superficial loss of a taxpayer means the taxpayer’s loss from the disposition of a particular property where

(a) during the period that begins 30 days before and ends 30 days after the disposition, the taxpayer or a person affiliated with the taxpayer acquires a property (in this definition referred to as the “substituted property”) that is, or is identical to, the particular property, and

(b) at the end of that period, the taxpayer or a person affiliated with the taxpayer owns or had a right to acquire the substituted property,”

good grief, are we not making a mount Everest out of a molehill here though

what kind of loss we talking about? he sold 10 shares. T.e.n. M.e.a.s.l.y. S.h.a.r.e.s. Dollar loss could not have been much more than USD 50.00 per share. Maximum total loss $500.00 (e).

let's not have nervous breakdown splitting hairs over how to divide $500 loss. Let's just do something reasonable & move on.

one can pretty much guarantee that the tax authorities are not going to waste hours & hours fretting over whether his-n-her ACBs should be adjusted 500/0 or 200/300 or 175/325 .each:

.

 

[Numbersman61]

I agree that the amount is insignificant but for me the exercise was interesting. In reviewing the superficial loss rules, I came across articles relating to how an individual can transfer a capital loss from his own account to that of his spouse. Example - wife has capital gain of $20,000 in 2018. In 2019, husband sells a stock and realizes a capital loss of $20,000. Within 30 days, wife purchases the same stock. The superficial loss rules come into play, and the wife’s ACB in the stock increases by $20,000. She subsequently sells the stock and realizes a capital loss which can be applied against the capital gain reported in 2018 with a resulting tax refund.
I may be wrong but that is my understanding of the way the system works. It’s possible that this apparent loophole has been plugged or that the anti-avoidance tax rule applies. Any thoughts?

 

[humble_pie]

I agree that the amount is insignificant but for me the exercise was interesting. In reviewing the superficial loss rules, I came across articles relating to how an individual can transfer a capital loss from his own account to that of his spouse.

but according to your example the husband would forfeit - lose forever - his chance to claim the capital loss himself, no? he would simply be exporting the loss to his wife.

in real life, the number of cases where this manoeuvre would actually be helpful must be severely limited. Maybe once in a blue moon.

plus the numbers would have to be significant for the intra-spousal strategy to be worth doing. None of that t.e.n. m.e.a.s.l.y. s.h.a.r.e.s. stuff


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